Pennsylvania’s proposed fracking law will exacerbate its budget shortfall

February 7, 2012

As Pennsylvania Governor Tom Corbett prepares to release the state’s fiscal 2013 budget tomorrow, the AP is reporting that Republicans in the state legislature are planning to cram through a law that levies a minimal tax on gas and oil drillers in the state. Although taxes on gas and oil production could be a means of plugging substantial revenue shortfalls, it’s likely that the legislation will require drillers to pay the smallest level of fees of any state with recoverable energy assets.

From the AP today (emphasis mine):

Pennsylvania’s top-ranking state senator says he’s hoping for a speedy vote in his chamber on sweeping legislation to impose a drilling fee and update safety regulations on the booming natural gas industry.

Senate President Pro Tempore Joe Scarnati said he hopes senators will vote on the bill by Monday night. The proposed compromise hasn’t been released publicly or amended into a bill, but Scarnati says he believes it will get enough votes to pass.

The provisions were agreed to by the Legislature’s Republican leaders and fellow Republican Gov. Tom Corbett, without input from Democrats.

Although it’s unclear what the final form of the drilling fee will be, the legislation passed in the Pennsylvania General Assembly imposed a stepped, multiyear flat fee on gas wells instead of the volume-based “severance,” or “production,” tax that all major energy producing states use. When I first wrote about the revenue the state would forgo I said:

There are shale gas fields covering more than half of the United States, but Pennsylvania has emerged as the rising star of domestic energy production with its “Mighty Marcellus” fields. This is a great resource for Pennsylvania, but I’ve been confused about legislation that would impose an “impact fee” on shale gas producers instead of the traditional volume-based royalty structure used by other states. The loss of revenues to the state over the next 20 years using the “impact fee” could be approximately $24 billion using current gas prices. If gas prices doubled (they are currently at 10-year lows), losses to the state could exceed $48 billion or more.

This loss of potential revenue from gas drilling comes as Pennsylvania has suffered revenue shortfalls. According to the Pennsylvania Office of the Budget Mid-Year Briefing, in the first five months of fiscal 2011-12, collections across nearly all revenue categories failed to meet estimates. Revenue collections were 3.6 percent, or $345.3 million, below estimate. There are current-year revenue shortfalls too, even though the state’s economic performance and employment picture is improving.

The senate president pro tempore who announced the desire to vote on gas-drilling legislation tonight also announced that harsh cuts are likely for the state budget. From the AP again:

Pennsylvania’s top-ranking senator says he expects dramatic and difficult spending cuts in Gov. Tom Corbett’s budget plan.

Senate President Pro Tempore Joe Scarnati said Monday that Pennsylvanians should be prepared for a debate on how best to use tax dollars, and he warned that he can’t envision lawmakers raising taxes to ease spending cuts.

Corbett is delivering his budget plan Tuesday for the fiscal year beginning July 1. The state must increase spending on pensions and debt, and advocates for the poor and education worry that spending on their causes will be cut to absorb the difference.

Meanwhile, business advocates are pushing for tax cuts and Pennsylvania’s current-year tax collections are running behind expectations.

It’s a little difficult to watch all this from a distance. Pennsylvania has plenty of  space to impose royalty fees on gas drillers; their neighbor and competitor, West Virginia, is taxing producers at 6.1 percent. Pennsylvania is missing a great chance to stabilize the state budget and add funds to the treasury. Something ominous is happening in the dark in Harrisburg, and I don’t think it will benefit the people.

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