Editor & Publisher, Marcellus Drilling News (MDN)
The Pennsylvania House passes its budget bill insisting on no new taxes, including the insane severance tax being pushed by Governor Tom Wolf.
On Monday Pennsylvania House Republicans released their version of a state budget, and yesterday (Tuesday) they voted to pass it. Ba-boom! The budget is noteworthy for many reasons. Of prime interest to MDN is that the budget does NOT include PA Gov. Tom Wolf’s insane 6.5% severance tax.
As a matter of fact, after passing the bill yesterday, Republicans are quoted as saying the bill’s overall aim is to inject “sanity, predictability and affordability” into state spending. Wait. Did House Republicans just call Wolf and the Democrats “insane,” with respect to spending and taxing? We believe they did.
PA House Majority Leader Dave Reed said he understands the final version will get changed, quite a bit: “We understand it’s a negotiation, a beginning, not an end.” Let’s hope the Republicans hold the line once again against an insane severance tax proposal from Gov. Wolf.
The Pennsylvania House of Representatives has voted 114-84 to move its first edition of a state budget bill for 2017-18.
The measure passed on strong party lines Tuesday with all yes votes cast by Republicans, and just four of the majority Republicans joining all 80 Democrats on the floor in voting no.
The $31.5 billion spending plan, introduced earlier this week, is most significant for setting down some early markers from the House majority for weeks of budget deliberations ahead, including:
* An insistence on no tax increases and no new borrowing to support current-year expenses. The Republican plan would turn first to expanded gambling and further liquor sales reforms for new state revenue.
* Setting a likely floor of $31.5 billion for overall general fund spending, which is actually slightly below current-year spending levels. Gov. Tom Wolf’s February proposal called for $32.3 billion in total spending.
* Endorsement of the $100 million increase sought by Wolf in the state’s main subsidy line for classroom instruction in public schools.
But there are battle lines drawn, too.
In brief floor debate, Democrats complained about what they termed as deep cuts into several human-services programs.
Wolf on Monday had criticized the GOP’s proposed spending cuts in areas like assistance with child care expenses for low-income families; a $50 million trim to Wolf’s $75 million boost in spending for pre-kindergarten programs; and $12 million slice to Commission on Crime and Delinquency funding that Wolf said will have a direct impact on the ability to provide overdose-reversing antidotes to local police.
The governor said he will stick with his plan to raise revenue for those and other causes through proposals for about $1 billion in new taxes, including a severance tax on natural gas production in the Marcellus Shale region, the elimination of certain sales tax loopholes and some changes to state business tax structures.
Republicans said Tuesday their bill’s overall aim is to inject “sanity, predictability and affordability” into state spending, in part by controlling major cost drivers like medical assistance and other entitlements.
“This budget seeks to bring those costs back in line with reality,” said House Majority Leader Dave Reed, R-Indiana County.
The budget bill, House Bill 218, now moves to the Republican-controlled state Senate, where that chamber will have a chance to declare its own priorities.
Wolf and the two chambers are supposed to agree on a final spending plan – and the taxes and revenues to fund it – by the July 1 start of the new fiscal year. Most of that work takes place in complex, closed-door negotiations between the governor and the legislative leadership teams.
After allowing for $234 million to patch a current-year shortfall, the House GOP plan would actually cut overall spending next year by a little under 1 percent.
“We balance the budget by cutting through a lot of the bureaucratic spending in Harrisburg, while focusing on the funding that we want to get out into the local communities that take care of the core functions of government,” House Majority Leader Dave Reed, R-Indiana, told reporters in a brief question-and-answer session in the Capitol late Monday afternoon.
The plan is for the fiscal year starting July 1.
Democrats quickly signaled their opposition in a party-line committee vote Monday evening. Wolf aired concerns about some of the plan’s spending cuts, including for child care subsidies, and said he believed that corporations should pay their “fair share” while state government tightens its belt.
