Shale Law in the Spotlight: Timeline and Overview of Natural Gas Severance Tax Proposals in Pennsylvania

Written by Chloe Marie – Research Fellow

The state of Pennsylvania does not levy a specifically identified severance tax on natural gas extraction, but rather imposes an impact fee on unconventional gas wells. Each year that he has been in office, Pennsylvania Governor Tom Wolf has proposed a severance tax on unconventional natural gas extraction as part of his budget proposal, but severance tax legislation has failed to advance through the Pennsylvania General Assembly.

In light of the recent severance tax proposal made upon the issuance of the 2018-2019 proposed Executive Budget, this Shale Law in the Spotlight article will provide an overview of the prior proposals set forth by Governor Wolf since taking office in January 2015.

·       2015 Severance Tax Proposal and proposed legislation

As part of his 2015-2016 Executive Budget, Governor Wolf proposed to impose a severance tax at a rate of 5% on natural gas extracted at the wellhead, plus a fixed tax amount of 4.7 cents per Mcf of gas extracted. As this proposal was incorporated into legislation, a pricing floor was established for producers at $2.97 per Mcf – meaning that each time the average market price was below $2.97, the pricing floor would have been used to calculate the severance tax.

This severance tax proposal was included as part of Governor Wolf’s education reinvestment plan to improve the funding public education in Pennsylvania. In a Press Release dated February 11, 2015, the Governor Office declared that this proposal was modeled on West Virginia’s severance tax structure and was expected to raise over one billion dollars in revenue for fiscal year 2017. The 2015-2016 Executive Budget was passed in March 2016 without the Governor’s signature, and it did not include any severance tax provisions.

In 2015, a total of at least 14 bills were introduced in either the Senate or the House regarding the levy of a natural gas severance tax in Pennsylvania, including Senate Bills 116, 395, 415, 519, 719, 741, and House Bills 82, 500, 528, 1142, 1321, 1363, 1536, 1743. None of those bills advanced through the General Assembly by the end of the 2015-2016 legislative session.

·       2016 Severance Tax Proposal and proposed legislation

In its proposed 2016-2017 Executive Budget, Governor Wolf again proposed the imposition of a severance tax on natural extraction at a 6.5% rate of the value of natural gas. The proposal specifies that the impact fee can be taken as a credit against the severance tax. The Pennsylvania General Assembly passed the state budget in June 2016, but it did not provide for a severance tax.

In 2016, at least three more bills – House Bills 2013, 2165, and 2171 – were introduced in the House of Representatives regarding the imposition of a severance tax on natural gas extraction. None of these bills advanced through the General Assembly by the end of the 2015-2016 legislative session.

·       2017 Severance Tax Proposal and proposed legislation

The Office of the Governor renewed its call for a 6.5% severance tax on natural gas extracted in Pennsylvania in the Executive Budget for fiscal years 2017-2018 released on February 7, 2017. During extended budget negotiations, Governor Wolf called on the General Assembly to “replace their most recent tax proposals with a commonsense severance tax and vote,” as stated in a Press Release dated October 4, 2017. The General Assembly passed the state Executive Budget without agreeing to a severance tax on natural gas.

In addition to Governor Wolf’s initiative to impose the payment of a severance tax, House Bill 1401 was introduced on May 18, 2017, to provide for the levy of a severance tax at a rate of 3.2% of the gross value of dry natural gas or natural gas liquids. On October 18, 2017, the Bill was reported out of the House Finance Committee. It remains pending before the House of Representatives. 

A total of at least seven other bills have been introduced to the House of Representatives and Senate regarding the imposition of a severance tax on natural gas, including House Bills 1054, 1086, 1624, 1662, 1720, and Senate Bills 566 and 245.

·       2018 Severance Tax Proposal and proposed legislation

On February 6, 2018, Governor Wolf introduced a proposed Executive Budget for fiscal years 2018-2019, in which he urged the General Assembly to agree on severance tax legislation. Governor Wolf proposed the enactment of a volume-based tax determined using the New York Mercantile Exchange price as follows:

·       A rate of 4.2 cents per Mcf will be levied if the NYMEX price equals to $3 or less;

·       A rate of 5.3 cents per Mcf will be levied if the NYMEX price equals to $3 but less than $5;

·       A rate of 6.4 cents per Mcf will be levied if the NYMEX price equals to $5 but less than $6;

·       A rate of 7.4 cents per Mcf will be levied if the NYMEX price is greater than $6.

If legislation were passed, the severance tax would enter into force on July 1, 2018, with a first payment due on June 15, 2019. The proposed budget clearly states that the existing impact fee will remain in place, but no fee deduction or credit will be allowed against the severance tax. The Governor Office declared that “this commonsense proposal generates much-needed revenue to address critical budget needs, but does not place a majority of this tax burden on Pennsylvania residents.”

On the same day, Marcellus Shale Coalition President David Spigelmyer released a statement in which he expressed the organization’s opposition to Governor Wolf’s severance tax proposal alleging that “unfortunately, the governor once again is putting politics first by proposing additional energy taxes that will make hiring and investing in Pennsylvania more difficult for local job creators, small businesses and manufacturers.”

In early March, Senator Baker asked the Pennsylvania Independent Fiscal Office (IFO) to provide its own assessment of the potential impact of the proposed severance tax on future royalty payments, and more precisely how it may affect post-production costs. On March 16, 2018, the IFO answered in a memorandum that “in the longer-term, if the [NYMEX] price did increase in response to the tax, then royalties would also increase and thereby offset some (or all) of the tax passed back to landowners.”

In response to this finding, the Governor Office provided additional language to the severance tax proposal implying that “current landowners would be held harmless from any pass back of the new severance tax” before adding that “on a prospective basis, it is possible that royalty rates for new leases could be reduced to reflect a portion of the new tax.”  

On May 9, 2018, Senate Bill 1000 was introduced, with the support of Governor Wolf, that would provide for a volumetric severance tax and amend the Tax Reform Code of 1971. The Bill was referred to the Senate Environmental Resources & Energy Committee where it remains pending. The companion bill, House Bill 2253, was introduced and referred to the House Environmental Resources and Energy Committee on May 3, 2018.

This material is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.