Christiana: Severance tax would have negative impact on Pa. ethane advantage

September 11, 2017
Rep. Jim Christiana

State Rep. Jim Christiana, several other lawmakers and groups representing Pennsylvania business owners, workers and its manufacturing industry called on Gov. Tom Wolf and House and Senate lawmakers to abandon calls for a severance tax on shale gas production in the commonwealth.

During an hourlong news conference that was live-streamed Monday from Harrisburg, Christiana, R-Beaver, noted there are 322,000 Pennsylvania residents who rely on the oil and gas industry for their livelihood.

Christiana and other lawmakers and industry representatives said the state has been attracting a “robust” petrochemical industry to the commonwealth since 2012.

He added that with Pennsylvania's abundance of ethane being produced along with natural gas – ethane is used to form ethylene, a building block for scores of petrochemical and plastic products – the state has the opportunity to attract manufacturers that will create more jobs.

Naming the big players who have been drawn to the state over the past several years – including Chevron and Shell – he added that their presence here “relies on their purchasing Pennsylvania ethane.”

Shell is building an ethane cracker to make ethylene in Beaver County, a $6 billion investment that is seen as a way to take advantage of the region's ethane output, but others in the industry see additional opportunities to attract other processors and petrochemical manufacturers to the region.

According to the Commonwealth Foundation, under the Senate's current plan to fill a $2.2 billion revenue hole in the 2017-18 state budget, Pennsylvanians would pay a higher tax on cellphone service, home heating bills, electricity and some online purchases made through companies such as Amazon and eBay.

A new natural gas gross receipts tax makes up the majority of the increase. About half of Pennsylvania households would pay this tax on their home heating bills. The Senate also added a natural gas severance tax on top of the impact fee drillers already pay.

The foundation said the state would raise about $100 million a year by imposing a new tax on natural gas production in the Marcellus Shale, the nation's largest natural gas field. The effective tax rate for the 2017-18 fiscal year would be 2 cents per thousand cubic feet, although the annual tax rate could range from 1.5 cents to 3.5 cents.

The proposal would raise significantly less money than what Wolf had originally sought – he proposed a 6.5 percent tax on the value of production in February.

In 2015, Wolf proposed a 5 percent production tax, plus 4.7 cents per thousand cubic feet.

Christiana said if a severance tax is passed, “the government will be arbitrarily raising the price of what is the critical piece” in attracting industry to the state.

Those advocating the severance tax have argued that the producers need to be here because of Pennsylvania's vast natural gas reserves in the Marcellus, but Christiana said recent statistics run counter to that assumption.

He noted since the year began, the active rig count in Pennsylvania is down 75 percent, while Ohio's has risen 100 percent.

He added that while Dow Chemical plans to invest $8 billion in the United States, none of the spending includes Pennsylvania. Exxon has said it will spend an additional $20 billion in investment in petrochemicals in the United States, but plans no spending in the commonwealth.

Gene Barr, president and chief executive officer of the Pennsylvania Chamber of Business and Industry, who worked in the oil and gas industry before joining the chamber, noted that capital investment “is fluid; capital will move because companies need to make that rate of return. If they cannot get that rate of return in the commonwealth, they will go elsewhere.”

Passage of a severance tax would be “a boneheaded move,” said David Taylor, president of the Pennsylvania Manufacturers Association, given that Pennsylvania's low ethane cost has the potential of attracting more petrochemical manufacturers, something that would diminish with the added tax.

“We need to give high-value manufacturing a reason to be here,” Taylor said.

During a brief question-and-answer session, Christiana said he would support a 2015 idea he floated that would “reformulate and rebrand” the impact fee and call it a severance tax, adding that if it resurfaced, it would have to include a more definitive way to determine capital cost recovery that fluctuates with the cost of natural gas.

Separately on Monday, 13 different Pennsylvania organizations involved with the oil and gas industry sent a letter to the House of Representatives asking that any final revenue package “not include higher taxes on energy producers, consumers and utility rate payers.”

While stating it recognizes the “difficult financial position the state is in due to less-than-expected revenue collections,” the group urged lawmakers to consider pro-growth economic policies.

“When the state's economy grows, its broad-based tax collections – sales and use, corporate net income and personal income taxes – will rise as well,” the letter stated.

Signatories included the Pennsylvania Chamber of Business and Industry, the state chapter of the American Petroleum Institute, the Marcellus Shale Coalition, Energy Association of Pennsylvania, Pennsylvania Builders Association, Pennsylvania Manufacturers Association, Pennsylvania Independent Oil and Gas Association and the Pennsylvania Chemical Industry Council.

The Senate took action in late July to resolve the $2.2 billion funding gap for the $32 billion state budget, but there has been no agreement with the state House, which returned to Harrisburg Monday for its first session in seven weeks.

Michael Bradwell has been business editor for the Observer-Reporter since 1995, and was named editor of The Energy Report in 2012. He joined the newspaper in 1990 as a general assignment reporter in the Greene County bureau and has also worked as a copy editor. A 1974 graduate of Pennsylvania State University with a degree in English, he began his career at the Bedford (Pa.) Gazette. Prior to joining the O-R, he served as public relations director for Old Bedford Village, account executive at two Pittsburgh public relations agencies and copywriter for the country’s largest wholesaler of mutual funds.

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