Post by pfsc on Jun 2, 2015 11:18:05 GMT -5
Senate Finance and Environmental Resources and Energy Committees
6/1/15, 10:30 a.m., Hearing Room #1, North Office Building
By Jeff Cox, PLS
The committees held a public hearing on a proposed severance tax on natural gas.
Eileen McNulty, Acting Secretary, Pennsylvania Department of Revenue, told the lawmakers, “To begin, I’d like to highlight for the committees two important facts: One - that Pennsylvania is the second largest producer of natural gas in the country, but the only state in the US that is home to abundant natural gas production but doesn’t impose a tax on those resources; and two - that our education system is suffering from funding cuts that increased class sizes, shrank teaching staffs and led schools to eliminate programs that would enhance our children’s development.” She explained that Gov. Wolf’s proposed tax will only apply to gas severed from unconventional formations using the technology generally known as fracking. Acting Sec. McNulty pointed out that the proposal is modeled after the severance tax in West Virginia. She also noted the tax will preserve funding currently delivered through the impact feed established by Act 13. According to Acting Sec. McNulty, beginning in fiscal year 2016-17, the severance tax would fund debt service payments for the Governor’s proposed Economic Growth Bond. She added that the Governor’s proposed Education Reinvestment Act will “help enable the Commonwealth to invest an additional $2 billion to improve our educational system over the next four years and pursue a goal of universal pre-kindergarten education for all of Pennsylvania children.” Acting Sec. McNulty concluded, “Natural gas has the potential to fuel not only our homes and truck fleets, but also a world-class education system for our children and a manufacturing renaissance for our communities and economy.”
Chairman Yaw commented that he disagreed with most of the conclusions made by Acting Sec. McNulty in her testimony. He noted many suggest that Pennsylvania is the only state that doesn’t have a tax natural gas. Chairman Yaw wanted to know what the impact fee is and whether it is a tax. McNulty responded that she said that Pennsylvania is the only state without a severance tax. Chairman Yaw noted that most states don’t have a Johnstown Flood Tax. McNulty explained that if the impact fee was converted into a tax rate it would be in the neighborhood of two percent. Chairman Yaw wanted to know how many other states have an impact fee. McNulty said she is not aware of another state. Noting her testimony stated that 80 percent of the tax will ultimately be paid by non-Pennsylvanians, Chairman Yaw pointed out that 50 percent of Pennsylvania households are served by natural gas. He asked if those people will also be paying an additional fee. According to Acting Sec. McNulty, those people are paying fees right now including severance taxes from other states such as West Virginia. Chairman Yaw asked about the provision that producers may not reduce royalty payments to landowners and its impact on existing contracts between landowners and gas companies. Acting Sec. McNulty responded that it is her understanding that the language in the proposal has been reviewed by the Administration’s attorneys who believe the language is sufficient. Chairman Yaw commented that there “are a minimum of a thousand different contracts out there” and expressed doubt that the language is sufficient. Chairman Yaw then asked about using a portion of the severance tax to provide the equivalent of the impact fee to municipalities. Acting Sec. McNulty said she believes the formula for the distribution is the same as it is in current law.
Sen. Leach wanted to know how the gas is sold, Acting Sec. McNulty explained that it is sold generally at a pipeline hub and from there it is distributed throughout the country and internationally. Sen. Leach asked if a particular tax rate in a particular state impacts the international commodities market. He wanted to know how the Pennsylvania tax would impact prices in the international market. Acting Sec. McNulty responded, “Minimally, if at all.” Sen. Leach asked if the tax is enacted where Pennsylvania’ rate would be nationally. Acting Sec. McNulty explained that Pennsylvania would be somewhere “in between”. She added it would not be the highest and not be the lowest.” She pointed out other states have the ability to have more flexibility in determining severance tax rates. Sen. Leach asked Acting Sec. McNulty if the gas industry has fled those states that have imposed a severance tax. She responded, “No.”
Sen. Bartolotta wanted to know which state has the highest severance tax rate. Acting Sec. McNulty responded that she did not know, but suggested it is probably Texas. Sen. Bartolotta noted that the proposed five percent severance tax along with the artificial floor of $2.97 per thousand cubic feet plus the 4.7 cent per thousand cubic feet of gas extracted totals a 20 percent to 21 percent rate on the industry. She noted that the industry is already laying off workers because the price is so cheap at the moment and if the tax is imposed, they will reinvest their capital elsewhere. Acting Sec. McNulty explained that the rates included in her testimony are the statutory rate and not the effective rate. She then explained in detail how the effective rate is calculated. Sen. Bartolotta asked if Texas and West Virginia have an artificial floor. Acting Sec. McNulty said she did not know the details of their taxes.
