Pennsylvania Gov. Tom Wolf on Wednesday proposed a severance tax on Marcellus Shale natural gas extraction to fund the commonwealth's teetering public education system.
Wolf, a Democrat, wants to levy a 5% severance tax on drillers, plus 4.7 cents per thousand cubic feet that flows from those wells, he told reporters at Calm Elementary School in Chester County. According to Wolf, the tax could generate $1 billion in its first year, which he said equals the funding cuts of the past few years.
Pennsylvania ranks 45th nationwide in percentage of funding the state provides for public education. "This is intolerable," he said. The Philadelphia, Harrisburg, Chester Upland and York school districts are under state oversight. York entered receivership in December.
The tax would replace the state's impact fee, which has raised about $630 million since 2008.
Wolf can expect headwinds from the natural gas industry, the Republican-dominated legislature and some skeptics in the capital markets.
"A severance tax does not come close to solving Pennsylvania's budget woes," said Tom Kozlik, a director with Janney Capital Markets in Philadelphia. "Additionally, I question how substantial and reliable this revenue stream will be as a medium to long term source for the state."
The state's overall finances have drawn rating-agency glare. Moody's Investors Service rates Pennsylvania Aa3, while Standard & Poor's and Fitch Ratings assign AA-minus ratings. All three downgraded the Keystone State last year, citing unfunded pension liability and budget imbalance.
"I am looking for much more meaningful reforms to occur before I can shift my opinion on the direction of the commonwealth's credit quality," said Kozlik.
Wolf said the so-called Education Reinvestment Act would mirror the tax in West Virginia, to keep Pennsylvania competitive with neighboring states. Two-thirds of Pennsylvania covers the Marcellus Shale ancient geological formation that has attracted drilling companies taking advantage of new fracking technology.
New York Gov. Andrew Cuomo in December banned hydraulic fracturing, citing a state Department of Health's conclusion that "fracking" for natural gas cannot be done safely.
Wolf said his measure calls for exemptions for gas given away free, from low-producing wells, and wells brought back into production after not having produced marketable quantities of gas. He said it would protect property owners who lease land for natural gas expansion.
Pennsylvania is the only major gas-producing state that does not charge a tax on oil and tax extraction, though some industry advocates have argued that the impact fee is a de-facto tax.