Budget Agreement Reached: Includes Severance Tax, No Tobacco Levies

Governor Ed Rendell announced this afternoon that the legislative leaders and he agreed on a $28.05 billion budget plan for 2010-11. The budget would increase spending by $182 million, or less than 1% from the current year budget. That is $500 million more than Senate Republicans wanted and $1 billion less than the $29 billion spending plan proposed in February.

The budget will include a severance tax on natural gas from the Marcellus Shale, with details to be worked out by October 1. It does not include an excise tax on cigars and smokeless tobacco or a plan to do away with the sales tax vendor discount. Legislation to close the Delaware loophole and reduce corporate income tax rates also failed to make the final cut.

The Governor announced a few details on proposed spending cuts (dollar figures based on 2009-10 approved budget amounts):

  • 9.1% reduction in library funding ($5.5 million)
  • 9.2% cut to the Department of Environmental Protection ($14.6 million)
  • 11% cut to the Department of Conservation and Natural Resources ($10.2 million)
  • 10% reduction to the Department of Labor and Industry ($9.2 million)
  • 11.7% cut to the agriculture programs ($7.9 million)
  • 7.5% reduction to the Executive Offices ($15.3 million)

The Governor also said the budget would require 1,000 state employee layoffs.

The budget would provide an increase in the basic education line item of $250 million, but overall education expenditures were cut by $126 million. Accountability Block Grants would be cut by $14 million – from $271 million in recent years to $257 million.

The Governor also said that the borrowing limit on the Redevelopment Assistance Capital Program (RACP), which provides grants for redevelopment projects, will be increased by $600 million.

The budget plan leaves recurring revenue sources – like the tobacco taxes – on the table and relies heavily on one-time funds. Among those one-time funding sources is $850 million in extended FMAP funds that have not yet been approved by Congress. The Governor said that if Congress fails to approve the FMAP funding, he and legislative leaders will have to identify additional cuts in the budget.

Overall, the Governor said this budget will put Pennsylvania in bad shape for the 2011-12 fiscal year when the state will have to deal with the loss of federal stimulus funds.

Most details on the budget are not yet available. As information is released, we will post updates on our website.

Don’t ‘Give Away the Store’ With Industry-Friendly Severance Tax Exemptions

( – promoted by John Morgan)

If the Pennsylvania General Assembly listens to the natural gas industry, two-thirds of the gas extracted from a typical Marcellus Shale well will be exempted from a state severance tax.

That is the central finding of a report released Thursday by the Pennsylvania Budget and Policy Center. It examines severance tax policies in Texas and Arkansas as the gas industry ramps up efforts to include exemptions in Pennsylvania’s severance tax that are more generous than the gas tax breaks offered by either of those industry-friendly states.

The gas industry has successfully lobbied Pennsylvania officials to include an exemption for low-producing wells in recent severance tax proposals. The exemption would be for existing shallow, or “stripper,” wells – in addition to Marcellus Shale wells in their later years of production.

More recently, the industry has been making the case for a tax exemption during the first three years of Marcellus Shale well production to recover capital costs. If both front- and back-end exemptions are included, a typical Marcellus Shale well would be taxed for only nine years of its 40-year life span.

Pennsylvania doesn’t need to offer tax breaks to attract gas producers. The state is already close to lucrative natural gas markets in the Northeast, and studies in other states have found tax breaks do little to spur production. Pennsylvania could end up leaving millions of dollars on the table without much to show for it.

While the industry cites Texas and Arkansas as models, neither state offers exemptions for all gas wells at the beginning or end of production. Texas, for instance, provides a rate reduction for “high-cost” wells based on the actual costs of drilling. Only in extreme cases will the tax rate be reduced to zero and only until half of capital costs are recovered. Unlike in Pennsylvania, Texas drillers also pay billions each year in property taxes on gas reserves.

As Center Director Sharon Ward noted in a press release on Thursday: “Pennsylvania taxes are already very favorable to the gas industry. Further tax breaks will drain revenue for core services like health care, education, and environmental cleanup. Communities across Pennsylvania are already feeling the impact of Marcellus Shale drilling. Lawmakers need to act now to put a properly structured severance tax in place.”

The Budget and Policy Center paper recommends that lawmakers reject an upfront severance tax exemption for Marcellus Shale wells and that any exemption for low-producing wells be conditioned on gas prices dropping below a certain level – the same way a rate reduction is triggered for shallow wells in Texas.

Read the full report here.

Check out media coverage of the report here.

And view video coverage of a Thursday press conference (taken by the Roxbury News), where Sharon Ward was joined by Representative David Levdansky and Jan Jarrett of PennFuture to discuss the report.