Minority Chairman Yudichak indicated the Independent Fiscal Office has put the impact fee at between one and two percent. He wanted to know if that number is accurate. Acting Sec. McNulty responded that they have not done a separate calculation on that. Chairman Yudichak said information provided by the Administration indicates there has been a 600-percent increase in production over past four years and the companies have paid $193 million in taxes during that period. He emphasized the need for accurate base line numbers on the effective tax rate of the impact fee and the increased volume over the past four years. Acting Sec. McNulty responded that the numbers are “accurate” and she would provide the committees with the details.
Sen. Ward commented that she has great concern regarding the local share received through the current impact fee and the Governor’s proposed changes. She wanted to know how much money the severance tax will generate. Acting Sec. McNulty explained that it will depend on the price of gas but the Administration believes it will generate $1 billion in the first full fiscal year. Sen. Ward asked how the money will be distributed. According to Acting Sec. McNulty the vast majority will go to education.
Chairman Eichelberger asked if the proposal is modeled after West Virginia. Acting Sec. McNulty responded, “Yes.” Chairman Eichelberger commented that there seems to be a lot of differences on what Pennsylvania does and what West Virginia does on how the tax is implemented and other aspects. Acting Sec. McNulty conceded that “it is not exactly the same.” Chairman Eichelberger said that he does not believe West Virginia is a good comparison. Acting Sec. McNulty commented, “There is no such thing as a standing severance tax. There are many variations amongst states.”
Matthew Knittel, Director, Independent Fiscal Office (IFO) testified, “In a recent analysis of the Administration’s revenue proposals, the analysis found that most of the proposed severance tax would likely be exported to final consumers who reside in other states.” He added, “This adjustment will take several years to occur and the tax incidence could be quite different in the near-term.” Knittel explained, “Data from the US Energy Information Administration and the Pennsylvania Department of Environmental Protection suggest that three-quarters of production for calendar year 2014 may have been exported,” He further explained, “Because total production grows more quickly than internal consumption, the analysis projects that roughly 80 percent of future production could be exported.” Knittel noted, “Recent price forecasts assume a recovery in regional prices, partly due to significant new pipeline capacity that is scheduled to become operational during the next several years.” Concluding his testimony, Knittel told the committees, “In summary, the proposed severance tax will likely move Pennsylvania from one of the lowest severance tax states to the highest tax state, relative to other major gas producing states.”
Chairman Yaw said that it is his understanding that one part of the West Virginia tax is due to sunset in 2018. Knittel responded, “That is correct.” Chairman Yaw asked about the projection regarding new pipeline capacity and how it was determined, Knittel explained that it is based on data from Bentek Energy and the US Energy Information Administration. Chairman Yaw asked if the severance tax is enacted would it make Pennsylvania rate one of the lowest to one of the highest. Knittel responded, “Yes, that is what our analysis finds.”
Sen. Bartolotta commented that it is her understanding that West Virginia’s severance tax applies to all of its natural resources. Knittel responded, “I believe so.”
Sen. Hutchinson asked how future projections on production are determined. Knittel said the IFO was provided a baseline production number from Bentek Energy.
Lou D’Amico, President and Executive Director, Pennsylvania Independent Oil and Gas Association (PIOGA), commented, “I oppose the Governor’s severance tax proposal and each and every other severance tax proposal in the General Assembly.” He continued, “I oppose the tax, not only because I represent this industry, but also as a citizen of the Commonwealth since birth, I oppose any taxation that singles out a particular industry or business in Pennsylvania for special tax treatment afforded every other business in the Commonwealth.” D’Amico cautioned, “People are losing jobs in this industry already, as a result of the economic environment.” He added, “Adding a severance tax will do nothing but lead to the loss of more jobs and reduced capital expenditure programs, and further dampen the state’s economic recovery.” D’Amico asserted, “This is glaringly apparent, yet for some reason many members of the General Assembly and certainly everyone in this administration are oblivious to it.” He later argued, “The severance tax is by no objective, informed or reasonable analysis a fair or commonsense tax. The severance tax is bad public policy, targeting one industry and one alone to achieve particular goals that are not attainable in any event by the proposal.” D’Amico concluded, “This proposal will cost jobs, increase energy costs for our citizens, and squander the opportunity to make Pennsylvania an attractive state for business and investment.”
David Spigelmyer, President, Marcellus Shale Coalition, testified, “In Pennsylvania alone, the shale gas industry has created and supported nearly a quarter of a million jobs and helped the Commonwealth weather one of the nation’s most difficult economic recessions in a generation.” He pointed out, “Not only is Pennsylvania the only state in the nation that levies an impact tax, which has generated more the $850 million since 2012, but we are the only industry in the Commonwealth that is required to pay a special impact fee above and beyond every other high-end tax that Pennsylvania levies.” According to Spigelmyer, “All told, the natural gas industry, its affiliates and supply chain have collectively helped generate $2.1 billion in revenue for Pennsylvania, which is above and beyond the industry-specific impact tax.” He noted that in 2004, Gov. Rendell’s Pennsylvania Business Tax Reform Commission, which included Gov. Wolf, made major tax recommendations that were guided by a series of primary Business Tax Reform Criteria. According to Spigelmyer the criteria included equity, economy of administration, neutrality, competitiveness, stable and sufficient revenues and simplicity. He explained to the lawmakers how “nearly every premise is either ignored or disregarded” by the proposed severance tax. Spigelmyer observed “The dialogue on this important issue has become centered around a fundamentally false choice: either you’re for a higher energy tax or you’re against children’s education and future.” He added, “By exploiting children to suggest that the natural gas industry is to blame for the failings of our state’s longstanding structural fiscal challenges is absurd.”
