Pennsylvania lawmakers and officials counting on the 2019 revenue from the state’s impact fee on natural gas wells to match the previous year’s should probably expect to be disappointed.
According to a new report from the state’s Independent Fiscal Office, the impact fee collections for last year, which will be revealed in April, are likely to fall $53.6 million short of 2018’s collections. That’s a drop from $251.8 million to $198.2 million.
The IFO’s report says that the biggest reason for the decline is a drop in the average annual price of natural gas on the New York Mercantile Exchange. By going below a certain threshold, “the impact fee schedule will decrease by $5,000 per horizontal well compared to CY 2018 levels. The NYMEX gas price has not been below $3.00 since CY 2016.”
That change alone accounts for $49.9 million of the projected revenue drop from 2018.
Pennsylvania lawmakers opted to impose impact fees rather than the severance tax that many other states use, in part to ensure that at least a portion of the revenue goes to the communities where the wells are located in the hopes of mitigating any potential negative impacts.
“Proceeds from the impact fee are distributed to local governments and state agencies to provide for infrastructure, emergency services, environmental initiatives and various other programs,” the IFO noted. “Local governments receive funds based on the number of wells located within their boundaries or their proximity to jurisdictions where natural gas extraction took place.”
Pennsylvania Gov. Tom Wolf, a Democrat, has repeatedly proposed the imposition of a severance tax atop the impact fee. In his first years in office, the severance tax would have gone to help close projected state budget deficits. His most recent proposal, heavily promoted throughout 2019, would have seen the state borrowing against future severance tax proceeds to fund a $4.5 billion package of infrastructure projects branded under the “Restore PA” umbrella.
The Republican-controlled Legislature has declined to consider the governor’s severance tax proposals, with many lawmakers insisting that a combination of both an impact fee and a severance tax would cripple an industry that underpins the economies of some of the state’s most economically challenged regions.
The IFO each year calculates an “effective tax rate” for the impact fee, an exercise designed to figure out a theoretical severance tax rate that would generate the same amount of revenue. For 2019, the IFO puts the effective tax rate at 2.1 percent, down just a tenth of a percent from 2018’s 2.2 percent rate. In 2015, the effective tax rate was 6.3 percent.
According to the IFO, there were 616 unconventional wells in their first year of operation in 2019, which is when the impact fee is highest. The second-year group listed 777 wells, the third year was 810, and there were more than 9,000 wells four years or older, more than 1,300 of which have reached the age where they no longer are subject to the impact fee.