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PA House Passes Gas Drilling Tax, Debate Moves to State Senate

Sep 30, 2010 | Parker Waichman LLP

The Pennsylvania House of Representatives has approved a severance tax on natural gas drilling – including hydraulic fracturing – in the state. It remains to be seen if the tax will make it through the state’s Republican-controlled Senate.

For the past two years, gas drillers have been descending upon Pennsylvania, anxious to tap the vast natural gas resources in the state’s Marcellus shale. To get at the natural gas, drillers use a process called hydraulic fracturing, or fracking, which involves injecting water, sand, and a cocktail of chemicals at high pressure into rock formations thousands of feet below the surface. Environmentalists are concerned that fracking could contaminate the state’s waterways, some of which supply water to cities along the East Coast. Fracking has already been blamed for instances of water contamination in Pennsylvania.

Pennsylvania is the only major gas producing state that does not a assess severance tax on gas drillers. The proposal passed by a 104-94 vote in the Pennsylvania House Wednesday would tax gas drillers 39 cents per thousand cubic feet of gas extracted, with provisions for increases in the fee if gas prices rise above about $5.50 per million British thermal units. The tax is expected to raise $120 million during the rest of the current fiscal year ending in June 2011, and $326 million in 2011-12, according to a report from the House Appropriations Committee. About 60 percent of the revenue would go toward local governments and environmental protection, with the remaining 40 percent going to the state’s general fund.

Gas drillers are not happy with the proposal, and are pushing the Senate to amend the bill to lower the tax rate.

Senate Republicans favored a 1.5 percent tax in the first few years, and a rate that would gradually rise to 5 percent. Drillers argue that a low initial tax rate will allow them to recover capital used in exploration. In addition, they are pushing for the inclusion of a pooling law, which would force property owners to sell their mineral rights if a certain percentage of their neighbors have already done so.

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