Report: Severance tax proposal could cost mineral owners millions

  • Marie Cusick
FILE PHOTO: This 2011 file photo shows a farmhouse in the background framed by pipes connecting pumps where the hydraulic fracturing process in the Marcellus Shale layer to release natural gas was underway at a site in Claysville, Pa.

Keith Srakocic / AP Photo

FILE PHOTO: This 2011 file photo shows a farmhouse in the background framed by pipes connecting pumps where the hydraulic fracturing process in the Marcellus Shale layer to release natural gas was underway at a site in Claysville, Pa.

A new analysis published Thursday by Pennsylvania’s Independent Fiscal Office estimates mineral owners could wind up losing tens of millions of dollars in natural gas royalties if Governor Tom Wolf’s proposed severance tax becomes law.

The administration says the report has it wrong because it doesn’t take into account a key detail in Wolf’s proposal. On Friday, the IFO added a footnote acknowledging that detail, but it did not amend its report.

The calculation was requested by state Sen. Lisa Baker (R- Luzerne), who asked the IFO to examine how a potential severance tax could affect the post-production costs many landowners already see gas companies deducting from their monthly royalty checks.

“States that levy a natural gas gas severance tax allow those costs to be treated like a post-production cost,” IFO director Matthew Knittel wrote.

Post-production costs are the expenses of moving natural gas from the wellhead to the market. Some Pennsylvania landowners allege the costs are exorbitant and leave them with little to no royalty money. The controversy has spurred lawsuits and proposed legislation. Earlier this month, West Virginia passed a new law prohibiting gas and oil companies from deducting post-production expenses in certain types of leases.

Wolf’s severance tax proposal is based on volume, and varies depending on the price of natural gas. The IFO estimates it would bring in about $210 million in revenue next year, and $379 million in three years. The report projects $51 million could be withheld from mineral owners, in the third year.

Wolf spokesman J.J. Abbott disputed the analysis, noting the severance tax proposal the administration has circulated to the Legislature contains language explicitly prohibiting gas companies from deducting the severance tax from royalty payments.

In response, IFO director Matthew Knittel noted the language Abbott is citing is not publicly available. He said he relied on information contained in the executive budget, which was minimal.

“There’s nothing in the executive budget about how those [costs] would be handled,” said Knittel.

Abbott said such information is routinely provided to the IFO, upon request.

“It is surprising that they would not ask and only use limited information,” said Abbott.

The fiscal office’s footnote, added Friday, said the administration had provided language it said would bar companies from deducting the tax from royalties.

“If this language is enacted and can be enforced,” the fiscal office wrote, “it would imply that current landowners would be held harmless from any pass back of the new severance tax.” Looking ahead, it wrote, “it is possible that royalty rates for new leases could be reduced to reflect a portion of the new tax.”

Pennsylvania remains the only major gas-producing state in the country that does not tax production. Instead, it levies a per-well “impact fee.” Passing a severance tax on production has long been a major priority for Wolf, who calls it the “fairest and simplest” solution to the state’s budget woes.

The natural gas industry has lobbied hard against it. David Spigelmyer, president of the gas trade group, the Marcellus Shale Coalition, said the IFO report shows regular Pennsylvanians will feel the sting of a new tax.

“Lawmakers should heed this warning and focus instead on pro-growth policies that expand natural gas production and use,” said Spigelmyer.

In the report the IFO also attempted to calculate how much royalty money people in Pennsylvania’s top gas-producing counties have received. It is a difficult figure to pin down, because royalties are lumped in with rental, copyright, and patent income on state tax returns.

In Susquehanna, Washington, Bradford, Greene, Lycoming, Wyoming, Tioga, and Butler counties, the IFO estimates royalties shot up from $20 million in 2006 (before the Marcellus boom took off) to $919 million in 2012. The analysis finds royalties peaked at $1.6 billion in 2014 and have declined since then, hitting $639 million in 2016.

Note: This story has been updated with comments from the IFO and the governor’s office. 

A previous version of this story incorrectly asserted that every state allows its severance tax to be passed back to landowners.