No Time For Giving Up

It appears that members of the General Assembly are moving towards a final plan for funding the budget they passed in June. We share the sense of relief that is gradually emanating from the Capitol—we, too, are tired of talking about the budget. But we also know that the urge to get something done can sometimes overcome the urge to get it done right. So now is the time for members to demand that this budget not just be finished but be finished right. That means two things.

First, that the revenue plan include sufficient recurring tax revenue to address our long-term structural deficit. The pain of the last three months will be for naught if the state finds itself facing an even larger deficit on July 1, 2018. A large deficit in an election year offers too much temptation for the worst kind of budget chicanery and gimmickry, which will mean that the structural deficit will deepen again next year. Democrats and Republicans in the Senate have shown that they understand that the ongoing budget deficit can’t be solved without new tax revenues. Most House members, of both parties, understand that as well. Speaker Turzai and his extremist followers in the House caucus have been holding out for a budget with minimal new revenues.

This state will suffer if the members of the General Assembly most determined to get their way are those living in budget fantasy land. For the good of the state, senators and representatives of both parties who understand the reality of our budgets need to stand as firmly for sufficient recurring revenues in any funding plan.

And second, it’s critical to stand firm on a severance tax on natural gas drilling. It is simply absurd that among all of the states with substantial natural gas reserves, Pennsylvania is alone in not having a severance tax. We have repeatedly exploded the myths that justify our failure to tax natural gas drilling. We have shown that natural gas drillers pay little in corporate or personal income taxes. We have shown that the impact fee takes in but a fraction of the severance taxes in other states. We have shown that it is not taxes but the gas markets that determine how much drilling takes place in any state. With prices rising, and with our plentiful reserves which are relatively easy to secure and the new pipeline capacity being created in the state, there is every reason to think that gas production will expand substantially in Pennsylvania in the next few years. Failing to secure a modestly larger portion of the benefits of production for the people of Pennsylvania is simply political malpractice, no matter what your ideology or party.

And the proof of what we and others are saying about the severance tax can be seen in one of the alternatives being considered: a sales tax on commercial storage and distribution centers. We have not analyzed this tax in detail but pointed out earlier in the year that it makes sense to tax business services and end the sales tax exemption for this industry. But if the objection to a tax focused on the natural gas industry is that it will lead natural gas drillers to leave the state—presumably to move to other states that already have such a tax—then how can one defend taxing commercial storage and distribution facilities? Natural gas drillers cannot pick up the Marcellus shale deep under our land and move it to another state. Nor can they find a state with natural gas drilling that doesn’t have a severance tax. But wholesalers and retailers can easily move storage and distribution facilities to another state. And they can find states where the proposed tax is not already in place. It is utterly illogical to oppose the severance tax while embracing a sales tax on storage and distribution centers.

The wealth of the natural gas industry, and its willingness to cut some Pennsylvania politicians in on the action through huge campaign contributions, is the main reason why we don’t have a severance tax today—which isn’t very compelling “reasoning.” But, it is why Pennsylvania needs to finally make the natural gas drillers pay here what they pay without much complaint everywhere else they operate.

We need to get the budget done now. But we need even more to get it done right. It’s time for the responsible members of the General Assembly, in both parties, to stand firm for doing just that.

Addendum: We just heard that the tax on storage facilities is now dead and that in its place an increase in the statewide tax on hotel rooms from 6% to 11% is under consideration. This will, we believe, make the hotel tax in Philadelphia the highest in the nation. Without a chance to analyze the tax, it is hard to evaluate it. It may keep some tourists, conventioneers, and major events from coming to Philadelphia. Or, the many attractive destinations in the state, including Philadelphia, may minimize the harm. (And the relatively low property taxes in Philadelphia that help keep hotel costs down relative to other cities may partly offset the impact of the tax.) But once more, the embrace of this idea by opponents of the shale tax call into question some of the arguments they offer against it, including the idea that we shouldn’t ever place an additional tax beyond corporate and personal income taxes, like a severance tax, on any industry. Even if were true that natural gas drillers pay a great deal in corporate or personal income taxes—so does the hotel industry which, unlike the natural gas industry, also pays property taxes and the existing county and / or municipal hotel taxes.

 

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