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House of Representatives
Session of 2015 - 2016 Regular Session


Posted: January 30, 2015 09:35 AM
From: Representative Gene DiGirolamo and Rep. Pamela A. DeLissio, Rep. Thomas P. Murt , Rep. Harry Readshaw
To: All House members
Subject: Proposal to Add a 3.2% Drilling Tax to Act 13 Impact Fee

In the near future, we plan to introduce legislation to create a 3.2% severance tax, or drilling tax as we prefer to call it, on unconventional natural gas extraction. This tax will be in addition to the existing Act 13 impact fee. 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 leaves this intact, but creates a new drilling tax that would be paid in addition to the impact fee.

Our proposal, like that of so many other states, is to tax the value of the natural gas produced. Added together, the impact fee and the 3.2% drilling tax would equal approximately 5% of the value of natural gas sold. Pennsylvania, now the second largest producer of natural gas in the nation, is the only major gas producing state that does not impose a drilling tax.

Adding a severance tax on the value of Pennsylvania’s natural gas production would generate additional funds above the existing impact fee, while still protecting host communities who benefit from the fee. As the value of production grows, so would the severance tax revenues. This would provide needed additional funding dollars for education, human services, and environmental programs, while also helping to make the required increase in pension contributions more manageable.

For ease of understanding the distribution of the tax revenues, it is helpful to know that in the first year 1% of the tax will equal $6M, and will grow to over $9M per percentage point by 2019-20 with continued modest growth in production. The details within the four areas of funding will be precisely worked out prior to introduction of the bill and co-sponsors will be consulted on the distribution within the four areas.

The drilling tax revenue will enhance funding to the following programs that invest in education, paying down pension debt, the environment, and human development:

2015-16 Estimate[i]
  • Basic education 40% $226 million
  • Pensions 35% $197 million
  • Human Services 15% $ 85 million
  • Environmental programs 10% $ 56 million
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 reserves?

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.

[i] Based on an average natural gas price of $3.48 per MCF.

Introduced as HB1321