Pennsylvania Natural Gas Industry Update

http://www.philly.com/inquirer/local/20091025_How_Marcellus_Shale_gas_came_to_be_tax-exempt_in_Pa_.html

How Marcellus Shale gas came to be tax-exempt in Pa.

By Mario F. Cattabiani and Amy Worden
Inquirer Staff Writers

HARRISBURG - All through Pennsylvania's 101-day budget impasse, Gov. Rendell spoke of pain.

A recession-weary state had to tighten its belt. Revenues had to rise - income tax, sales tax, new taxes on whole industries. "We can't get this budget resolved," Rendell said, "without everyone feeling some pain."

But when the budget was finally signed Oct. 9, one industry came away pain-free.

The natural-gas industry's leaders and lobbyists beat back Rendell's proposal to tax gas as it is pulled to the surface from the rich black-rock reservoir known as the Marcellus Shale.

So, as drilling rigs are sprouting in the state's northern tier and southwestern corner, the gas those rigs are extracting still isn't taxed. That makes Pennsylvania unique among the 15 states that produce the most natural gas.

What's more, the industry persuaded Harrisburg to lease more public land to gas drillers - even as the state's budget for environmental protection was being sharply cut.

What happened to Rendell's gas-tax proposal?

He says the industry made good arguments for staving it off. He did not want to slow the "gold rush," as he called it, of jobs and commerce the drillers would bring.

One legislator came away with a more cynical view.

"The same old influential interest groups getting their way," said State Rep. Greg Vitali (D., Delaware). "It was just another day in Harrisburg."

What follows is a closer look at some key moments in the short life of Rendell's proposal to help balance the budget by taxing natural gas.

Tapping "the gold rush." As Rendell prepared his Feb. 4 budget address, a boom was under way. Natural-gas industry representatives were fanning out across the state, securing leases and drilling wells at twice last year's pace.

Rendell, a policy wonk, did his homework. He spoke with Gov. Joe Manchin III of West Virginia, a state that also sits atop the Marcellus Shale and has taxed natural gas for years.

In his budget address, Rendell proposed to tax gas extracted in Pennsylvania.

Rendell said Manchin, a fellow Democrat, had assured him that West Virginia's tax did not "inhibit gas extraction and that it is continuing at a record pace, and it's reaping critically needed revenues so the state can provide services to its citizens."

Rendell's plan matched West Virginia's - a 5 percent tax on the value of natural gas at the wellhead, plus 4.7 cents per 1,000 cubic feet of natural gas extracted.

By Rendell's estimates, such a tax could raise $107 million for Pennsylvania in its first year, helping fill a billion-dollar budget gap.

In a recent interview, Manchin described what he said to Rendell months ago.

"The Marcellus Shale is a tremendous producer. A severance tax will not deter" the drillers, Manchin said. "Believe me, if we didn't have the gas, they wouldn't be here."

Manchin said he had faced industry complaints in 2005 when he proposed to expand the tax, with some companies threatening to leave.