Bruce Grindle, Vice President, Pennsylvania Grade Crude Oil Coalition (PGCC), argued, “The imposition of a severance tax at this time is ill-advised and would take the wind out of the sails of one sector of Pennsylvania’s economy that has been growing.” He said, “Despite the assertion by some administration officials that oil and gas companies will not leave Pennsylvania from more favorable economic climes, they must recognize that capital for investment always follows the path of least resistance.” Grindle told lawmakers. “The imposition of a severance tax on the conventional oil and gas industry in Pennsylvania would most certainly be the final nail in the coffin of an industry that has been an economic engine and part of the western Pennsylvania landscape for over 150 years.” He explained, “Historically low commodity prices that are further discounted by a negative trading basis and ever increasing regulatory compliance costs have already resulted in a dramatic decrease in conventional well development.” According to Grindle, the number of conventional wells drilled in Pennsylvania has declined steadily from a high of 4,834 wells drilled in 2007 to a projected 300 to 400 wells in 2015. He warned, “Suffice it to say that any additional economic burden on the conventional oil and gas industry will result in the majority of conventional operators shuttering their businesses and plugging their wells.” Grindle supplied the committees with the following information:
• Comparison of Natural Gas Severance Tax at Various Price Points
• PA DEP Yearly Oil and Gas SPUD Data (Conventional and Unconventional
• PA DEP Yearly Oil and Gas SPUD Data (Conventional and Unconventional (Bar Graph)
Sen. Leach commented that he has heard about the struggles of the industry and how the industry cannot afford “one additional penny to educate the kids in Pennsylvania.” He cited some recent comments made by industry leaders to their investors and shareholders talking about their success. Sen. Leach said there appears to be a “dissonance” between the industry’s testimony and the comments made to investors and shareholders. Spigelmyer responded that only one of his members is in a cash positive position today. He added that very few operators today are returning positive dollars because they are building the factories for the long-term development including the infrastructure for the use of the product long-term. According to Spigelmyer the industry in Pennsylvania is still in its infancy and the very early stages of development.
Noting Grindle’s testimony regarding the declining number of conventional wells drilled in Pennsylvania since 2007, Sen. Bartolotta asked why DEP is asking for more enforcement officers. Grindle responded, “I don’t have a great answer for that.” Sen. Bartolotta asked Grindle what is the break-even point for his members. Grindle responded, “Between $4 and $5.”
Chairman Yudichak noted that people did see a $1,200 savings due to the savings generated by the shale gas development but in turn those people are paying higher property taxes over the past four years. He asked if the current impact fee has had any negative impact on the industry. Spigelmyer responded that in February, 2012, when the fee was enacted, 26 rigs were dropped. He observed, “Economic decisions matter.” Spigelmyer cautioned the industry is nearing a production plateau.
Sen. Ward expressed concern with the slowdown in manufacturing in Westmoreland County. She wanted to know what the state should do to help the industry. Spigelmyer responded, “Grow manufacturing.”Grindle said, “A regulatory environment that recognizes the difference between the conventional and unconventional industry.” He added, “We need policymakers who understand small businesses here in Pennsylvania.”
Minority Chairman Blake commented that the state has singled out industries in the past regarding taxation.
Sen. Haywood cited several gas companies who are not paying the corporate net income tax in Pennsylvania. He wanted to know what companies are actually paying the corporate tax rate. Spigelmyer responded that “no one is in a cash positive position today therefore you do not have significant corporate net income tax collections.”
Sen. Hutchinson wanted to know the difference between conventional and unconventional production. Grindle explained, “The difference is the order of magnitude.” He further explained that a conventional well may occupy a quarter or a half of an acre whereas a unconventional could be five acres or more. Grindle described the conventional oil and gas industry in Pennsylvania as “a cottage industry.”
