Gas industry argues against severance tax in state budget

June 26, 2014

As Pennsylvania legislators debating the annual budget argue whether the state should enact a severance tax on unconventional gas wells as part of the spending plan, the state’s gas industry weighed in Thursday to again oppose the idea.

During a brief telephone conference with reporters from across the state, representatives of three of the industry’s most influential groups in Pennsylvania said the industry already pays enough in taxes, and said severance taxes levied by other shale states is often misrepresented by those who favor the concept here.

Thursday’s conference call included Lou D’Amico, president and executive director of Pennsylvania Independent Oil & Gas Association; Stephanie Catarino Wissman, executive director of the Associated Petroleum Industries’ Pennsylvania branch; and Dave Spigelmyer, president of Marcellus Shale Coalition.

At various times during the half-hour call, the speakers noted the advent of unconventional natural gas well drilling created $630 million in new revenue in the form of Act 13’s impact fee for municipalities where drilling occurs, as well as $2.1 billion in revenue for the state in the form of corporate net income taxes and other state levies.

“Shale development continues to be an economic bright spot in the commonwealth,” Spigelmyer said, adding that the gas industry’s capital investment in Pennsylvania has created nearly 250,000 jobs.

Noting that “capital equals jobs,” he added there are a dozen other shale states competing for capital investment by the natural gas industry.

“Capital investment will very quickly (leave) Pennsylvania if we set up an uncompetitive situation in the commonwealth” from a tax perspective, he said.

The shale boom has also been responsible for lower rates paid by natural gas consumers, he added.

“Natural gas utility rates are one-half of what they were in 2008,” Spigelmyer said.

Wissman, who said the industry is opposed to any severance tax, said the average Pennsylvania employee in the industry earns $35,000 per year more than that state’s average worker.

Both she and Spigelmyer noted that the current impact fee begins as soon as a driller “turns dirt” for a well, while a severance tax is levied only on producing wells.

With approximately 1,000 drilled unconventional wells “not turned on line” because of pipeline capacity issues, Spigelmyer said, those wells wouldn’t produce any tax revenue under a severance plan.

According to D’Amico, comparisons to other shale-producing states’ severance taxes on natural gas are often misrepresented by proponents here.

In Texas, he said, high-production wells pay a “tremendously reduced” severance tax for the first 10 years.

West Virginia, which also levies a severance tax, exempts wells from all sales tax, he added.

When a reporter asked that if the industry would actually walk away from the highly productive wells its has drilled to date in the commonwealth, Spigelmyer acknowledged it wouldn’t exit, but said drilling activity here would be diminished.

“You wouldn’t eliminate production in Pennsylvania, but you would shrink the fairway,” he said.

While a percentage for a severance tax is under debate here, Spigelmyer said Ohio is currently proposing between 2.5 and 2.75 percent.

Pennsylvania’s current revenue is derived from fees assessed on 47 drilling companies for Marcellus and Utica Shale wells drilled in 2013, plus smaller fees on previously drilled unconventional wells assessed under Act 13.

The state collected $225.75 million from energy companies on drilled wells in 2013, an increase from $202.4 million the year before and the highest total in the three years the fees have been assessed.

More than half of the impact fees collected are distributed by the Pennsylvania Public Utility Commission to municipalities and counties where natural gas drilling occurs. The proceeds can be used for environmental, public safety, road and bridge repairs and emergency services.

Collectively Washington and Greene counties, which sit in the “sweet spot” of Marcellus Shale production, will receive $25,695,350 in Act 13 money, with Washington and its towns netting $16,212,939 and Greene and its municipalities $9,482,410.

Impact fee revenue is also sent to numerous state agencies, including the PUC, Department of Environmental Protection and the Fish and Boat Commission, to be used for drilling oversight programs.

Despite the impact fees being directed to municipalities where drilling occurs, all Democratic gubernatorial candidates and the Pennsylvania Budget and Policy Center favor replacement of the impact fee with a severance tax on the amount of natural gas produced, claiming it would bring the state millions in additional revenue.

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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