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Proposed Tax Breaks for Natural Gas Industry Are Bad Deal

Pennsylvania has a long history of supplying the nation with natural gas that provides energy for cooking, heating, and other important uses. Only Texas has more currently active wells.

Until recently, most natural gas wells were shallow in depth and most produced modest amounts of natural gas. These “stripper wells” or “low-producing wells” produce fewer than 60 thousand cubic feet (MCF) per day. Despite the large number of producing wells, Pennsylvania currently ranks 15th in natural gas production.

The economic viability of extracting natural gas from the Marcellus Shale, which lies underneath most of Pennsylvania, has created a boom in gas drilling. The new wells are much more productive and profitable, attracting attention from the major natural gas production companies operated out of Texas, Oklahoma, and Louisiana - and big oil companies including ExxonMobil and Shell.

The General Assembly is now considering several proposals to enact a tax on natural gas production (called a severance tax), as is done in 28 of the 32 gas-producing states. Pennsylvania is the only mineral-rich state that levies no type of severance tax and the largest natural gas-producing state without one.

As the severance tax issue comes to a head, natural gas companies are trying to shape the proposal by securing exemptions to the tax. Long-time stripper well producers have gained traction for a tax exemption for low-producing wells. This exemption has been incorporated into every legislative and executive severance tax proposal since 2009. As currently defined, the exemption would include existing shallow wells and Marcellus Shale wells in their later years of production.

Now, the natural gas industry is seeking a tax exemption for the first three years of well production, citing tax policies in other shale gas-producing states, including Texas and Arkansas.

If the General Assembly adopts both proposed exemptions, only one-third of total gas production at a typical Marcellus Shale well would be subject to severance tax, and companies would pay tax for only nine years of the 40-year life of the well. This two-ended exemption is much more generous than either the Arkansas or Texas severance tax structures and should be rejected by the General Assembly.

 

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