Severance tax would hurt Pa.'s natural-gas industry

By Denise M. Furey

Two years ago at the Marcellus Shale Coalition's annual conference, Lt Gov. Jim Cawley warned Democrats in Harrisburg that one cannot both tax and ban shale-gas development. Unfortunately, the severance tax in Gov. Wolf's proposed budget could unintentionally do just that.

The Pennsylvania legislature offered Wolf an alternative budget with no severance tax, but he promptly vetoed it. I hope the legislature sticks to its guns.

The weak price of natural gas already has resulted in a reduction in the number of rigs in the state, down from 116 in 2012 to 47 in March. A severance tax would only further curtail the drilling of new wells and eliminate related construction jobs, not to mention the income tax and other related state revenues from those activities.

Wolf's plan would be particularly deadly to the sector. The governor wants to put a 5 percent tax, along with a fixed fee of 4.7 cents, on each thousand cubic feet of gas extracted. Also, he wants the tax assessed on a minimum price of $2.97. Today's market price for natural gas is $2.86, which is already below that base. Perhaps more importantly, gas producers in Pennsylvania are reportedly receiving significantly lower prices - ranging from $1.20 to $1.80 - owing to inadequate transportation infrastructure.

At these prices, the tax works out to be as high as 16 percent, making it one of the highest in the nation. If Wolf gets his way, drillers will look to develop reserves in other states - effectively banning new development in Pennsylvania. The American Petroleum Institute estimates that Wolf's plan would reduce the state's gross product by $20 billion through 2025.

Wolf wants the proceeds from the severance tax earmarked for public education. Sadly, I doubt any large portion of these tax revenues will go to classrooms instead of ever-expanding pension expenses. Ninety-eight percent of municipalities that petitioned the state for exemptions to increase real estate taxes at a rate above inflation from 2010 to 2014 cited pension expenses as a cause. Our underfunded pension plans are a real problem, but we won't solve them by derailing an industry that has been and could continue to be an economic engine in the state.

I do not believe that the governor is an extreme environmentalist who wants Pennsylvania to exit the shale-gas business. He probably read the same Environmental Protection Agency report I did, which concluded that there is no evidence that hydraulic fracturing negatively affects water supplies. He did ban drilling on state land. But in many cases the state did not buy mineral rights when it bought land, so the governor may not be able to prohibit mineral owners from accessing their assets.

Wolf also promised to maintain the fracking ban in the Delaware River Basin. That may also be an empty gesture. As long as Andrew Cuomo and Jack Markell remain the governors of New York and Delaware, respectively, the Delaware River Basin Commission is unlikely to come to a consensus on environmental rules for drilling, which are prerequisites for the commencement of any development.

If I were a cynic, I would worry that callilng for the use of the severance tax to fund schools without addressing the pension crisis is a sop to the teachers' unions that helped get Wolf elected. The drilling bans appear to be gestures to environmental groups, which also backed him last year.

I really do not believe this governor has a plan to derail the shale-gas industry. But given his actions to date, it appears that he has no concrete and coordinated policies for the sector (except to tax it), which to me is as frightening as a plan to ban development.