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PA Budget Hearing Exposes Severance Tax Game

cost of renewables - Tom ShepstoneTom Shepstone
Natural Gas NOW

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Pennsylvania budget hearings are revealing just how little thought the Wolf Administration has given to the severance tax it wants to impose for spite.

There are two weeks of hearings going on in Harrisburg right now to study Tom Wolf’s proposed new budget for Pennsylvania. It’s more boring than you can imagine; watching paint dry is a pleasant diversion, in fact. Still, tucked inside the hearings are some questions and answers that tell us an awful lot about the Wolf administration and where it stands on natural gas issues. There are also a lot of additional questions that need to be asked.

Budget hearings take place about this time of the year every year for the next fiscal year (2017-2018 in this case). Heads of departments appear before House and Senate committees to be questioned on what they plan to spend and what they’re planning to do with the money they take from us. It can be pretty depressing listening to the assembled two branches of state government discussing how to squeeze more out of taxpayers. The whole thing is a cat and mouse game, too, of course. Yet, there is a lot of substance involved, given that it’s about following the money.

Eileen McNulty, Secretary of the Revenue Department and her top staff testified on Tuesday before the Pennsylvania House Appropriations Committee. They testified for a full two and one-half hours, during which time three questions were asked regarding the gas industry. The entire hearing can be found here (look under PA House Hearings for Department of Revenue, 2/21/17). Don’t bother watching unless insomnia is a life or death situation for you. We’ve already identified the three spots where gas discussions start.

The first is at 25:46, when Republican Representative Jamie Santora from Delaware County noted previous Wolf severance tax proposals included promises all the money collected would go to education. He asked if that was true this time. Deputy Secretary for Tax Policy, Dan Hassell (yes, the tax policy guy’s name really is Hassell) stumbled around to get to the answer. He said the new proposal included no floor price against which the tax would apply, effectively admitting the last proposal was fatally flawed in that respect.

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He also inexplicably implied natural gas prices were relatively high when Wolf first proposed a severance tax, which, of course, was not true. He continued by saying they had collapsed but were now rising again, meaning revenue forecasts were going up before admitting he was “not aware of any component that would dedicate the money to education.” It was a big stumble for the Wolf administration. Kudos to Representative Santoro. He exposed the truth about the severance tax; it’s not for the kids but, rather, for punishment of the gas industry and a raid on royalties to help solve Pennsylvania’s spending problem.

The next question came from Democrat Representative Kevin Boyle of Montgomery and Philadelphia Counties at 1:15:50 who repeatedly stated the Commonwealth had a “real revenue problem” (funny how it’s never, ever a spending problem). He asked how much money the severance tax would have generated had it been enacted when earlier proposed.

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Eileen McNulty’s non-answer was “we’d have to calculate that,” as she endorsed the idea that lack of revenues and not spending were the cause of Pennsylvania’s “structural deficit.” She then conveniently segued into the need to replenish the state’s Rainy Day Fund. Boyle then asked her if it was fair to say “we could have produced hundreds of millions of dollars of additional revenue since 2011 if there had been a severance tax.” She unsurprisingly caught that softball in her bare hands and with a big smile.

The last question on gas came at 1:39:15 from Republican Representative Jason Ortitay from Allegheny and Washington Counties (finally someone from the gas region). He asked if the new proposed severance tax would allow for capital cost recovery as a deduction. McNulty was totally evasive, first suggesting that was an income tax matter (it is not) and then trying to divert to the fact the tax would credit impact fees paid before finally admitting the proposal would not allow for capital cost recovery. It’s worth noting, by the way, other states (e.g., Alaska, Colorado, Ohio, Louisiana and Texas) do allow capital cost recovery and, therefore, would have much lower effective severance tax rates than Governor Wolf proposes.

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Ortitay then asked what the Department had projected with regard to revenue trends from the tax. She said she expected production and revenue to increase the long-term, although it would go down in 2017, stating (correctly) that a lot depended on increasing pipeline capacity. That was a nice admission. Pennsylvania’s gas revenues (whether we’re talking income, sales or severance taxes) depend on pipeline infrastructure. One wonders if pipeline opponents who want severance tax punishment of the industry liked that one. McNulty also acknowledged sales tax collections go down in shale counties when drilling slows, indicating just how important shale development is to those areas and the Commonwealth.

