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Corbett maintains hard line on no Marcellus Shale tax

As new taxes go, a levy on natural-gas drilling in Pennsylvania would seem like a pretty easy political sell. Two-thirds of the state's voters support the idea, several polls indicate.

A Marcellus Shale gas drilling site near Latrobe, Pa. Gov. Tom Corbett (right) has said he is open to a fee to aid host communities. (Laurence Kesterson / Staff Photographer)
A Marcellus Shale gas drilling site near Latrobe, Pa. Gov. Tom Corbett (right) has said he is open to a fee to aid host communities. (Laurence Kesterson / Staff Photographer)Read more

As new taxes go, a levy on natural-gas drilling in Pennsylvania would seem like a pretty easy political sell.

Two-thirds of the state's voters support the idea, several polls indicate.

Politicians are desperate for money to plug a $4 billion budget gap and prevent deep cuts in the state college system and other programs.

Even the industry, not shy about throwing its weight around the statehouse, might not put up much of a fight.

Every other major natural-gas-producing state has some sort of tax, and some of the biggest drillers have said they wouldn't oppose one here so long as it was reasonable.

Former Gov. Ed Rendell says he struck a deal with industry leaders in an evening meeting at the governor's mansion in the fall - only to see it evaporate the next night in negotiations with Republican legislators.

"The Marcellus industry has been clear and outspoken on this for a year or so," said Ray Walker, vice president of Range Resources in Texas and chairman of the Marcellus Shale Coalition, an industry group. "We are willing to discuss a severance tax."

But the new governor isn't.

In fact, Gov. Corbett, who signed a no-tax pledge during his campaign last year, is far more resolute in his opposition to a tax than many in the industry that would pay it.

"The governor absolutely does not subscribe to the notion that because everybody else collects a severance tax, we should as well," Patrick Henderson, Corbett's energy executive, said last week in an interview.

Corbett said Sunday that a tax might encourage drillers to invest elsewhere.

"The gas isn't going to move. What does move is the capital and the equipment," he said on Inside Story on 6ABC. "It's going to move where gas is cheapest to produce."

Although Corbett said last week that he might consider an "impact fee," Henderson said it would be a mistake to read that as a retreat.

Corbett wants any such fee to go directly to drilling communities - and only to cover real costs, such as road repair and extra police, Henderson said. The governor wants his new Marcellus Shale Advisory Commission to help calculate those costs. The panel's first meeting was Friday.

"The severance tax is off the table," said Lt. Gov. Jim Cawley, chairman of the 30-member commission, which includes Walker and 12 others with industry ties.

Even so, the tax question is sure to keep boiling in Harrisburg this year as Pennsylvania continues to wrestle with the consequences of a booming energy industry entering a recession-ravaged state.

After their demoralizing losses in the fall, Democrats are rallying around a single theme: Republicans are willing to hurt the middle class and students while letting their drilling-industry friends off the hook. They point to the industry's campaign donations, including $800,000 to Corbett. Environmentalists and unions have gotten in on the action, holding news conferences and rallies.

Meanwhile, the drillers and their allies are emphasizing the thousands of jobs and millions in revenue the industry already brings to the state.

The issue could drive a wedge between legislators in drilling country and Republicans in Southeastern Pennsylvania, which presumably wouldn't share in the impact fees.

"No one down here can even see why this is controversial," said Daylin Leach (D., Montgomery). He said local polls had found 8-1 support for a natural-gas tax, putting his GOP counterparts "in an awkward position."

'A lot of money at stake'

One thing is not in dispute: A tax on Marcellus Shale gas could raise a lot of money.

Drilling in the shale has ramped up dramatically since 2004, when Pennsylvania got its first well using the new hydraulic-fracturing process that frees gas from the rock.

From July 2009 to December 2010, drillers reported, 1,247 Marcellus Shale wells produced 466 billion cubic feet of gas. At today's prices, a 5 percent tax - akin to West Virginia's - would have collected $93 million in that period.

On top of that, nearly 1,500 additional wells are not yet in production, and tens of thousands more are projected.

At West Virginia's tax rate, the wells would yield nearly $400 million in revenue by 2015, estimated the Pennsylvania Budget and Policy Center, which favors a tax.

But Corbett said Sunday that, even at $200 million a year, a severance tax would not come close to plugging the hole in this year's budget.

