Pennsylvania Includes Proposed Natural Gas Severance Tax in Proposed Budget

Energy & Resources

By Jason Droske

On February 9, 2010, Pennsylvania Governor Edward Rendell announced a new proposed budget for the 2010-2011 fiscal year. This budget includes a proposed tax on the severance of natural gas within the Commonwealth, which will affect gas producers operating within Pennsylvania. The budget refers to this tax as a “Marcellus Shale Severance Tax”; however, the tax will apply to any well that produces more than sixty thousand (60,000) cubic feet of natural gas per day. The Governor believes that the industry is established enough to bear this tax based on the 2,500 Marcellus Shale permit applications submitted in 2009 and the 5,000 applications expected to be submitted in 2010.

However, not everyone agrees with the Governor. The Marcellus Shale Coalition stated: “Marcellus Shale development is moving out of its infancy, but remains very much in an early development phase. Fewer than half of the 1,100 Marcellus Shale wells that have been drilled are tied into a pipeline and moving gas to markets. Pennsylvania still lacks much of the critical resources and infrastructure needed to develop the Marcellus Shale and compete with other leading natural gas states on a continuing basis. This includes efforts to train and develop the local workforce. So much progress has already been made, but it’s still very early.”

The proposed tax will be assessed at 5% of the value of the natural gas produced as measured at the wellhead plus an additional $0.047 per thousand cubic feet of natural gas severed. There is an exemption for marginal wells, defined as wells that produce less than sixty thousand (60,000) cubic feet per day. The proposed tax would take effect on July 1, 2010, and the revenues generated would be earmarked for the Stimulus Transition Reserve Fund. For producers familiar with the West Virginia severance tax, the proposed Pennsylvania severance tax is currently intended to mirror the West Virginia tax.

As of today, this tax is still a proposal. Stay tuned for further updates.

Schneider Downs provides accounting, tax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA, and Columbus, OH.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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