Gene Barr, President and CEO, Pennsylvania Chamber of Business and Industry, said, “We are willing to have a discussion about properly funding our schools, but we will disagree that the only way for our education system to produce better results is to increase spending.” He added, “First and foremost, we need to solve the pension crisis.” Barr cautioned, “The enactment of a severance tax will impede the significant progress Pennsylvania has made with respect to job creation and render the state even less competitive with that of other states.” He noted, “A recent economic analysis found that the administration’s severance tax proposal would cost Pennsylvania more than $20 billion in lost gross domestic product and up to 18,000 jobs over the next decade.” Barr added, “More than 6,000 jobs would be lost as soon as 2016 - many of them well-paying supply chain and construction labor positions.” He said, “The proposal to levy a five percent tax on a minimum artificial price floor of $2.97 per thousand cubic feet of gas plus an additional 4.7 percent per thousand cubic feet will set the Commonwealth back instead of allowing the state to grow its economy , jobs and provide Pennsylvanians with lower energy bills.”
Chairman Yaw asked how to utilize the natural gas industry to build an economic base and what the General Assembly could do. Barr responded, “First, do no harm with more taxes.” He also stressed the need to build out the infrastructure to move the product downstream and to develop new markets for Pennsylvania energy.
Sen. Haywood asked if the tax breaks for the energy industry should be eliminated. Barr responded, “The industry utilizes legitimate business write-offs for expenses they incur in terms of operating in a given area.” Sen. Haywood asked if the Chamber is opposed to combined reporting. Barr said, “That’s correct.” Sen. Haywood asked if the Chamber is opposed to closing the Delaware loophole. Barr argued that the issue of passive investment is completely different from combined reporting. Sen. Haywood asked if the Chamber has any recommendations on how to address the budget deficit. Barr reiterated the need to address the pension system.
Sen. Aument asked about training a workforce in Pennsylvania for the energy industry. Barr explained that many of his members are having problems finding people to fill open positions. He admitted the business community has not done a good job in communicating its workforce needs to the school systems. Barr discussed the impact of not developing a workforce that is work ready.
Michael Wood, Research Director, Pennsylvania Budget and Policy Center, testified in support of a severance tax. According to Wood, “Oil and gas development companies often pay little to no corporate income tax due to federal energy development tax incentives.” He argued, “Even with the booms and busts inherent in this industry, the oil and gas businesses continue to thrive in states that have severance taxes.” Wood stressed, “There is no factual basis that the industry would somehow work differently in Pennsylvania and become unprofitable due to the tax.” According to Wood, “Revenue estimates put forward by the Wolf Administration and the Independent Fiscal Office have the total tax proceeds exceeding $1 billion by 2016-17, the first full fiscal year of collections.” He added, “This includes the $225 million that is to be distributed as the impact fee which is replaces.” Wood observed, “The enactment of a natural gas severance tax, like the one proposed by Gov. Wolf, is long overdue.” He concluded, “A severance tax on natural gas is precisely the type of recurring revenue needed to diversify the state’s revenue base and help it grow in tandem with state expenditures for critical services like schools, health care and environmental protection.”
Chairman Yaw commented that Wood’s testimony makes a lot of generalizations. He noted the details in the West Virginia tax and what Gov. Wolf is proposing are “significantly different.” Chairman Yaw asked Wood if he is still supporting the West Virginia model. Wood responded, “The rate the Governor has suggested based on what was done in West Virginia. There are other parts that are different than that and we acknowledge that.” Chairman Yaw asked Wood about his comment that the tax would not drive any companies away. He asked if Wood has talked with any gas companies. Wood responded, “Yes”. Chairman Yaw asked, “Which companies have you talked to?” Wood responded, “Southwest Energy but I am not sure.” Chairman Yaw noted that Wood had testified that Pennsylvanians would be on the hook for any remediation. He pointed out that not part of the proposed severance tax is for remediation. Wood responded that part of the money is for increased enforcement. He added that his group would like to see some money set aside for remediation.
Sen. Haywood asked if education funding in Pennsylvania is adequate. Wood responded, “No.”
Nathan Benefield, Vice President of Policy Analysis, The Commonwealth Foundation, testified, “There is a misconception among the public that gas drillers pay no or little taxes, which as you know, wildly inaccurate.” According to Benefield, “gas drillers paid more than $600 million in impact fee taxes from 2011 to 2013.” He noted, “Despite the name, the impact fee functions as a tax, as funds are used for government projects only tangentially related to gas drilling.” Benefield added, “On top of this, gas drillers pay taxes common to every business operating in Pennsylvania, including the corporate income tax, personal income tax and sales tax.” He pointed out that the Commonwealth’s overall tax burden is far higher than other drilling states. Benefield commented, “Pennsylvanians should the 10th highest local and state tax burden in the nation, with the highest effective corporate income tax.” He noted, “In contrast, there is no corporate income tax or personal income tax in Texas or Wyoming, and the corporate income tax in West Virginia is 6.5 percent compared to Pennsylvania’s 9.99 percent rate.” Benefield provided the committees with a policy memo entitled The Impact of Gov. Wolf’s Tax Proposals on Job Creation.