The same tug-of-war between politicians and a powerful industry has played out across the nation. In 2000, the Wyoming legislature hired economist Shelby Gerking to study how tax rates affected drilling activity - in effect, to test the industry's assertion that taxes discouraged drilling. He found that taxes made a dent, but only a dent. Far more important were factors such as the price of natural gas.

Gerking said it wasn't a popular study: One industry official tried to get him fired from the University of Wyoming, but the college president backed him.

"There was a lot of flak," said Gerking, now a professor at the University of Central Florida. "There was a lot of money at stake, that's why."

"Where are they going to go to escape a tax?" he asked. "These taxes are not going to change production."

But his argument, repeated by environmentalists and others, hasn't always gotten through. Indeed, many legislators have cited a Pennsylvania State University study - financed in part by the shale coalition - that concluded a severance tax would hamstring the industry.

Tax deal - or no deal?

In 2009, Rendell surprised aides by pulling the plug on his initial tax proposal, saying he feared scaring off an industry that promised thousands of jobs.

Rendell thought he was losing only a year. In a recent interview, he acknowledged making a political miscalculation. "I was just too certain it was going to be a slam-dunk" in 2010, he said.

In June, Rendell and legislators agreed to craft a severance tax in the fall. In September, he brought industry leaders to the mansion for an evening bargaining session.

Rendell said he and the executives had agreed on a rough compromise close to the graduated tax he was proposing, starting at 3 percent the first year. The next night, he said, he brought the executives back with GOP legislative leaders, figuring a deal was done.

"I essentially said, 'Tell them what you told me.' And they wouldn't. They went south," Rendell said. "The most I could get out of them was they would consider a fair tax."

Walker, one of the executives at the meeting, said he didn't recall it quite that way: "We were always in lockstep with Senate Republicans."

Now, with Corbett's hard line, the shale coalition is hammering home the same message: Companies are willing to pay a reasonable fee or tax, though they will push for other measures, such as a law restricting local governments from using zoning rules and the like to limit drilling.

The industry is not in lockstep on taxes. The Pennsylvania Independent Oil and Gas Association, which represents traditional drillers, remains steadfastly antitax.

Others are wary of being painted as a greedy, black-hat industry that won't pay its fair share - and Democrats and unions are already taking up the paintbrush.

Still, as one industry lobbyist pointed out, there's no reason to jump aboard a tax proposal now: "How can you ask the industry to push for something when the governor of the state, on his own, has adamantly committed against it?"

Devising an impact fee

Though Corbett is willing to consider an impact fee, it's not yet clear how such a fee would work. What is clear is that enacting one would require threading a political needle.

Industry executives and legislators have begun to talk about putting a levy on each well, akin to impact fees for housing developments. Another idea would be to create a local-option tax; counties could decide the fees within a set framework.

But local fees would go disproportionately to a few Pennsylvanians. So far, most Marcellus gas production is in Bradford, Susquehanna, Washington, Tioga, and Greene Counties - which, all told, constitute about 3 percent of the state's population.

It's also not clear how much of municipalities' costs could be charged to drillers.

One big-ticket item: repairing roads torn up by truck traffic, but many drillers already volunteer to cover that. Companies spent $100 million in Bradford and Tioga Counties this year, according to an industry estimate.

Meanwhile, polls have found growing support for a tax: 70 percent of respondents in a Susquehanna Polling Research survey statewide said they supported it, including 62 percent of Republicans.

No matter, Corbett and his aides say. "The governor does not govern based on polls," Henderson said last week. "He received a clear mandate, and it was clear to the voters that he does not support tax increases, period."

Supporters of an impact fee would have to devise something Corbett could sign - and that suits Republicans in the state House, who have been less enthusiastic.

They would also need such key Senate figures as Majority Leader Dominic Pileggi (R., Delaware) - who, as of Friday, sounded more open than ever to a severance tax.

"The industry has clearly said this wouldn't in any way interfere with their capital investment or job creation in the state," he told The Inquirer.

Another Republican singing a similar tune is Tom Ridge. The former governor - whose lobbying firm has been paid $900,000 in fees from the shale coalition - pointed out that the industry had operated profitably in states with severance taxes.

"It's got to be part of the discussion," Ridge said in an interview last week.

He said his role was largely "pounding on" companies in the coalition to make them realize that they risk everything if Pennsylvanians turn against them because of environmental concerns, taxes, or anything else.

"Nobody wants to pay more taxes," he said, but drillers need to be seen as good corporate citizens.

"You don't want to be grudgingly accepted," Ridge said he tells them. "You want to be warmly embraced."