There are a whole bunch of questions that should have been asked about Wolf’s proposed new 6.5% severance tax (with a credit for the existing impact fee) and weren’t. I would have asked, for instance, whether the governor’s team was aware the existing impact fee, according to Pennsylvania’s Independent Fiscal Office (see Table 3 from report below), already amounted to an effective tax rate of 6.9% in 2015 and 5.0% in 2016?

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I would have also asked about the Independent Fiscal Office further reporting in April, 2016, that “most other states apply the [severance] tax to the market value at the wellhead (which allows post-production deductions).” Does the governor propose to allow such deductions in Pennsylvania?

While McNulty acknowledged the importance of pipelines to revenues it would have, too, been nice to see it pointed out that, in July 2016,  natural gas producers shipping through the Henry Hub received, on average, $1.37 or 97% more than Pennsylvania producers shipping through the Transco-Leidy Line. This differential is, according to the Energy Information Administration, attributable to the availability of pipeline capacity there (and not in Pennsylvania) to deliver product.

Surprisingly, no one addressed the potential problem with the Pennsylvania State Constitution uniformity clause if the Commonwealth were to only levy a severance tax only on unconventional natural gas producers – particularly given the Supreme Court’s recent ruling regarding uniformity affecting casinos? Most states apply severance taxes, moreover, to multiple industries and do not single out just one.

Finally, it would have been very nice if some legislator had addressed a question about how gas might allow Pennsylvania to actually reduce spending. Among the most significant cost drivers for any large agency, especially those with multiple facilities across the Commonwealth, are energy costs.

This became very apparent in the analyses conducted recently to decide what prison(s) should be closed. While SCI Pittsburgh was chosen because it’s the oldest and mostly costly to run, it ironically had one advantage; much lower energy costs per prisoner at $583 vs. $1,009 for SCI Frackville, which is a new prison – some 42% lower. This is because it is the only facility to run totally on natural gas.

Moreover, a recent report prepared for the Pennsylvania Office of the Budget entitled Achieving a sustainable budget for the Commonwealth of Pennsylvania states the following:

“Initial analysis shows that some Commonwealth agencies have above-average energy consumption compared to benchmarks for similar building types. Further analysis is required to develop detailed initiatives given the unique properties of each facility and to assess investment costs and potential funding sources for energy-saving facility upgrades. Contingent on further analysis conducted in a detailed design phase, there may be ~$2 million in savings for FY17-18, ~$4 million in savings for FY18-19, and ultimately ~$7 million in run-rate savings.”

Penn State, as an example, recently converted from coal to natural gas at its University Park West Campus Steam Plant, significantly reducing both costs and greenhouse gas emissions. Messiah College in Mechanicsburg also recently brought natural gas to its campus in cooperation with UGI. This is expected to save the college $800,000 per year, paying back the capital cost in less than seven years. Susquehanna University made a conversion from coal to gas in 2015 and reduced its carbon emissions by 70-80% while saving costs.

I would love to have seen some legislators question why Pennsylvania wasn’t doing such conversions anywhere and everywhere it could as a way to help its budget on both the spending and revenue sides. Unfortunately, there were no such questions, but they can still be asked by the Senate and in later written questions to both committees. Let’s hope they are asked.

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5 thoughts on “PA Budget Hearing Exposes Severance Tax Game

  1. If the NG industry is taxed for extracting energy, would not it need to apply as well to the renewable industry wind and solar and hydro for extracting energy?

      • A severance tax is usually applied to resources that are used up when they are extracted (oil, gas, coal, ores) or take a long time to regenerate (timber).

        A legislature could tax any type of energy it wished to raise revenue, discourage its use or encourage conservation. Renewables usually have considerable “hidden costs” in the materials used, site requirements and recycling old or damaged components that taxes and fees could be levied on. Bonding could also be used to guarantee compliance with regulations over the life of a renewable project.

        Structuring a serverance tax, like NY’s ‘ad valorem’ tax, to be paid directly to local governments and school districts could be a way to help the public see gas as part of the answer to local concerns.

  2. Pingback: Cindy Dunn Was for Natural Gas Before She Was Against ItNatural Gas Now

  3. Pingback: Wolf Administration Loses All Credibility on Severance TaxNatural Gas Now

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