In connection with the completion of the 2010-2011 budget for the Commonwealth of Pennsylvania, the General Assembly has expressed its intention to pass legislation imposing a severance tax on the extraction of natural gas. The structure and rate of the tax remains uncertain, but it is expected that Pennsylvania law makers will negotiate the scope and magnitude of the tax in the coming months.

On July 6, Governor Edward G. Rendell (D) signed the 2010-2011 budget for the Commonwealth of Pennsylvania. The fiscal code, enacted in conjunction with the budget, includes a statement of the intention of the Democratic House Majority Leadership and the Republican Senate Majority Leadership to pass legislation to raise revenue from the extraction of Marcellus Shale natural gas by October 1, 2010 with an effective date for implementation no later than January 1, 2011. 

Governor Rendell contends that the vast growth in natural gas extraction in the Marcellus Shale has strained local resources, and that the natural gas industry should bear a portion of the increased costs of local and county governments. Some Republicans oppose the tax and have sought to delay its enactment, possibly until the November gubernatorial election. Republican gubernatorial candidate, Attorney General Tom Corbett, who is leading in the polls, does not support the imposition of a severance tax.

The form of any severance tax is still uncertain and is expected to be the subject of extensive debate this summer. House Bill 1489, sponsored by the House Environmental Resources and Energy Chairman Camille "Bud" George (D), which has bipartisan support, would impose a tax of 35 cents per thousand cubic feet (Mcf) of gas at the wellhead subject to an annual increase if gas prices increase. Other proposals include a severance tax imposed at a rate of 5% of the value of the gas extracted plus 4.7 cents per Mcf, similar to the tax imposed by West Virginia, or 8% of the value plus 8 cents per Mcf. 

Energy industry participants and associations may seek to obtain additional drilling rights in exchange for the enactment of the severance tax. The Marcellus Shale Coalition, an association of natural gas producers and other market participants, has requested that the severance tax not be established in a vacuum, but rather as part of a comprehensive evaluation of industry laws and regulations. 

A recent survey indicates that all of the states with natural gas production that exceeds the production in Pennsylvania impose a natural gas severance tax (California imposes a minor conservation fee). Several states that impose a severance tax on natural gas extraction also impose a similar tax on the oil, timber or mining industries. The current severance tax proposals in Pennsylvania, however, are limited in application to the natural gas industry and are not expected to be expanded to other resources.