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Herbein Blog

21 Nov
2013

Energy Tax Controversy

Energy Tax Controversy

With the Pennsylvania gubernatorial race heating up, a controversial proposed energy tax is back on the table.  Severance taxes on natural gas production in Pennsylvania have been proposed for years, but Governor Tom Corbett decided to levy an impact free based on the number of wells drilled instead of a tax on the amount of gas produced.  In the two years that the impact fee has been in effect, more than $400 million has been collected and used for local governments and Pennsylvania programs.

With the election over a year away, several candidates for Governor have already stepped forward to support a severance tax on natural gas production.   U.S. Representative Allyson Schwartz and Former Secretary of the Department of Environmental Protection Kate McGinty both support a 5% severance tax.   Another former DEP Secretary, John Hanger, calls for reasonable severance taxes and expansion of Pennsylvania’s energy efficiency initiatives established under Governor Ed Rendell. Schwartz estimates that a 5% severance tax could generate up to an additional $600 million in state funds in its first year which she believes should be used to finance transportation projects including bridge repair.

Studies done in September 2013 show nearly 4,500 bridges in Pennsylvania are categorized as “structurally deficient” and in need of either repair or replacement.  Of the 4,500 structurally deficient bridges, 20 percent are located in Southwestern PA including  223  in Allegheny County, 173 in Washington County, 168 in Westmoreland County, 118 in Fayette County, 92 in Greene County and 71 in Beaver County.

Over the past few years, the federals funds which have been used to repair the bridges have been milked dry, making the State Legacy Funds, funded with the impact fees, the primary method of funding the transportation network repairs.  This is what makes Candidate Schwartz’s proposed severance tax to replenish bridge funds so favorable to some voters.   However, while the severance tax could help bolster transportation funds, energy producers, related suppliers, and The Marcellus Shale Coalition are strongly opposed to the additional taxes.

The Coalition argues that with low natural gas prices and the discovery of competing shale formations across the country, drilling of new wells in Pennsylvania has already begun to slow. The Coalition believes that increased taxes, and  therefore the higher cost of production will lead to reduced production activity, reduced state and local revenues, fewer jobs, and a diminished economic impact on areas where drilling is prevalent.   Ms. Schwartz defends the proposed severance tax stating that other states with severance taxes, such as Texas and Oklahoma, have high rates of 7% or more, while her proposed tax would only be 5%.  The coalition is worried that even though the severance is at a lower rate, Pennsylvania’s corporate tax rates, which they argue are among the nation’s highest state tax rates, combined with the severance tax could be a crippling blow to energy producers in Pennsylvania.

The controversy over the severance tax has already gotten the attention of the shale and related industries and the controversy will likely continue as the November 2014 election approaches.

For additional information please contact the author Alex J. Patterson at ajpatterson@herbein.com.

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