Op-Ed: How A Principled Severance Tax Can Break Budget Stalemate

By Rep. Gene DiGirolamo (R-Bucks) and Steve Stroman

As the budget stalemate in Harrisburg drags into its 10th week, it is clear to most observers that a reasonable natural gas severance tax will be a key element of the final compromise.

Such a severance tax is smart public policy, fair to the industry, makes substantial investments in our citizens and natural resources, and can attract the support of Gov. Tom Wolf, Republican legislative leaders, and both Democratic and Republican members of the General Assembly.

Our perspective is informed in very general terms by our work on House Bill 1363. We developed this bi-partisan severance tax legislation in conjunction with Republican Tom Murt of Montgomery County, and Democrats Harry Readshaw of Pittsburgh and Pam DeLissio of Philadelphia.

A reasonable tax rate:

Pennsylvania remains the only major natural gas producing state without a severance tax. The Commonwealth now assesses a decidedly modest impact fee based on the number of wells drilled.

Taxing gas at a fair rate based on the economic value of the gas produced, following the model of 27 other states, would generate hundreds of millions in additional state revenues.

We propose a 3.2 percent tax on top of the existing impact fee, which would translate into an effective tax rate of approximately 5 percent, essentially the rate of neighboring West Virginia.  The industry is thriving in West Virginia, and it will continue to thrive in Pennsylvania if we enact a similar tax.

The non-partisan Independent Fiscal Office concluded that the impact fee translates into the lowest effective natural gas tax rate in the United States. For 2014, the effective rate was 2.1 percent. A tax akin to West Virginia's would bring in two to four times as much revenue as our impact fee, according to various studies.

A reasonable tax structure:

Wolf proposes taxing the gas industry starting at a minimum price of natural gas, specifically $2.97 per thousand cubic feet, regardless of the actual price of gas. Last week's Henry Hub spot price for natural gas averaged $2.65, over 10 percent lower than the proposed Wolf tax floor.

While we appreciate the desire to establish a floor for state revenues, this element of the Wolf proposal is contrary to basic microeconomics and creates additional vulnerability for an industry already under stress from low gas prices.

We understand that Wolf has shown a willingness to move away from the tax floor. He will need to make such a move to earn the support of Republican leadership.

Protect Act 13 impact fee distributions:

Pennsylvania's impact fee revenues, while modest overall, provide important funding to local governments dealing with the impacts of gas drilling on their communities.

The impact fee also provides funding for affordable housing and environmental initiatives such as Growing Greener, water infrastructure, hazardous sites cleanup, conservation districts, parks and trails.

Wolf proposes to place a ceiling on these impact fee revenues and their beneficiaries. While these programs do better under Wolf's proposal under certain scenarios of gas prices, we advise the governor to remove the impact fee cap.

Taking such a step would help reassure some of the principal Republican architects of Act 13 who are also negotiating the budget.

Direct the lion's share of funding to education:

A centerpiece of Wolf's 2014 campaign was enacting a severance tax and directing the bulk of the funding to basic education. Republican legislative leaders have moved the governor's way on increasing education funding, and almost all have been careful not to rule out a severance tax.

It is clear that this will, or should, be a central element of the final budget compromise.

We propose that, once impact fee programs are fully funded, that at least 75 percent of additional revenues be directed to education, with the remainder going to environmental and human services programs.

Funding for conservation, clean energy and environmental protection:

Wolf is on the mark for proposing to earmark a portion of severance tax revenue to bolster clean energy initiatives and to provide the Department of Environmental Protection with additional staff to enforce drilling laws.

It is appropriate that a portion of an extraction tax be invested in solar, wind, energy efficiency and other technologies to help build a low-carbon future.

We also recommend that a portion of the tax revenue be directed into the popular Growing Greener conservation and environmental program, and to local clean water programs that will help Pennsylvania comply with its Chesapeake Bay obligations.

Funding human services programs:

We propose that some of the tax revenue be directed to human services programs so that we can better strengthen the stitching of our social safety net for individuals and families in need.

Some of these valuable programs include drug and alcohol programs, intellectual disability programs, behavioral health services, the Human Services Development Fund, the Homeowners Emergency Mortgage Assistance Program, rape and domestic violence programs, and the operation and maintenance of veterans' homes.

[Editor’s Note: Rep. DiGirolamo has introduced his natural gas severance tax proposal as House Bill 1363.]

Rep. Gene DiGirolamo (R-Bucks) is Majority Chair of the House Human Services Committee and  Steve Stroman is the director of Penn's Woods Conservation Advocates.

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