The state's gas pains: Taxing the new industry properly is a budget imperative

TOMORROW, Gov. Rendell will give

his eighth and final budget address. That budget will include a $450 million deficit, much smaller than last year's

$3.2 billion hole.

This time around, the process must not be allowed to drag on for months, as it did last year.

One obvious solution to nailing it down quickly: The legislature should take a harder look at closing some glaring tax loopholes. In good times, these can be merely annoying - in bad times, they are unjustifiable. Some of the items now exempt from state taxes: smokeless tobacco, helicopters, candy bars, dry cleaning and legal services. And there are many others.

But the easiest to deal with should be the natural-gas extraction tax. Last year, the governor proposed a tax on gas from the newly discovered wells in the Marcellus Shale region. The proposal would have generated $632 million over the course of five years, but Rendell scrapped the idea, saying he was worried about hurting an infant industry.

Gas companies may just be getting started, but extraction will soon be big business. There are massive gas deposits under almost every part of the state (except right here in the southeast). This natural resource has the potential to transform the state's economy, especially in rural areas that have been hammered by job losses.

Managing this new industry is a major challenge for state government. We have to create an environment that encourages job creation but also takes long-term steps to invest in Pennsylvania's future. A tax on natural-gas extraction has to be part of that equation.

Thirty-nine other states with natural-gas deposits all have some kind of tax on the industry. Companies consider it the cost of doing business. Adding our own state tax to the mix will not hurt our ability to compete.

If we need any more evidence of that, consider what happened when the rights for drilling for natural gas in state forests were auctioned off. Officials expected to raise $64 million. Instead, gas companies coughed up $128.5 million. Clearly, these same companies can afford the tax.

Make no mistake: We need the revenue from a new tax to offset the negative impact of natural-gas development. Mining can threaten wildlife, pollute the local water supply and erode the fertile topsoil needed for farming.

The state will have to boost funding for environmental monitoring and safety protections for workers. Also, many of these mines will lead to economic development in rural communities. That's a good thing, but it also means that state and local government will have to invest in basic infrastructure like roads and sewers.

Some of the revenue should also be set aside to invest in building the state's green economy. We already have incentives for alternative energy companies. These could be expanded with a portion of the extraction-tax revenue. Ultimately, the state's energy sector should include natural gas, solar and wind.

Some of the money must also go to the general fund. In tough economic times, the state can't afford to turn away revenue from a new source. Most businesses are hurting right now and paying less in taxes. It's only fair that companies making big profits from drilling pay their fair share.

The main reason a gas tax failed to pass during the last budget cycle was the automatic opposition of many lawmakers to any new taxes, an unworthy response to a major financial challenge.

We can have an honest debate about taxes and spending, but Pennsylvania must take the steps necessary to make sure our natural wealth benefits everyone.