Marcellus Shale: Lawmakers Fail To Address Pressing Needs Regarding Natural Gas Industry In 2011-12 Budget

On June 29, 2011, for the first time in eight years, the Pennsylvania General Assembly, confronted with deep budgetary and economic challenges, passed a balanced budget before the June 30 deadline with no broad-based tax increases and a property tax reform measure. Legislators from both parties sought to fill a portion of the 2011–12 budget gap with a new severance tax or impact fee on natural gas producers, but at the risk of having the budget vetoed, lawmakers voted against including either one in the budget. The $27.15 billion General Fund budget, which passed largely along party lines and was signed into law by newly elected governor Tom Corbett, is also the first Pennsylvania budget since 1970 to significantly reduce spending from the previous year, representing a decrease of $1.17 billion, or 4.1 percent, from 2010–11.

According to Governor Corbett, the 2011–12 budget consolidates and streamlines economic development programs to focus on job creation and attracting businesses to Pennsylvania. The budget maintains important tax credit programs at 2010–11 levels, including the Job Creation and Film Production Tax Credits, and increases the cap on the Research and Development Tax Credit from $40 million to $55 million. The budget also reinstates the phase-out of Pennsylvania's corporate Capital Stock and Franchise Tax, which will be eliminated in 2014. Additionally, lawmakers did not seek to amend Pennsylvania's Corporate Net Income Tax or impose combined reporting on business corporations.

In a last-minute legislative measure, Governor Corbett also sought a series of changes to Pennsylvania's property tax reform law, which will give taxpayers greater control over local property tax increases through the referendum process. School districts are now restricted from raising property taxes above an index determined by Pennsylvania's Department of Education, with two exceptions: districts may increase property taxes above the state index without a voter referendum only to fund special education and pension liabilities. The legislature is now out of session until September.

Impact Fee as an Alternative to a Severance Tax

The Marcellus Shale Formation, which principally extends across West Virginia and the Appalachian Basin to northwestern Pennsylvania, represents an important source of energy for the Midwest and the northeastern United States that is projected to last several decades. Geologists estimate that nearly 500 trillion cubic feet of natural gas could be recovered from the formation. Whether to impose a severance tax or an impact fee on natural gas production has been the focus of vigorous debate among lawmakers, economists, producers, local governments, and the general public. Pennsylvania remains the largest natural-gas-producing state without a severance tax.

A study published this week by researchers affiliated with Penn State and funded by the Marcellus Shale Coalition suggests that the economic impact of Marcellus Shale exploration could be even greater than has been previously estimated.1 This study predicts that by 2020, Pennsylvania could supply as much as a quarter of the nation's natural gas, creating $20 billion in value and boosting state and local tax revenues by $2 billion.

Similar industry-backed optimistic reports have generated skepticism from critics who claim that the reports improperly sway the severance tax debate. A recent article published in Ecological Economics persuasively argues that such studies should "(1) includ[e] better assumption of when and where households spend windfall gains, (2) clarify[] the process used to determine where suppliers to the industry and royalty earnings households are located (in state or not)...