Wolf in February floated a $32.3 billion spending plan, based on a $1 billion tax package, including a tax on Marcellus Shale natural gas production, and a range of savings measures, including closing a prison in Pittsburgh, cutting unfilled employee positions and reducing dispensing fees on drug purchases.
The House GOP’s plan would require nearly $800 million in new money to balance, and Reed suggested that the bulk of it could come from steps to legalize the expansion of casino-style gambling and the private-sector sale of wine and liquor in Pennsylvania.
New spending in the House GOP plan would include $150 million more for public schools, special education and early childhood education, below Wolf’s $200 million proposed increase. It also would maintain Wolf’s proposal to add more than $150 million to fund caregiver help and day services for another 2,000 people with intellectual disabilities or autism.
No additional debt or borrowing would be required to balance it, including Wolf’s proposal to use the Pennsylvania Farm Show Complex to secure a $200 million upfront payment, Reed said.
Still, Reed acknowledged that a lot remains up in the air, including the question of whether to impose a fee on 2.5 million residents whose municipalities receive full-time coverage from the Pennsylvania State Police at a cost of $600 million.
“We understand it’s a negotiation, a beginning, not an end,” Reed said.
Currently, highway construction dollars is propping up the state police budget, perhaps unconstitutionally.
Across-the-board cuts would not spare the Department of Environmental Protection, which has been warned by the federal government that it is not adequately staffed to enforce safe drinking water, air quality and mining pollution standards.
MDN editor Jim Willis recently received an email with some interesting facts and figures from Marcellus Shale Coalition president David Spigelmyer, which has a bearing on the severance tax debate that will now heat up. As we have previously highlighted, an impact fee (really an impact tax) is a far more reliable revenue source than a severance tax. Impact fees are assessed on wells when the well is permitted and drilled, regardless of how much the well does or does not produce. With a severance tax, if a driller decides to turn the spigot off for a while due to low prices for natural gas, the state makes no money either. However, with an impact fee, the state still makes money. Yes, new drilling may slow for a while, but the previous wells that were drilled still provide revenue for years to come, regardless of how much gas is produced.
Responding to a previous story on MDN, Dave Spigelmyer emailed this comment:
Just a tidbit that I thought worth sharing in relation to the impact fee story below. It is often overlooked that we have roughly 2,000 wells that have been drilled that today are not in production (9,555 unconventional wells drilled, 7,435 in production). Those wells that are not producing are either waiting on pipelines, waiting to be completed or just shut in. A point worth making is that the impact fee in PA assesses that fee on spud date or the day the bit touches the ground. So PA actually benefits by gaining the use of those funds regardless of whether the company is receiving a financial return from those wells. Just another angle on the matter as I know this is certainly not the last time a debate will occur on tax vs fee (which, as you keenly articulate, is a TAX). You point out that when prices drop, so do collections. The impact fee adjustments are far more subtle on price. Collections have dropped admittedly, but that is a result of gas prices dropping, the squeeze or haircut operators face to get gas into the interstate pipelines (basis issues) and PA being a difficult place to invest (slower permit times, difficult regulatory climate and significant uncertainty).
One other item worth sharing in these days of budget boxing, the impact fee has a $6 million annual carve to fund the DEP [Dept. of Environmental Protection]. Also, the cost of a well permit has risen from $100/permit to $5,000–a pay as you go system for funding the DEP. Historically, the industry drills about a one-third (1/3) of the wells it permits (that is a rough number). In 2016, 1,315 permits were issued for 504 unconventional wells drilled. By the way, we received 14,702 inspections on our wells–for those who don’t believe we have enough inspectors or oversight (we are #2 in the size of our regulatory force behind TX and TX activity dwarfs our own). So, if 1,315 permits were issued, that is another $6.575 million into the agency. My only point here is that the industry is providing very adequate revenue to the agency.
Thanks Dave! Some excellent insight into how funding takes place for the DEP, and why the severance tax is a BAD idea for PA.
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