Governor Wolf made taxing the natural gas industry the centerpiece of his campaign, and if he gets his way, he could move Pennsylvania from having one of the lowest effective gas tax rates in the country to one of the highest.
That was the analysis presented Monday at a joint senate committee hearing in Harrisburg from the state’s Independent Fiscal Office (IFO). Much like the Congressional Budget Office in Washington D.C., the IFO is tasked with providing nonpartisan analysis for budgetary purposes.
“The proposed severance tax will likely move Pennsylvania from one of the lowest severance tax states to the highest tax state, relative to other major gas producing states,” says IFO director Matthew Knittel.
The IFO analysis examines the effective tax rate on production from a new well drilled in 2018. Assuming an ultimate recovery of between 10-15 billion cubic feet over a 30 year time period, the IFO finds Pennsylvania’s current impact fee translates to an effective tax rate of less than one percent, while Wolf’s proposed severance tax would amount to 7.3 percent. Even though a state like Texas, for example, has a higher statutory rate (7.5 percent), most shale wells get an exemption and don’t pay that. The IFO finds a similar Texas well would pay an effective rate of 3.1 to 3.5 percent.
Wolf is modeling his plan on West Virginia, which taxes both volume and sales. Under his proposal, gas companies would pay a 5 percent tax on the value of the gas, plus 4.7 cents for every thousand cubic feet. It would also set a minimum value of $2.97 per thousand cubic feet, regardless of the actual sale price. Wolf says the tax could generate a billion dollars in its first year, which he’d use to boost funding public education.
Eileen McNulty, acting secretary of the state Department of Revenue, testified on behalf of the administration.
“Natural gas has the potential to fuel not only our homes and truck fleets, but also a world-class education system for our children,” she told senators.
But representatives from the gas industry, who oppose the tax, were quick to warn legislators it would curb economic growth.
“Make no mistake, we will witness significant major decline in capital outlay in Pennsylvania,” said Dave Spigelmyer, head of the gas trade group, the Marcellus Shale Coalition. “This tax matter could not come at a more difficult time for an industry that’s already under economic pressure.”
The Republican-led committees were largely receptive to the message.
“What’s the one thing we could do to help this industry?” asked Sen. Kim Ward (R- Westmoreland).
“Grow manufacturing,” Spigelmyer replied.
Later on, Sen. Scott Hutchinson (R- Butler) joked that he had considered wearing an ‘I love fossil fuels’ t-shirt to the hearing, ”Because I do,” he said.
Meanwhile, Democrats questioned whether the industry was exaggerating the possible effects of a new tax.
“All the graphs, all the testimony we’ve heard about the decline of the industry is a function of the demand side of the equation,” said Sen. John Blake (D- Lackawanna). ”Because there hasn’t been tax policy driving that decline.”
While skyrocketing output has made the Marcellus Shale one of the most productive energy fields in the world, the glut of gas caused prices to crater. The initial race to drill also outpaced pipeline capacity, leaving wells stranded from potential markets. The industry is in the midst of looking for more ways to utilize the gas– in transportation, electric power generation, and manufacturing.