Written by Chloe Marie
– Research Fellow
This
series will address severance taxes on natural gas imposed by natural
gas-producing states and this first article will review the severance tax
system for the states of Pennsylvania, Ohio and West Virginia.
Pennsylvania
The
state of Pennsylvania does not levy a severance tax, but rather imposes an
impact fee on unconventional gas wells. Pennsylvania Governor Tom Wolf has
repeatedly proposed a severance tax on unconventional natural gas extraction, but
each time the proposal has failed to advance through the Pennsylvania General
Assembly.
For
the year 2015-2016, 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 volume MCF. This proposal set a pricing floor
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. In 2016, Governor
Wolf proposed a severance tax at a rate of 6.5% of the value of the natural
gas. In the 2017-2018 Pennsylvania Executive Budget
issued on February 7, 2017, Governor Wolf once again proposed a severance tax
of 6.5% of the value of natural gas extracted with the possibility to convert
the amount paid in impact fee as credit against the severance tax.
In Pennsylvania, the
state Public Utility Commission (PUC) is responsible for administering the
impact fee – also called the unconventional gas well fee – as well as
overseeing its collection and distribution to local governments and state agencies
(58
Pa. C.S. chap. 23). Every
unconventional gas producer must pay this fee to the Commission for each well
they spud each calendar year. The impact fee is calculated based on the average
annual price of natural gas and the age of the well.
All fees must be
collected and deposited in the Unconventional Gas Well Fund no later than April
1 of each year and then distributed from the fund no later than July 1 of each
year following a specific formula. Prior to the distribution of any funds to
local government entities, funds are distributed to state agencies as follows
(funds are increased annually based on the Consumer Price Index):
·
PA Fish and Boat Commission - $1,000,000
·
PA Public Utility Commission - $1,000,000
·
PA Department of Environmental Protection - $6,000,000
·
PA Emergency Management Agency – $750,000
·
PA Office of State Fire Commissioner - $750,000
·
PA Department of Transportation - $1,000,000
·
PA Housing Affordability and Rehabilitation Enhancement Fund -
$2,500,000
·
County conservation districts - $7,500,000
Once these initial
distributions have been made, 60% of the remaining revenue must be distributed
to local governments on the basis of the following formulas:
·
36% to counties based on the number of spud wells in each county;
·
37% to municipalities based on the number of spud wells in each
municipality; and
·
27% to municipalities based on the number of spud wells in each county
based on the proximity to the wells, the total population and the total highway
mileage of the eligible municipalities within the county.
The remaining
revenue must be deposited in the Marcellus Legacy Fund and distributed to state
agencies and projects, including:
·
20% to the Commonwealth Financing Authority
·
10% to the Environmental Stewardship Fund
·
25% to the Highway Bridge Improvement Restricted Account
·
25% for water and sewer projects
·
15% for greenways, trails, recreation, open space, etc.
·
5% to the Department of Community and Economic Development (DCED);
however funds not utilized by the DCED must be deposited in the Hazardous Sites
Cleanup Fund.
For drilling in 2016,
the Commission collected and appropriated $173,258,900.00, which amount is a
small decline compared with previous years.
The Pennsylvania
PUC sets forth the previously received amounts as follows:
·
2015 - $187,711,700.00
·
2014 - $223,500,000.00
·
2013 - $225,752,000.00
·
2012 - $202,472,000.00
·
2011 - $204,210,000.000
Ohio
The
severance tax is set at 2.5 cents per thousand cubic feet (Mcf) of natural gas
extracted. The Ohio Revised Code provides for an annual exemption applicable to
landowners using natural gas produced from their own wells; however, this
exemption is limited to the extent that natural gas resources should not exceed
a cumulative market value of $1,000 per year (ORC §
5749.02(A)(6)).
As
for the revenue distribution, 10% is deposited in the Geological Mapping Fund
while the other 90% is deposited in the Oil and Gas Well Fund (ORC § 5749.02(B)(4)). Payments are made
electronically each quarterly period.
In
addition to the severance tax, well owners are subject to an oil and gas
regulatory cost recovery assessment, with an exception provided for an exempt
domestic well (ORC § 1509.50). The cost recovery
assessment is calculated on a quarterly basis using a formula that takes into
consideration the amount of severance taxes paid, the amount of oil and gas
production, and the total number of wells owned or being reported. The amount
of severance taxes is added to the assessment based on production and the
resulting sum is then compared to the minimum assessment amount – which is $15
per well. The severance taxes are subtracted from the greater of the two
amounts to arrive at the assessment amount due.
West Virginia
In
West Virginia, a severance tax has been set at 5% of gross value of natural gas
measured at the wellhead (WVC § 13A). Before July 1, 2016,
natural gas producers also had to pay an additional severance tax by volume of
4.7 cents to state Tax Commissioner. The money received from this additional
tax used to be deposited in the Workers’ Compensation Debt Reduction Fund to
pay off debts associated with the state-run workers’ compensation system prior
its privatization in 2006. On February 29, 2016, however, Governor signed SB 419 into law terminating
the Workers’ Compensation Debt Reduction Act and thus also terminating the payment
of this additional 4.7 cent tax as of July 1, 2016.
The
West Virginia Code provides for severance tax exemptions applicable to wells
producing less than 5 Mcf of natural gas per day and wells not producing
marketable quantities for 5 consecutive years, which exemption is for up 10
years.
90%
of the revenue from the severance tax is then deposited in the West Virginia
General Fund and the first $24 million of the revenue collected is distributed
to debt service for infrastructure bonds. The remaining 10% is distributed to
counties and municipalities. Of this percentage, 75% is distributed to oil and
gas producing counties, and 25% is distributed to all counties and
municipalities based on population densities.