The following groups submitted written testimony to the committees:
• Associated Petroleum Industries of Pennsylvania
• Environmental Defense Fund
• America’s Natural Gas Alliance
6/1/15, 10:30 a.m., Hearing Room #1, North Office Building
By Jeff Cox, PLS
The committees held a public hearing on a proposed severance tax on natural gas.
Eileen McNulty, Acting Secretary, Pennsylvania Department of Revenue, told the lawmakers, “To begin, I’d like to highlight for the committees two important facts: One - that Pennsylvania is the second largest producer of natural gas in the country, but the only state in the US that is home to abundant natural gas production but doesn’t impose a tax on those resources; and two - that our education system is suffering from funding cuts that increased class sizes, shrank teaching staffs and led schools to eliminate programs that would enhance our children’s development.” She explained that Gov. Wolf’s proposed tax will only apply to gas severed from unconventional formations using the technology generally known as fracking. Acting Sec. McNulty pointed out that the proposal is modeled after the severance tax in West Virginia. She also noted the tax will preserve funding currently delivered through the impact feed established by Act 13. According to Acting Sec. McNulty, beginning in fiscal year 2016-17, the severance tax would fund debt service payments for the Governor’s proposed Economic Growth Bond. She added that the Governor’s proposed Education Reinvestment Act will “help enable the Commonwealth to invest an additional $2 billion to improve our educational system over the next four years and pursue a goal of universal pre-kindergarten education for all of Pennsylvania children.” Acting Sec. McNulty concluded, “Natural gas has the potential to fuel not only our homes and truck fleets, but also a world-class education system for our children and a manufacturing renaissance for our communities and economy.”
Chairman Yaw commented that he disagreed with most of the conclusions made by Acting Sec. McNulty in her testimony. He noted many suggest that Pennsylvania is the only state that doesn’t have a tax natural gas. Chairman Yaw wanted to know what the impact fee is and whether it is a tax. McNulty responded that she said that Pennsylvania is the only state without a severance tax. Chairman Yaw noted that most states don’t have a Johnstown Flood Tax. McNulty explained that if the impact fee was converted into a tax rate it would be in the neighborhood of two percent. Chairman Yaw wanted to know how many other states have an impact fee. McNulty said she is not aware of another state. Noting her testimony stated that 80 percent of the tax will ultimately be paid by non-Pennsylvanians, Chairman Yaw pointed out that 50 percent of Pennsylvania households are served by natural gas. He asked if those people will also be paying an additional fee. According to Acting Sec. McNulty, those people are paying fees right now including severance taxes from other states such as West Virginia. Chairman Yaw asked about the provision that producers may not reduce royalty payments to landowners and its impact on existing contracts between landowners and gas companies. Acting Sec. McNulty responded that it is her understanding that the language in the proposal has been reviewed by the Administration’s attorneys who believe the language is sufficient. Chairman Yaw commented that there “are a minimum of a thousand different contracts out there” and expressed doubt that the language is sufficient. Chairman Yaw then asked about using a portion of the severance tax to provide the equivalent of the impact fee to municipalities. Acting Sec. McNulty said she believes the formula for the distribution is the same as it is in current law.
Sen. Leach wanted to know how the gas is sold, Acting Sec. McNulty explained that it is sold generally at a pipeline hub and from there it is distributed throughout the country and internationally. Sen. Leach asked if a particular tax rate in a particular state impacts the international commodities market. He wanted to know how the Pennsylvania tax would impact prices in the international market. Acting Sec. McNulty responded, “Minimally, if at all.” Sen. Leach asked if the tax is enacted where Pennsylvania’ rate would be nationally. Acting Sec. McNulty explained that Pennsylvania would be somewhere “in between”. She added it would not be the highest and not be the lowest.” She pointed out other states have the ability to have more flexibility in determining severance tax rates. Sen. Leach asked Acting Sec. McNulty if the gas industry has fled those states that have imposed a severance tax. She responded, “No.”
Sen. Bartolotta wanted to know which state has the highest severance tax rate. Acting Sec. McNulty responded that she did not know, but suggested it is probably Texas. Sen. Bartolotta noted that the proposed five percent severance tax along with the artificial floor of $2.97 per thousand cubic feet plus the 4.7 cent per thousand cubic feet of gas extracted totals a 20 percent to 21 percent rate on the industry. She noted that the industry is already laying off workers because the price is so cheap at the moment and if the tax is imposed, they will reinvest their capital elsewhere. Acting Sec. McNulty explained that the rates included in her testimony are the statutory rate and not the effective rate. She then explained in detail how the effective rate is calculated. Sen. Bartolotta asked if Texas and West Virginia have an artificial floor. Acting Sec. McNulty said she did not know the details of their taxes.
