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Severance Tax and Regulatory Reform: The Great Debate of this Decade!

  Winter 2017

Severance Tax and Regulatory Reform: The Great Debate of this Decade!
By: Teresa Irvin McCurdy, President of TD Connections, Inc.

 

At the time of writing this article, the Pennsylvania (PA) House of Representatives is still debating a severance tax/regulatory reform bill for a couple of weeks with no immediate resolution in sight. Should the House pass HB 1401, it would then go to the Senate for consideration and ultimately the Governor to approve or veto. However, its fate is unknown as there have been numerous amendments adopted to the bill to reform the regulatory environment for oil and gas.

The debate over whether to have a severance tax in PA has been looming since the Marcellus took center stage in 2010 as reports of potential reserve numbers grew exponentially and the public and some members of the legislature saw the natural gas industry as a revenue source to help solve the Commonwealth’s financial problems. In 2012, Act 13 was adopted to impose an Impact Fee on unconventional natural gas operators as a compromise to a severance tax. A sizeable portion of the revenue was allocated to local governments to help offset impacts due to natural gas development and a portion to the state’s general fund. This fee, which is basically a tax, is in addition to all the other federal, state and local taxes that other businesses pay in PA.

Why is it fair to single out a sector of the oil and gas industry and expect them to pay “extra” to do business in PA via an impact fee or a tax? