Key questions for evaluating severance tax legislation

Pennsylvania lawmakers are in the third week of a budget stalemate that even the most optimistic political observers saw from miles away. I cannot overstate how important these budget negotiations are to the environment. In addition to funding state environmental protection agencies, the budget negotiations include debate on levying a severance tax on natural gas drilling and using part of that revenue to invest in Pennsylvania's clean energy economy as well as enforcing environmental regulations.

So far, the severance tax has been a moving target in the budget debate. Negotiations have ranged from haggling over the details to outright hostility. Legislative leaders such as Rep. Mike Turzai (R-Allegheny) have been particularly outspoken and largely refuse to negotiate with Gov. Tom Wolf on any aspect of the tax. Other leaders, such as Sen. Jake Corman (R-Centre), are more open to negotiating.

Negotiations are expected to continue at least for another couple of weeks, if not longer. But as the negotiations drag on though, there are some key questions to keep in mind when evaluating any potential piece of severance tax legislation:

1. Where is the revenue going? The most important part of any severance tax proposal is how the revenue is invested. PennFuture has strongly advocated that part of the revenue must go to re-starting key clean energy programs as well as beefing up enforcement of environmental regulations. In both cases, budget cuts have severely depleted these programs at a staggering cost to the environment. Their inclusion in any severance tax legislation is crucial.
2. What about the Impact Fee? In 2012, policymakers implemented a "Impact Fee" on natural gas drillers that effectively taxes the industry at the lowest rate of any state with gas drilling. The majority of the revenue from the fee is returned to local municipalities impacted by drilling to rebuild their infrastructure. As a result, the Impact Fee is very popular among drilling counties, making whether the Fee remains or is eliminated due to levying a severance tax a key negotiation sticking point.
3. What about the price floor? Gov. Wolf's severance tax proposal includes a "price floor" of $2.97/mcf, meaning that natural gas drillers would be taxed at $2.97/mcf even if the price of gas falls below this level. In theory, the price floor protects state revenue from possible fluctuations in the price of gas as well as guaranteeing a minimum level of revenue. Currently, natural gas prices in Pennsylvania are lower than the price floor, but are expected to rise as pipeline projects are completed. Nonetheless, the natural gas industry still decries the price floor.
4. What about policy riders? During the course of crafting legislation, the General Assembly has a funny habit of sneaking in provisions in larger bills it knows it can't pass on its own. Their hope is no one notices. Any potential severance tax deal will offer an opportunity to do the same and we've already seen legislative leaders attempt to eliminate new oil and gas regulations by slipping a provision in the Fiscal Code bill. It's entirely possible a similar situation could happen again, potentially reducing the overall benefit of the deal.

Ultimately, the severance tax is crucial environmental policy - if not the most important piece of environmental policy to be enacted in 2015. It's vital we get it right.

Matthew Stepp is director of policy for PennFuture and works out of our Philadelphia and Harrisburg offices. He tweets @MatthewStepp.