Minority Chairman Yudichak indicated the Independent Fiscal Office has put the impact fee at between one and two percent. He wanted to know if that number is accurate. Acting Sec. McNulty responded that they have not done a separate calculation on that. Chairman Yudichak said information provided by the Administration indicates there has been a 600-percent increase in production over past four years and the companies have paid $193 million in taxes during that period. He emphasized the need for accurate base line numbers on the effective tax rate of the impact fee and the increased volume over the past four years. Acting Sec. McNulty responded that the numbers are “accurate” and she would provide the committees with the details.
Sen. Ward commented that she has great concern regarding the local share received through the current impact fee and the Governor’s proposed changes. She wanted to know how much money the severance tax will generate. Acting Sec. McNulty explained that it will depend on the price of gas but the Administration believes it will generate $1 billion in the first full fiscal year. Sen. Ward asked how the money will be distributed. According to Acting Sec. McNulty the vast majority will go to education.
Chairman Eichelberger asked if the proposal is modeled after West Virginia. Acting Sec. McNulty responded, “Yes.” Chairman Eichelberger commented that there seems to be a lot of differences on what Pennsylvania does and what West Virginia does on how the tax is implemented and other aspects. Acting Sec. McNulty conceded that “it is not exactly the same.” Chairman Eichelberger said that he does not believe West Virginia is a good comparison. Acting Sec. McNulty commented, “There is no such thing as a standing severance tax. There are many variations amongst states.”
Matthew Knittel, Director, Independent Fiscal Office (IFO) testified, “In a recent analysis of the Administration’s revenue proposals, the analysis found that most of the proposed severance tax would likely be exported to final consumers who reside in other states.” He added, “This adjustment will take several years to occur and the tax incidence could be quite different in the near-term.” Knittel explained, “Data from the US Energy Information Administration and the Pennsylvania Department of Environmental Protection suggest that three-quarters of production for calendar year 2014 may have been exported,” He further explained, “Because total production grows more quickly than internal consumption, the analysis projects that roughly 80 percent of future production could be exported.” Knittel noted, “Recent price forecasts assume a recovery in regional prices, partly due to significant new pipeline capacity that is scheduled to become operational during the next several years.” Concluding his testimony, Knittel told the committees, “In summary, the proposed severance tax will likely move Pennsylvania from one of the lowest severance tax states to the highest tax state, relative to other major gas producing states.”
Chairman Yaw said that it is his understanding that one part of the West Virginia tax is due to sunset in 2018. Knittel responded, “That is correct.” Chairman Yaw asked about the projection regarding new pipeline capacity and how it was determined, Knittel explained that it is based on data from Bentek Energy and the US Energy Information Administration. Chairman Yaw asked if the severance tax is enacted would it make Pennsylvania rate one of the lowest to one of the highest. Knittel responded, “Yes, that is what our analysis finds.”
Sen. Bartolotta commented that it is her understanding that West Virginia’s severance tax applies to all of its natural resources. Knittel responded, “I believe so.”
Sen. Hutchinson asked how future projections on production are determined. Knittel said the IFO was provided a baseline production number from Bentek Energy.
Lou D’Amico, President and Executive Director, Pennsylvania Independent Oil and Gas Association (PIOGA), commented, “I oppose the Governor’s severance tax proposal and each and every other severance tax proposal in the General Assembly.” He continued, “I oppose the tax, not only because I represent this industry, but also as a citizen of the Commonwealth since birth, I oppose any taxation that singles out a particular industry or business in Pennsylvania for special tax treatment afforded every other business in the Commonwealth.” D’Amico cautioned, “People are losing jobs in this industry already, as a result of the economic environment.” He added, “Adding a severance tax will do nothing but lead to the loss of more jobs and reduced capital expenditure programs, and further dampen the state’s economic recovery.” D’Amico asserted, “This is glaringly apparent, yet for some reason many members of the General Assembly and certainly everyone in this administration are oblivious to it.” He later argued, “The severance tax is by no objective, informed or reasonable analysis a fair or commonsense tax. The severance tax is bad public policy, targeting one industry and one alone to achieve particular goals that are not attainable in any event by the proposal.” D’Amico concluded, “This proposal will cost jobs, increase energy costs for our citizens, and squander the opportunity to make Pennsylvania an attractive state for business and investment.”
David Spigelmyer, President, Marcellus Shale Coalition, testified, “In Pennsylvania alone, the shale gas industry has created and supported nearly a quarter of a million jobs and helped the Commonwealth weather one of the nation’s most difficult economic recessions in a generation.” He pointed out, “Not only is Pennsylvania the only state in the nation that levies an impact tax, which has generated more the $850 million since 2012, but we are the only industry in the Commonwealth that is required to pay a special impact fee above and beyond every other high-end tax that Pennsylvania levies.” According to Spigelmyer, “All told, the natural gas industry, its affiliates and supply chain have collectively helped generate $2.1 billion in revenue for Pennsylvania, which is above and beyond the industry-specific impact tax.” He noted that in 2004, Gov. Rendell’s Pennsylvania Business Tax Reform Commission, which included Gov. Wolf, made major tax recommendations that were guided by a series of primary Business Tax Reform Criteria. According to Spigelmyer the criteria included equity, economy of administration, neutrality, competitiveness, stable and sufficient revenues and simplicity. He explained to the lawmakers how “nearly every premise is either ignored or disregarded” by the proposed severance tax. Spigelmyer observed “The dialogue on this important issue has become centered around a fundamentally false choice: either you’re for a higher energy tax or you’re against children’s education and future.” He added, “By exploiting children to suggest that the natural gas industry is to blame for the failings of our state’s longstanding structural fiscal challenges is absurd.”
