Pennsylvania's budget saga and the proposed severance tax

Pennsylvania has been without a budget since its fiscal year began on July 1, and remains without a budget after the House voted 127-73 earlier in the month against Governor Wolf’s $31.6 billion budget plan (a 9 percent increase from last year’s budget). The Republicans in the House and Senate passed an $11 billion stopgap budget that was vetoed by Wolf last month on the rationale that it “sells out the people of Pennsylvania to oil and gas companies and Harrisburg special interests.” This past week, Rep. Stephen Bloom (R-North Middleton Twp.) and Rep. Dan Moul (R-Gettysburg) proposed a series of bills that would provide $3 billion in federal and state money for struggling school districts and social service organizations that Wolf also vetoed. According to reports, no signs of progress between the sides have been made since and neither the governor nor legislative leaders had returned to the bargaining table, instead leaving the talks to their staffers. This past Friday, Moody’s Investors Service downgraded its outlook on the Commonwealth’s debt from “stable” to “negative” amid this political gridlock.

In addition to the income and sales tax hike, the main sticking point of the budget impasse is Governor Wolf’s proposed mineral extraction tax. Governor Wolf’s plan proposes a 3.5 percent mineral extraction tax plus a fee of 4.7 cent/mcf of gas produced layered on top of the impact fee, which is currently imposed on every well drilling for gas in the Marcellus Shale formation. According to the Independent Fiscal Office (“IFO”), Governor Tom Wolf’s proposed severance tax would give Pennsylvania the distinction of having the highest effective tax rate on the extraction of minerals among gas-producing states in the country. IFO Director Matthew Knittel stated that the effective tax rate under Wolf’s proposal would be 7.3 percent; compare that with bordering gas-producing states Ohio (0.8 percent) and West Virginia (5.0 percent).

The effective tax rate of the impact fee is determined by dividing the annual impact fee revenue by the total market value of the product. The impact fee’s effective tax rate was 5.3 percent in 2011 and had dropped to 2.1 percent in 2014, yet still generated just over $220 million in fees in 2014. The IFO projects the effective tax of the impact fee to fall to an effective rate of 0.8 percent in 2018 if Wolf’s proposal is not instituted.

Governor Wolf has said that “…Pennsylvanians are right now getting a bad deal. We deserve to be fairly compensated for the use of our resources.” The opposition argues that much of the compensation for developed resources is the jobs and revenue the shale industry generates. According to the Pennsylvania Department of Labor and Industry, the numbers released in June of 2015 show that there were nearly 90,000 people in Pennsylvania employed in the third quarter of 2014 in either natural gas extraction development, or companies that provide goods and services to the industry.

Recently, one energy company announced layoffs of 10 percent, another announced rig reductions of 60 percent, and revenue declined 26 percent at a third. Wolf and fellow legislatures on both sides of the aisle should focus on ways to help grow the industry. By supporting the building of more pipelines and other infrastructure, natural gas extracted from Pennsylvania will be able to be exported to those in the northeast such as New York, Boston, and maybe even Canada, generating more jobs in the Commonwealth.