House Finance Committee Chair Issues Special Report On Marcellus Shale Severance Tax

Rep. David Levdansky (D-Allegheny), Majority Chair of the House Finance Committee, this week issued a special update on the proposed natural gas severance tax designed to capture some of the billions of dollars of value to be produced by drillers tapping into the Marcellus Shale formation in Pennsylvania.

According to the U.S. Energy Information Administration, 32 states produced measurable amounts of natural gas in 2007.

Pennsylvania ranked 15th among the natural gas producing states, yielding over 182 billion cubic feet of marketed production. This accounts for almost 1 percent of the total U.S. production. Among the 32 states that produce natural gas, 27 charge a severance tax on its production. Of the 14 states with greater production than Pennsylvania, all but California levy a severance tax.

In Pennsylvania, critics of the proposal to impose a severance tax claim that producers are already subject to the Corporate Net Income Tax and the Capital Stock and Franchise Tax. However, it should be noted that in the top 14 natural gas producing states, it is common to pay both severance and corporate taxes. In fact, Wyoming is the only one that does not.

Moreover, a review of well count reports issued by the Department of Environmental Protection shows that most of the companies currently operating wells in Pennsylvania are organized as Limited Liability Companies.

LLC’s are not subject to the CNIT, but instead pay the Personal Income Tax rate of 3.07 percent, the same tax rate as their employees who man the rigs. Both corporate entities and LLCs are subject to the Capital Stock and Franchise Tax, but that tax is scheduled to be phased out by 2011.

The Governor’s proposed rate is 5 percent of value of the natural gas at the wellhead plus 4.7 cents per thousand cubic feet of natural gas severed. This would match the current severance tax structure in neighboring West Virginia. The governor’s proposal is projected to take effect on October 1, 2009, and is expected to generate $107 million in Fiscal Year 2009-10. It is anticipated that revenues could generate as much as $632 million by 2013-14.

The Governor’s original proposal calls for the entire revenue to be distributed into the General Fund. As consideration of legislation that would enact a severance tax in Pennsylvania moves forward, it will be critical that we ensure portions of the revenue be distributed to at least the following areas:

-- The General Fund – to both offset the state’s current budget shortfalls and provide a new source of revenue;

-- A Dedicated Environmental Impact Fund – to ensure funding for projects that will be needed to address long and short term environmental issues that arise as a result of the increased drilling operations across the state; and

-- Local Revenue Sharing – A dedicated revenue stream that will allow local governments to address the numerous infrastructure impacts of the drilling industry, as well as reduce the burden of property taxes.

Download the full report.