Bruce Grindle, Vice President, Pennsylvania Grade Crude Oil Coalition (PGCC), argued, “The imposition of a severance tax at this time is ill-advised and would take the wind out of the sails of one sector of Pennsylvania’s economy that has been growing.” He said, “Despite the assertion by some administration officials that oil and gas companies will not leave Pennsylvania from more favorable economic climes, they must recognize that capital for investment always follows the path of least resistance.” Grindle told lawmakers. “The imposition of a severance tax on the conventional oil and gas industry in Pennsylvania would most certainly be the final nail in the coffin of an industry that has been an economic engine and part of the western Pennsylvania landscape for over 150 years.” He explained, “Historically low commodity prices that are further discounted by a negative trading basis and ever increasing regulatory compliance costs have already resulted in a dramatic decrease in conventional well development.” According to Grindle, the number of conventional wells drilled in Pennsylvania has declined steadily from a high of 4,834 wells drilled in 2007 to a projected 300 to 400 wells in 2015. He warned, “Suffice it to say that any additional economic burden on the conventional oil and gas industry will result in the majority of conventional operators shuttering their businesses and plugging their wells.” Grindle supplied the committees with the following information:
• Comparison of Natural Gas Severance Tax at Various Price Points
• PA DEP Yearly Oil and Gas SPUD Data (Conventional and Unconventional
• PA DEP Yearly Oil and Gas SPUD Data (Conventional and Unconventional (Bar Graph)
Sen. Leach commented that he has heard about the struggles of the industry and how the industry cannot afford “one additional penny to educate the kids in Pennsylvania.” He cited some recent comments made by industry leaders to their investors and shareholders talking about their success. Sen. Leach said there appears to be a “dissonance” between the industry’s testimony and the comments made to investors and shareholders. Spigelmyer responded that only one of his members is in a cash positive position today. He added that very few operators today are returning positive dollars because they are building the factories for the long-term development including the infrastructure for the use of the product long-term. According to Spigelmyer the industry in Pennsylvania is still in its infancy and the very early stages of development.
Noting Grindle’s testimony regarding the declining number of conventional wells drilled in Pennsylvania since 2007, Sen. Bartolotta asked why DEP is asking for more enforcement officers. Grindle responded, “I don’t have a great answer for that.” Sen. Bartolotta asked Grindle what is the break-even point for his members. Grindle responded, “Between $4 and $5.”
Chairman Yudichak noted that people did see a $1,200 savings due to the savings generated by the shale gas development but in turn those people are paying higher property taxes over the past four years. He asked if the current impact fee has had any negative impact on the industry. Spigelmyer responded that in February, 2012, when the fee was enacted, 26 rigs were dropped. He observed, “Economic decisions matter.” Spigelmyer cautioned the industry is nearing a production plateau.
Sen. Ward expressed concern with the slowdown in manufacturing in Westmoreland County. She wanted to know what the state should do to help the industry. Spigelmyer responded, “Grow manufacturing.”Grindle said, “A regulatory environment that recognizes the difference between the conventional and unconventional industry.” He added, “We need policymakers who understand small businesses here in Pennsylvania.”
Minority Chairman Blake commented that the state has singled out industries in the past regarding taxation.
Sen. Haywood cited several gas companies who are not paying the corporate net income tax in Pennsylvania. He wanted to know what companies are actually paying the corporate tax rate. Spigelmyer responded that “no one is in a cash positive position today therefore you do not have significant corporate net income tax collections.”
Sen. Hutchinson wanted to know the difference between conventional and unconventional production. Grindle explained, “The difference is the order of magnitude.” He further explained that a conventional well may occupy a quarter or a half of an acre whereas a unconventional could be five acres or more. Grindle described the conventional oil and gas industry in Pennsylvania as “a cottage industry.”
