Berman & Asbel, LLP

Severance Taxes, Impact Fees, and Pipelines in Pennsylvania

Governor Tom Wolf has announced plans to introduce the Education Reinvestment Act, which, if passed, will go into effect on January 1, 2016. The majority of the estimated $1 billion revenue will be reinvested in Pennsylvania's public school system, where past cuts have negatively impacted many schools. The funds will also be used to reinvest in environmental and regulatory programs overseeing the natural gas industry. The Governor stated that the Act is modeled after neighboring West Virginia's severance tax. Texas, West Virginia, and Oklahoma have already imposed severance taxes on the natural gas industries operating within their borders.

The proposed Act would impose a 5% severance tax on the value of the gas at wellhead as well as 4.7ยข per thousand cubic feet per volume severed. This proposal would include the impact fees already in place through Act 13, signed by Governor Corbett in 2012, which amended Title 58 of the Oil and Gas Act. Approximately sixty percent of the impact fees collected are distributed to local and state governments, primarily to cover the costs of the impacts of drilling. The other forty percent goes to various state agencies responsible for regulating and overseeing drilling operations and the Marcellus Legacy fund, which fund environmental and infrastructure projects around the state.

Under Act 13, impact fees may be imposed by any county with unconventional gas wells within its borders. Any county that does not pass an impact fee ordinance does not receive funding until it passes such ordinance. The Pennsylvania Utility Commission is in charge of collecting and distributing impact fees to local governments. The levy changes from year to year based on natural gas prices and the Consumer Price Index, but since 2011, impact fees have brought in $693 million dollars to the Commonwealth. In 2013, natural gas producers paid $50,000 on average per new well drilled, and $10,000 per vertical well.

Governor Wolf's expected $1 billion in revenue for fiscal year 2017 is calculated from current and projected natural gas production rates ranging from 4,900 bcf in 2015 to 5,200 in 2020. The proposed tax includes exemptions for gas given away for free, gas from "low producing wells", and wells brought back into production after not having produced marketable quantities of gas. The proposed Act will also provide protections for landowners who lease their property for natural gas activities so that the costs of the tax will not be passed onto the landowners.

Opponents of the tax criticize that the 5% severance tax plus the 4.7 cent per thousand cubic feet essentially amounts to a 7.2% tax on the industry. Opponents argue that such a tax will decrease capital investment in this industry in Pennsylvania and thereby decrease job creation and retention within the Commonwealth. Pennsylvania also has one of the highest corporate tax rates in the country, which, opponents argue, is already a significant deterrent to business investment in the state. Pennsylvania's corporate income tax rate is currently a 9.99% flat rate. Pennsylvania's state and local corporate income tax collections per person were $179 in 2011, which ranked 12th highest nationally. That is not to say, however, that there is not support for a severance tax by Republicans. A bipartisan bill to levy a 3.2%, in addition to the impact fee, is on the table. The bill is led by Gene DiGirolamo (R-Bucks), Pamela DeLissio (D-Philadelphia), Thomas Murt (R-Montgomery), and Harry Readshaw (D-Allegheny).

Governor Wolf will outline the proposed Act on March 3 as part of his first budget address on March 3.

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