House Finance Committee advances natural gas severance tax legislation

As senators began their review of the House’s Tax Code plan Wednesday, the House Finance Committee approved a natural gas severance tax bill, beginning what is likely to be a long and difficult path to that controversial proposal’s potential enactment.

The severance tax legislation, House Bill 1410, sponsored by Rep. Gene DiGirolamo (R-Bucks), was originally written to include a 3.2 percent severance tax above the current impact fee and was expected to generate between $300 million and $400 million in a full fiscal year.

However, an amendment to the legislation adopted by the committee completely overhauled the tax structure of the original bill by implementing a volumetric tax based on the price of gas with the amount of the tax increasing as the price of gas increases.

Some opponents of the tax saw the legislation’s advancement from committee as a giving up on marketing the state for its friendly tax environment as well as its proximity to natural gas resources.

“It’s not about natural gas jobs; those are great, but eventually they dry up – once a pipeline is built, there are some jobs to maintain it, but those dry up,” said Rep. Eli Evankovich (R-Westmoreland). “This has everything to do with whether your consumable products are going to be made by Texans and people from Louisiana – or are your consumables and the consumables for New York and D.C. going to be made by the hands of Pennsylvanians?”

Others saw the proposal as directly attacking the natural gas industry, particularly since it does not include any of the industry-sought permitting or environmental changes included in a recently passed Senate severance tax plan.

“The natural gas drillers already pay all the onerous taxes Pennsylvania imposes on any industry – they already pay the impact fee, which other states don’t have, but which Pennsylvania does have – to the tune of a billion dollars,” said Rep. Stephen Bloom (R-Cumberland). “If we add an additional tax on top of the impact fee on top of all the other taxes the drilling industry in Pennsylvania already pays, we are going to be putting our communities at a permanent disadvantage; we are going be punishing one of the very few taxpaying, job-creating industries in Pennsylvania.”

Supporters of severance tax legislation saw the move as bringing some certainty to the industry by having them pay their fair share.

“I am very conscious about lifting a burden on an industry that provides so much to Pennsylvanians, but I don’t believe this is that burden,” said Rep. Jordan Harris (D-Philadelphia). “I do believe that we can move forward collectively and work together to ensure that while we ask our taxpayers to pay their fair share, we ask the industry to do the same.”

While the legislation did pass the committee by a bipartisan 16-9 vote that split members as much by region as it did by party, it was seen by many as just the first step toward getting the bill to Gov. Tom Wolf’s desk.

One of the first hurdles facing the legislation is its language on minimum royalties.

The issue has bedeviled the General Assembly for several consecutive legislative sessions as property owners have sought an enforcement of their interpretation of Pennsylvania’s Minimum Royalty Act, which would ensure that they get paid their royalties without gas producers’ post-production costs being deducted from them.

While the amendment would provide their desired fix, such language has been fraught with political and constitutional concerns that have left the issue to languish.

As a potential sign of things to come, the legislation in committee Wednesday had to withstand a constitutional challenge.

Speaking to the bill’s prospects, House Majority Leader Dave Reed (R-Indiana) said that the legislation will not be fast-tracked.

“It’s going to be added to the voting schedule,” he said. “People are going to have the opportunity to look at it, offer amendments and give different perspectives. That’s the type of bill that sounds simple, but it’s far more complicated and I’m sure there are going to be different perspectives from all sides of it. We’ll air it out, it’ll get its time on the floor, and we’ll see where it goes.”

Moreover, the legislation does not include any environmental and regulatory reforms that accompanied the Senate-passed severance tax. That’s something Senate Majority Leader Jake Corman (R-Centre) said would be instrumental for his chamber’s consideration of a severance tax plan.

“We would not consider any Marcellus shale tax without the permit reforms,” he said Wednesday. “Whether that can be done in another bill that ties the two together, we’d be happy to take a look at it, but clearly, when we agreed to do (the tax), that was a significant component of it.”

Meanwhile, despite its uphill battle, Gov. Tom Wolf called for swift consideration of the severance tax by the full House.

“I urge House leadership to bring the severance tax to a vote on the floor as soon as they return to Harrisburg next week," he said. “This is a fair and commonsense proposal that will address our structural budget deficit. Pennsylvania is the only natural gas producing state without a severance tax and the vast majority of the tax would be paid out of state."

Elsewhere in the Capitol Wednesday, the Senate began its review of the Tax Code bill the House sent their way late Tuesday night.

The bill provided what amounts to around $1.7 billion in revenue by itself, with around $1.5 billion of that coming in the form of authorizing the Commonwealth Financing Authority to figure out the best way to monetize the Tobacco Settlement Fund, which amounts to a form of borrowing.

As to the plan, Sen. Corman noted there are a number of concerns in the Senate Republican Caucus with the amount of borrowing, but the fact that the legislation got 102 votes in the House gives the chamber reason to see if it’s something they can lift as a component of concluding the budget-balancing process.

“The question is: Does this proposal sustain us going forward? That’s something we want to review and spend some time on over the next couple of days before we come back on Monday,” he said.

“Having said that, we are sort of in desperate times right now – this proposal got 102 votes, so I think we need to spend some time to see if we can concur with it.”

Corman added that the House’s estimate of around $210 million in recurring revenues via a substantial gaming expansion measure is likely too high for what the Senate is likely to be able to send to them.

“I don’t know that there’s a whole lot of new ideas that have come into play. There will not be a VGT component to this proposal at all,” he said. “I know there was discussion of VGTs at truck stops, but that will not be a part of any bill that comes out of the Senate – the only really new component is this whole component of ancillary facilities that could be opened up throughout the Commonwealth.”

“We’re going to work through that and see what we get, but I’m going to make sure that when it comes to gaming, that we do the best public policy. Whatever that number it accumulates, great, but I’m not just going to keep setting policy to get to a high number.”

In response, House Majority Leader Dave Reed (R-Indiana) stated that using the gaming bill to meet revenue goals is a necessary component to ensuring state-related universities get funded and balancing the budget this year and next year.

“The balance sheet put forth that we have been discussing looks at $250 million to $265 million in revenue from gaming. That is not accidental,” he said. “We need that amount of revenue, plus the JUA we passed today, plus the plan we passed yesterday and we need the gaming bill to complete that process.”

On the other side of the aisle, Senate Democrats also said they had concerns and would be reviewing the House-passed legislation.

“We are reviewing the Tax Code that the House passed, but first need to analyze the bill as part of a comprehensive package. The House has not yet passed a Fiscal Code, and we'd like to see the House Republicans consider funding the state-related universities,” said Senate Minority Leader Jay Costa (D-Allegheny). “In the coming days, we'll be working internally as a caucus, but also with our colleagues across the aisle and with the governor's office.”

Jason Gottesman is the Harrisburg Bureau Chief of The PLS Reporter, a news website dedicated to covering Pennsylvania’s government.