Guest Post: An Opposing View of PA’s Severance Tax “Mess”

Dan Markind

You know how MDN feels about a new/extra severance tax in Pennsylvania–we’re dead set against it. We have been from the beginning. We think the impact fee (i.e. tax) is doing just fine, having raised over $1 billion in revenue from 2013 to 2017 (assuming the Independent Fiscal Office’s 2017 projections are accurate). The best part of the impact fee is that 60% of it stays local–in counties where drilling happens–instead of going to the black hole of Harrisburg overspending. However, there are Republicans in the state legislature addicted to spending, just like Democrats, and they continue to lobby for a new severance tax, to be placed on top of the existing impact fee. As we saw yesterday, PA’s rig count has been static to slightly down all year long (see Marcellus/Utica Rig Count Race Tightens: OH Count Closes in on PA). Does PA want to drive even more business out of the state and into neighboring Ohio and West Virginia? That, in our humble opinion, is exactly what a severance tax will do. Although, MDN doesn’t play favorites, we love all our state children equally! We don’t want PA to make a serious mistake. However, there are opposing opinions on the severance tax issue from people we respect. One of those people is Dan Markind, a partner with law firm Weir & Partners. Dan writes a regular email newsletter covering the Marcellus Shale in PA. Last week he wrote about the budget negotiation collapse and the (admitted) debacle of House Republicans clutching at alternative straws–first a warehouse tax and then a hotel tax–anything but a severance tax. Dan believes the shale industry in PA has alienated other industries, and has boxed itself into a corner by not accepting some form of a severance tax. We disagree with Dan’s view on this matter–but his view is shared by many. Which is why we bring you his email newsletter from last week (with his permission), to present an alternative view on the severance tax issue…

Pennsylvania’s Shale Industry in a Severance Tax Bind

by Daniel Markind, Weir & Partners

This was the week that Pennsylvania’s budget negotiations moved from comedy to farce. Last Sunday, there was hope that a budget funding plan would be finalized in short order. Today, no resolution is in sight.

To recap, on September 13 the Pennsylvania House of Representatives defied the State Senate and passed a proposed budget-funding plan for the $32,000,000,000 State budget that did not include a mineral extraction tax. 15 Republican House members, including all of the members from Southeastern Pennsylvania, voted against their own party’s budget plan. It passed by only 103-91. On September 20 the State Senate summarily dismissed the House budget funding plan by a vote of 43-7. Last week, the two houses met with Governor Tom Wolf’s office to try to resolve their differences.

During those reconciliation meetings, the Governor surprised everyone when he agreed to a framework funding plan that did not include a mineral extraction tax. House and Senate Democrats were bewildered and aghast. They had convinced the Senate Republicans to go along with an extraction tax and had seen substantial House defections on the issue. Now their Governor seemed to throw it away. The House, however, still needed to make up the revenue shortfall. By last weekend, there was optimism in the Republican camp that a funding plan could be approved which did not include an extraction tax.

The first revenue generation idea floated by the Republican leadership was a tax on warehouse storage. This caused outrage as warehousing is among the fastest growing businesses in much of central Pennsylvania. The plan died.

Next, House Republicans sought to nearly double the hotel tax from 6% to 11%. Already highly taxed, this plan would have given Philadelphia the highest hotel tax in the country and Pittsburgh the second highest. The State tourism industry was completely blindsided but galvanized opposition quickly. Nonetheless, the House Republican leadership thought Tuesday night that it could get the hotel tax through the next day.

Instead, Wednesday morning brought a surprise Parliamentary maneuver seeking to force a floor vote on the mineral extraction tax. While it failed, all of the Southeastern Republicans again defected and voted for the discharge. Along with the failure of the warehouse tax plan, the discharge petition showed the House leadership the intensity of opposition among their rank and file to additional taxes on other industries. By mid-afternoon Wednesday, all hope for the hotel tax ended. Governor Wolf, embarrassed and emboldened, publicly excoriated the Republican leadership and demanded the passage of a mineral extraction tax. Exhausted, the House recessed until October 16. The Governor agreed to borrow money from State liquor stores to temporarily cover some of the shortfall and the mess dragged on.

From the industry perspective, the entire episode has been an example of wishful thinking crowding out clear-headed analysis. Political positions on shale taxation have been analyzed and reanalyzed for years. This week, Senators and Representatives were asked to make political calculations on the fly regarding the increased taxing of industries they had never imagined. Further, they had to analyze, without any preparation, two controversial actions with each vote. First, they were asked to vote to assess additional taxes on industries that directly affected some of their local economies (unlike shale in much of the southern and eastern parts of the State). Second, they would have had to explain to their constituents why they voted to approve those taxes and not an extraction tax on shale. That was a bridge too far. Now all eyes are back focused on a mineral extraction tax.

If there is good news for the shale industry from this week’s events I don’t see it. They have alienated other powerful industries in the State. Their champions, the House Republican leadership, dropped any pretense to holding the line generally on business taxes. They just sought to tax other businesses. All Republican Representatives from areas of Pennsylvania that don’t have shale drilling (Lehigh Valley, York, etc.) are now more likely to vote for the extraction tax, lest a tax be placed on industries that directly affect their localities. More than ever, in Pennsylvania the mineral extraction tax has become a parochial issue. Short term, that’s not good for the industry. Long term it’s terrible.

In the end, when the State finally agrees to a budget funding plan, it is possible that the industry will pull this out and not face an extraction tax. I doubt it. In any event, the price has been enormous. Unwilling to work together, unable to forge a united front with other economic sectors, more isolated politically than ever and facing a State that is delaying fully funding its public colleges until a spending plan is approved, the shale industry is in a bind. How it extricates itself remains to be seen.