Pennsylvania legislators continue to debate a severance tax proposal announced late last year, and previously discussed on this blog. Under that severance tax proposal, the commonwealth's system of impact fees would be replaced with a 4.9% severance tax. A bipartisan group of legislators announced that proposal, and it appears that support for a severance tax in the commonwealth may be growing. According to the Associated Press, tax collections are falling short of projections, and there is growing support in the legislature amid ongoing budget discussions.
Those opposed to the tax note that the impact fee adopted under 2012's Act 13 has generated significant revenues, and a new tax could slow the continued growth in natural gas production. In 2013, Pennsylvania's production of natural gas was more than 3 trillion cubic feet, an increase of more than 37% from 2012. That was on top of growth in 2012 that made it the fastest-growing state in terms of natural gas production. According to Stephanie Catarino Wissman, executive director of Associated Petroleum Industries of Pennsylvania, the impact of the fee structure adopted in 2012 already has raised $600 million, in addition to approximately $2 billion in state taxes the industry has paid since 2007. Perhaps in part because Pennsylvania's state corporate income tax rate of 9.99% is among the highest in the country, Pennsylvania Governor Tom Corbett has continued to express his staunch opposition to a severance tax.
Advocates for the tax argue that Pennsylvania is losing out on an opportunity to gain significant revenue. Although production has increased by more than 37%, revenues from the commonwealth's impact fee increased by only 11% over the same period. The Pennsylvania Budget and Policy Center determined in a report published last August that a 4 percent severance tax could generate as much as $1.2 billion annually by 2019-20. Meanwhile, a similar debate rages on in Ohio.
We noted Ohio's severance tax proposal, House Bill 375, when it was initially introduced and after amendments and testimony in the Ohio House Ways and Means Committee. According to the Columbus Dispatch, Ernst & Young issued a recent report commissioned by the Ohio Business Roundtable, which indicated the effective combined rate of state and local tax on horizontal drillers in Ohio currently is 1.5%, while it is 6.3% in Pennsylvania. Another report by the Pennsylvania Independent Fiscal Office indicated that Pennsylvania's rate would be .06%, while Ohio's would be 1.4%, under a high-production, high-price scenario. If Ohio were to adopt the 2.75% tax proposed in the amendments to Ohio House Bill 375, Ohio would have a 3.1% effective rate. BakerHostetler will continue to monitor the debate, and interested parties should continue to make their voices heard in the legislative process.
Additional coverage is available elsewhere on the web here and here.
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