Gene Barr, President and CEO, Pennsylvania Chamber of Business and Industry, said, “We are willing to have a discussion about properly funding our schools, but we will disagree that the only way for our education system to produce better results is to increase spending.” He added, “First and foremost, we need to solve the pension crisis.” Barr cautioned, “The enactment of a severance tax will impede the significant progress Pennsylvania has made with respect to job creation and render the state even less competitive with that of other states.” He noted, “A recent economic analysis found that the administration’s severance tax proposal would cost Pennsylvania more than $20 billion in lost gross domestic product and up to 18,000 jobs over the next decade.” Barr added, “More than 6,000 jobs would be lost as soon as 2016 - many of them well-paying supply chain and construction labor positions.” He said, “The proposal to levy a five percent tax on a minimum artificial price floor of $2.97 per thousand cubic feet of gas plus an additional 4.7 percent per thousand cubic feet will set the Commonwealth back instead of allowing the state to grow its economy , jobs and provide Pennsylvanians with lower energy bills.”
Chairman Yaw asked how to utilize the natural gas industry to build an economic base and what the General Assembly could do. Barr responded, “First, do no harm with more taxes.” He also stressed the need to build out the infrastructure to move the product downstream and to develop new markets for Pennsylvania energy.
Sen. Haywood asked if the tax breaks for the energy industry should be eliminated. Barr responded, “The industry utilizes legitimate business write-offs for expenses they incur in terms of operating in a given area.” Sen. Haywood asked if the Chamber is opposed to combined reporting. Barr said, “That’s correct.” Sen. Haywood asked if the Chamber is opposed to closing the Delaware loophole. Barr argued that the issue of passive investment is completely different from combined reporting. Sen. Haywood asked if the Chamber has any recommendations on how to address the budget deficit. Barr reiterated the need to address the pension system.
Sen. Aument asked about training a workforce in Pennsylvania for the energy industry. Barr explained that many of his members are having problems finding people to fill open positions. He admitted the business community has not done a good job in communicating its workforce needs to the school systems. Barr discussed the impact of not developing a workforce that is work ready.
Michael Wood, Research Director, Pennsylvania Budget and Policy Center, testified in support of a severance tax. According to Wood, “Oil and gas development companies often pay little to no corporate income tax due to federal energy development tax incentives.” He argued, “Even with the booms and busts inherent in this industry, the oil and gas businesses continue to thrive in states that have severance taxes.” Wood stressed, “There is no factual basis that the industry would somehow work differently in Pennsylvania and become unprofitable due to the tax.” According to Wood, “Revenue estimates put forward by the Wolf Administration and the Independent Fiscal Office have the total tax proceeds exceeding $1 billion by 2016-17, the first full fiscal year of collections.” He added, “This includes the $225 million that is to be distributed as the impact fee which is replaces.” Wood observed, “The enactment of a natural gas severance tax, like the one proposed by Gov. Wolf, is long overdue.” He concluded, “A severance tax on natural gas is precisely the type of recurring revenue needed to diversify the state’s revenue base and help it grow in tandem with state expenditures for critical services like schools, health care and environmental protection.”
Chairman Yaw commented that Wood’s testimony makes a lot of generalizations. He noted the details in the West Virginia tax and what Gov. Wolf is proposing are “significantly different.” Chairman Yaw asked Wood if he is still supporting the West Virginia model. Wood responded, “The rate the Governor has suggested based on what was done in West Virginia. There are other parts that are different than that and we acknowledge that.” Chairman Yaw asked Wood about his comment that the tax would not drive any companies away. He asked if Wood has talked with any gas companies. Wood responded, “Yes”. Chairman Yaw asked, “Which companies have you talked to?” Wood responded, “Southwest Energy but I am not sure.” Chairman Yaw noted that Wood had testified that Pennsylvanians would be on the hook for any remediation. He pointed out that not part of the proposed severance tax is for remediation. Wood responded that part of the money is for increased enforcement. He added that his group would like to see some money set aside for remediation.
Sen. Haywood asked if education funding in Pennsylvania is adequate. Wood responded, “No.”
Nathan Benefield, Vice President of Policy Analysis, The Commonwealth Foundation, testified, “There is a misconception among the public that gas drillers pay no or little taxes, which as you know, wildly inaccurate.” According to Benefield, “gas drillers paid more than $600 million in impact fee taxes from 2011 to 2013.” He noted, “Despite the name, the impact fee functions as a tax, as funds are used for government projects only tangentially related to gas drilling.” Benefield added, “On top of this, gas drillers pay taxes common to every business operating in Pennsylvania, including the corporate income tax, personal income tax and sales tax.” He pointed out that the Commonwealth’s overall tax burden is far higher than other drilling states. Benefield commented, “Pennsylvanians should the 10th highest local and state tax burden in the nation, with the highest effective corporate income tax.” He noted, “In contrast, there is no corporate income tax or personal income tax in Texas or Wyoming, and the corporate income tax in West Virginia is 6.5 percent compared to Pennsylvania’s 9.99 percent rate.” Benefield provided the committees with a policy memo entitled The Impact of Gov. Wolf’s Tax Proposals on Job Creation.
The following groups submitted written testimony to the committees:
• Associated Petroleum Industries of Pennsylvania
• Environmental Defense Fund
• America’s Natural Gas Alliance