Pennsylvania Governor Proposes 5% Tax on Natural Gas Drilling to Help Fund Education

by | February 12, 2015

By Laura Legere

Gov. Tom Wolf toured an elementary school on Wednesday morning where students were writing about love for Valentine's Day. Then the new governor proposed to raise hundreds of millions of dollars for education with a 5 percent natural gas extraction tax that has not earned him much affection from the drilling industry.

Mr. Wolf, a Democrat, proposed a tax that would be based on both the value and volume of gas extracted from natural gas wells, adopting a model used in West Virginia to hedge against fluctuations in the price of gas. He estimated the tax would raise about $1 billion in its first full year and said the "lion's share" of the revenue would be dedicated to education.

"We have to make sure that we're funding schools adequately, and this is a source of funding that's fair for Pennsylvanians," he said during a press conference in a classroom at Caln Elementary School, where the superintendent said that she recently announced furloughs and where the district struggles to provide basic supplies, like enough textbooks for every student.

Mr. Wolf sent a proposal to the legislature on Wednesday calling for a 5 percent severance tax on the value of gas at the wellhead plus 4.7 cents per thousand cubic feet of gas extracted. The tax would include what the administration called "reasonable exemptions" for gas that comes from low-producing wells or is given away free, for example.

Both Republicans and Democrats in the General Assembly have already announced or introduced severance tax legislation this session, which Mr. Wolf pointed to as a sign that the issue might inspire bipartisan cooperation in the Republican-controlled legislature.

But Senate Majority Leader Jake Corman, R-Centre, said in a statement that pension reform is a priority for the Republican majority, and it will have to come first.

"We repeatedly have said we cannot consider new revenue until we deal with pensions, which will have the effect of saving significant tax dollars," Mr. Corman said.

House Majority Leader Dave Reed, R-Indiana, said the combined elements of the governor's proposal would create a much higher tax burden than first appears, especially in a state where the cost of doing business is already high. "The governor is, in actuality, pushing roughly a 7.5 percent effective tax rate -- one of the highest in the nation," he said in a statement.

Although the tax proposed by the governor would replace the impact fee that natural gas companies currently pay to the state and to local governments based on the number of wells they drill, he knows that communities do not want to lose that money. Mr. Wolf said his proposal calls for a portion of the tax revenue to still go back to local communities that host wells.

The impact fee has raised more than $200 million a year since it was enacted in 2012.

The governor said he has not yet determined the exact formula for how the funds would be spent, but he also wants some portion of the revenue to go to environmental oversight of the industry and investment in alternative energy development.

And, acknowledging yet another important stakeholder group, Mr. Wolf's proposal includes protection for gas leaseholders by prohibiting drilling companies from deducting the tax from their royalty payments.

A majority of Pennsylvanians support an extraction tax, according to a Mercyhurst University poll of registered Pennsylvania voters. The poll last month found that 61 percent favored enacting a gas extraction tax.

Nearly all energy-producing states have some form of severance tax -- a point Mr. Wolf emphasized during his announcement when he said his tax proposal would be competitive with those in surrounding states.

The natural gas industry has fought hard against such a tax in Pennsylvania, saying it will discourage continued investment in a state where production from the gas-rich Marcellus Shale formation has been an economic driver.

"Make no mistake, adding a 5 percent tax to any business sector -- including the energy industry -- is going to reduce capital spending and hit the supply chain, especially Pennsylvania-based small and mid-sized businesses, as well as our region's labor and building trades," said David Spigelmyer, president of the Marcellus Shale Coalition, an industry trade group in Robinson.

Mr. Wolf countered that a tax would be "the best thing that could happen to the industry" because it will give every family a stake in the industry's success.

He said Pennsylvania ranks 45th in the nation in terms of the percentage of state funding dedicated to public education.

"We have the natural resources to actually do something about the problem here," he said.

(c)2015 the Pittsburgh Post-Gazette