Paul Gordon Collier- At a speech delivered today at Caln Elementary School in Thorndale, PA, Governor Tom Wolf hinted at a move that will be sure to stir up controversy in the gas industry.
During the speech, which was the kickoff to Governor Wolf’s “Schools that Teach Tour”, the Governor outlined a plan for taxing the value of natural gas, as well as adding a fixed state fee based on cubic feet estimates of Marcellus Shale Natural gas. This is being called a severance tax.
The tax revenue Wolf estimates to generate from this plan would amount to $1 billion a year. He has already earmarked that tax revenue to go to public schools. During the speech, Wolf cited the ‘cuts’ his predecessor made, Governor Tom Corbett, to education spending, promising to restore those cuts through this proposed severance tax plan.
(See our October 2014 Article addressing the debate on whether these were cuts or not)
Governor Wolf detailed a plan that would place a 5 percent tax on the estimated value of the gas based on the current market price, as well as a 4.7 cent tax per thousand cubic feet of estimated Marcellus Shale natural gas.
In a key part of this speech, Governor Wolf said, “We can get Pennsylvania back on track, and we can start by passing a commonsense severance tax that will help fund our schools – an idea with bipartisan support. The commonwealth ranks 45th in the nation in percentage of state funding for public education, and, as a result, we have seen larger class sizes, fewer teachers, and vital program cuts. These cuts have made it more difficult for students to get a strong education in Pennsylvania’s public schools. This is the right thing to do for our children and our economy and to move Pennsylvania forward.
In May of 2014, when the Wolf campaign was floating around the idea of a severance tax, Tom Shepstone, in an article on naturalgasnow.org (a pro-natural gas industry organization) had this to say about the plan, “Robbing Peter to pay Paul is a poor strategy, no matter how much Paul may applaud it. West Virginia, relatively speaking, has the highest state tax burden of any oil and gas state examined. The Pennsylvania severance tax proposal would move us closer to West Virginia and stymie what we have. It’s foolish. Robbing Peter never works.”
In a poll taken back in June of 2014, commissioned by the same group, Natural Gas Now, the numbers present a mixed opinion from Pennsylvanians on the idea of a severance tax:
“Among the three-quarters of voters who have been following the natural gas severance tax debate, 55% favor adding it, 34% oppose it, and the remainder is not sure. Just one-third (33%) favor a severance tax if it results in jobs leaving the state while 58% oppose it if it costs jobs.”
If Pennsylvanians make a connection between jobs and the severance tax, then support for the tax drops to 33 percent. If no connection can be shown between the severance tax and it having a negative effect on jobs, then support is strong at 55%.
The PA State Senate has 30 Republicans and 20 Democrats while the General Assembly has 119 Republicans to 84 Democrats. By coupling the severance tax with increases in the PA Education Budget, Wolf has a chance to put pressure on the Republican-controlled Assembly and Senate. A battle in the legislature, which, at present, may seem to be a losing battle for Wolf, could set up a key issue for democrats to run on in 2016.
The Education budget was a central theme of the Wolf campaign, and many view the recent election as a mandate by Pennsylvania voters to increase spending in the education budget. Republicans counter that there is no such mandate, that Corbett’s handling of the Joe Paterno firing had more of an effect on the election than did the debate over education spending.
It should be noted that the same electorate that sent Governor Wolf to Harrisburg also sent record numbers of Republicans to Harrisburg in the Assembly and the Senate. However, the Wolf campaign did run on a platform focused on education spending.
Regardless of whether or not the Governor has a mandate, the fight in the legislature is sure to be a fiery one. If the Governor does have a mandate, if the Pennsylvania voters do not make a connection between the severance tax and potential job losses, then the democrats may just have a winning issue for 2016.
Here is the full policy memorandum outlined by Wolf to PA Legislators:
Pennsylvania’s schools have suffered from $1 billion in funding cuts and a lack of resources. We have seen larger class sizes, fewer teachers, and program cuts that make it more difficult for students to get a strong education in Pennsylvania’s public schools. If we are going to get our Commonwealth back on track and be competitive in the 21st century economy, we must provide our young people with the educational foundation necessary to be successful.
Pennsylvania currently ranks 45th in the nation in the percentage of funding the state provides for public education. This is intolerable. Pennsylvania must take the lead in investing in early childhood, K-12, and higher education.
With Pennsylvania sitting on one of the largest deposits of natural gas in the world, it is up to us to use this resource wisely so it benefits all Pennsylvanians and helps to fund our schools.
Pennsylvania is currently the only major gas-producing state in the country that does not charge a tax on oil and natural gas extraction – and we’re failing to tax this resource at a time when our schools need more funding. If states like Texas, West Virginia, and Oklahoma are able to charge a severance tax to fund key priorities, it is long past time Pennsylvania does too.
In order to ensure that we are appropriately funding education at all levels, I am today proposing the Pennsylvania Education Reinvestment Act. This will raise needed new revenue for our state’s public education system by imposing a reasonable tax – in line with our neighbors – on the extraction of natural gas within the state.
The tax proposed in the Education Reinvestment Act will be modeled after the severance tax in neighboring West Virginia, which like Pennsylvania has seen a recent boom in production of natural gas from unconventional drilling.
Implementing a similar structure to West Virginia will ensure that Pennsylvania is competitive with neighboring states. In addition, this approach has the benefit of being field tested. West Virginia offers proof that a state can build a thriving unconventional natural gas industry while simultaneously using a portion of the proceeds to help make a better future for its citizens.
I am proposing a 5% plus 4.7 cents per MCF tax. My proposal would not be on top of the existing impact fee but includes it. My proposal would continue the payments made to communities impacted by drilling that are currently funded by the impact fee.
We can get Pennsylvania back on track, and we can start by passing a commonsense severance tax that will help fund our schools – an idea with bipartisan support. At a time when our budget is facing significant challenges and our schools are struggling, it simply makes sense to pass a competitive, commonsense severance tax.
• 5% of the value of gas at the wellhead;
• 4.7¢ per thousand cubic feet of volume severed.
Reasonable exemptions for:
• gas given away free;
• gas from low producing wells;
• wells brought back into production after not having produced marketable quantities of gas.
A tax with this structure is expected to generate over a billion dollars in fiscal year 2017 with revenue expected to grow with production. This number is based on the following estimates of production from both conventional and unconventional wells:
• 2015: 4,915.0 bcf
• 2016: 4,978.2 bcf
• 2017: 5,065.3 bcf
• 2018: 5,114.0 bcf
• 2019: 5,186.2 bcf
• 2020: 5,265.5 bcf
Finally, the Education Reinvestment Act will contain provisions to protect property owners who lease land for natural gas exploration. No portion of the tax imposed in this legislation will be allowed to be deducted from royalty payments.