by Charles A. Schliebs
Rather than the Wolf Administration reaching out to the industry to create a solution to the severance tax issue that can appropriately provide funding to the state and its future budgets in a fair and reasonable manner (as suggested in our last issue), for some inexplicable reason, the Wolf Administration not only failed to reach out in good faith but compounded its earlier missteps and is faced with getting nothing from its attempt to place additional taxes on the state’s oil and gas industry.
The Fatal Third Element of the Severance Tax Proposal
Many Harrisburg sources have told me that the Wolf Administration either did work backwards or must have worked backwards to add the third element of its proposed severance tax. At the time of our last issue, the Wolf Administration had added a second element since the initial flat 5% severance tax proposal used during the campaign wasn’t enough on its own to generate the Administration’s $1 billion target for education.
The second element, added on February 11, is a flat 4.7 cents per Mcf, effectively raising the tax percentage either a little or a lot depending on the price at which the gas is sold. Early on, and certainly during a good part of the campaign period, the Wolf Administration clearly had no understanding that the prices around the state at which the producers were able to sell their gas were dramatically lower than benchmark Henry Hub or NYMEX pricing. As pricing continued to remain low, the Wolf Administration realized that the billion dollar tax target was not feasible unless it added a third element, one that is completely unprecedented nationally in extraction taxes.
Recognizing that it made no sense to fund something as important as education with a tax that could vary significantly with gas prices, the third element, a floor price, declares that no matter what an E&P company is able to get for its gas, it will be taxed at a minimum $2.97 per Mcf! With prices over the last year going down as low as the 60 cents per Mcf range, this makes the effective tax rate in many cases much higher than any in the nation.
The third element of the proposed severance tax was the Wolf Administration’s biggest mistake, even bigger than (1) Governor Wolf earlier threatening a fracking ban, (2) declaring that the state was not a partner with the gas industry unless he got his tax, or (3) refusing to recognize that the Impact Fee is a tax on extraction by over and over and over again misrepresenting that Pennsylvania is the only state without an extraction tax. The reverse-calculated floor price, on top of the other positions noted, sent a message to the E&P companies across the Commonwealth that the Wolf Administration was so disconnected to the realities of the oil and gas industry and how capital decisions are made that it was no longer possible to sit down as partners in the state’s development and negotiate something that worked for Pennsylvania.Read more