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House of Representatives
Session of 2013 - 2014 Regular Session


Posted: December 12, 2013 11:14 AM
From: Representative Gene DiGirolamo and Rep. Thomas P. Murt , Rep. Pamela A. DeLissio, Rep. Harry Readshaw
To: All House members
Subject: Drilling Tax Proposal to Replace Act 13 Impact Fee

In the near future, we plan to introduce legislation to create a 4.9% severance tax, or drilling tax as we prefer to call it, to replace the existing Act 13 impact fee on unconventional natural gas extraction. Section 2318 of Act 13 provides that the impact fee shall expire upon the enactment of a severance tax. Our legislation will also direct the distribution of the proceeds.

Under the current impact fee, each well is assessed a fee which declines over time for the first fifteen years of operation. All unconventional wells drilled each year, no matter how much natural gas is produced, pay the same fee. For what is thought to be a typical unconventional well, the total impact fees paid over 15 years amount to less than 2% of the value of the natural gas sold from the well.

Our proposal, like that of so many other states, is to tax the value of the natural gas produced. The tax would be 4.9% of the value of natural gas sold from an unconventional well. Pennsylvania is the only major gas producing state that does not impose a drilling tax.

Due to the higher rate and Pennsylvania’s rapidly increasing natural gas production, a drilling tax would generate additional funds above the existing impact fee. As production grows, this difference grows larger.

At a 4.9% tax rate, which is less than the rate in neighboring West Virginia where the industry is thriving, enough revenue would be raised immediately that only a 40% share of these funds would be necessary to maintain the existing impact fee programs, including distributions to local governments, at a level equal to what they would receive under the impact fee.

For ease of understanding the distribution of the tax revenues, it is helpful to know that in the first year 1% will equal $5M, and will grow to $10M per percentage point in year five.

As the drilling tax revenue grows, these beneficiaries of Act 13 impact fee money would receive more funding under our drilling tax proposal than they would under the current impact fee. This means more revenue for local governments in the areas where drilling is taking place, replacement and repair of deteriorated bridges, water and sewer infrastructure and environmental initiatives.

The remaining 60% of the drilling tax revenue will enhance funding to the following programs that invest in education, the environment, human capital and economic development:

  • Basic education 40%
  • Environmental Stewardship Fund (Growing Greener) 10%
  • Investment in Public Lands-State Parks and State Forests 10%
  • Solar energy-Pennsylvania Sunshine Program 4%
  • Drug and Alcohol Programs 8%
  • Adults with Special Needs 8%
  • Behavioral Health 5%
  • Human Services Development Fund 5%
  • HEMAP 3%
  • Rape and Domestic Violence Programs 2%
  • Veterans Homes 2%
  • Industry Partnerships 3%

The proposal requires that these new revenues are to supplement General Fund appropriations for these programs-not supplant them.

In our view, any good drilling tax proposal should meet the following criteria:

  1. Is it fair and reasonable to the industry and allow it to grow? Is it comparable to other states?
  2. Does it assist host communities with the economic, social and environmental impacts of drilling?
  3. Does it make long-term investments in our natural resources and environmental programs?
  4. Does it make long-term investments in human capital and our economy?
  5. Does it strengthen the stitching of the Commonwealth’s safety net for times of need?
  6. Does it make sure that every citizen of the Commonwealth can benefit from the development of the Marcellus shale and other deep gas services?

We strongly believe that we have come up with a proposal that meets these criteria, and can serve as an excellent starting point for discussion and action moving forward.

We welcome you to join us in co-sponsorship of this proposal.

Introduced as HB2358