Newly-elected Pennsylvania Governor Tom Wolf caused a stir when he announced the introduction of a severance tax on all shale exploration in the state. According to Wolf, the tax which – if approved by the state legislature – would go into effect 1st January, 2016, and provide revenues for the state beginning fiscal year 2017, could generate over $1 billion.
The Governor pledged to use the “lion’s share” of the money to shore up Pennsylvania’s underfunded education system, which gets up to 30 per cent of its financing from the state’s coffers. Pennsylvania ranks forty-fifth in the nation for state support for education and schools were high on the agenda among the voters. The Governor could certainly use additional revenues to plug the current $2 billion deficit hole in state’s budget.
“There is a great opportunity here in terms of matching this need for funding and something we have in Pennsylvania,” Wolf said at Caln Elementary School in the Coatesville Area School District. “We sit on top of one of the richest deposits of natural gas in the world. So a severance tax on that resource would be something that is really appropriate.”
“This is about what we need to do as Pennsylvanians to serve this educational need that we all have,” he added. “We need to make sure that we are doing a good job and investing in our future by investing in education.”
Providing extra funding for education is certainly a noble cause, but the new shale gas tax proved to be a contentious issue.
The proposed tax – which Wolf said is based on the model used in West Virginia – charges 5 per cent of the value of the gas coming out of the well head and then an additional 4.7 cents per thousand cubic feet pulled out of the ground.
The necessity of imposing some kind of tax on gas exploration is something that both the Republicans and the Democrats agree upon. Lawmakers from both parties have already proposed their own such taxes in recent weeks ranging from 3.2 per cent to 8 per cent.
However, many Republicans believe that Governor Wolf’s tax is excessive and will, in effect, harm the economy. Adding the 5 per cent tax to the 4.7 cent charge per thousand cubic feet of extracted gas, they said, makes its a 7.5 percent tax. That on top of Pennsylvania’s 9.99 per cent corporate tax rate may make doing business in the state prohibitively expensive.
Governor Wolf, on the other hand, points to a report by Pennsylvania’s independent fiscal office that says adopting the West Virginia model would effectively make the tax rate 5.8 per cent, not 7.5 per cent.
Unsurprisingly, the gas industry in Pennsylvania opposes the new tax, arguing that the currently imposed 3.5 per cent local impact fee, which directs most revenue to the municipalities affected by shale gas extraction, and which generated $225 million last year, is a sufficient levy on the industry. The timing of the new tax is also not ideal given the low crude and natural gas prices, pushing some companies below profitability levels.
“Natural gas operators pay the same taxes that every other business in Pennsylvania pays, which has helped generate more than $2.1 billion through 2013,” said David Spigelmyer, president of the Marcellus Shale Coalition, a trade group.
The public clearly wants the severance tax, but it still needs to be approved by the state legislature, currently controlled by the Republicans, who would prefer to raise cash by privatizing the state liquor store system; an idea Wolf opposes. However, when asked, he brushed aside any concerns about getting the tax approved: “I don’t think lawmakers are gearing up for gridlock,” Wolf told Reuters. “Done right, a reasonable tax is actually the best thing for the private sector. This is a reasonable tax. It’s been working all around the country.”
At least 36 other states have a severance tax of some kind, according to the national Conference of State Legislatures. Pennsylvania’s current well fee is lower than all other states’ severance taxes except Ohio’s, the Fiscal Office report also found. Ohio Republican Gov. John Kasich is now calling for a higher severance tax.
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