TAX NEWS - JUNE 2010

Pennsylvania Tax: Pennsylvania missing $54M in tax revenue from natural gas production

Pennsylvania state missed out on $54 million of revenue by not taxing natural gas production, according to an independent policy group.

In addition, the Pennsylvania Budget and Policy Center says the amount is climbing.

The center has created a "severance tax ticker" on its website - www.pennbpc.org/severance-tax-ticker - that shows a real-time estimate of revenue the state has not collected since October for opting to keep natural gas production tax-fee.

The most recent tally was more than $54 million. Climbing at a rate of $11,000 per hour, the ticker was expected to be at $55 million by today.

The ticker harkens back to the famous National Debt Clock in Manhattan that constantly updates the national debt.

"We want to bring attention to how much revenue we left on the table," said Mike Wood, research director at the center. "The industry pays this tax just about everywhere - except for Pennsylvania."

Mr. Wood said 96 percent of natural gas produced in the U.S. is subject to a severance tax, which is a tax on the wellhead value of natural gas production.

Gas interest groups lampooned the ticker as "a gimmick."

"If we were prone to such gimmicks, maybe we would create a counter of all the jobs created by gas industry, or the local tax revenue," said Kathryn Klaber, executive director of the gas industry's Marcellus Shale Coalition.

Ms. Klaber conceded a severance tax is inevitable in the Keystone State, but thinks the state should first update natural gas legislation and regulations.

"Those other states have solved their regulatory and legislative issues around natural gas," she said. "When Pennsylvania does that, then let's talk about a severance tax."

As of the end of May, Pennsylvania faced a $1.2 billion budget shortfall. The center says a severance tax would have helped reduce dramatic cuts to other agencies affected by natural gas development, such as the $79 million cut in the budget for environmental protection and conservation. The tax could also pay to mitigate damage and costs related to drilling, including road repair and law and traffic enforcement.

The number assumes a 5 percent severance tax on the wellhead value of natural gas plus a fixed charge of $0.047 per thousand cubic feet produced. That tax rate is low compared to major natural gas producing states, but the same as is levied in neighboring West Virginia, which also sits on Marcellus Shale.

A severance tax is before the Legislature and could go into law in October, the start of the next budget year. However, the industry is lobbying for an exemption for gas produced from stripper wells. Also, the group would like to see initial wellhead revenue exempted from the tax for the recovery of the gas industry costs.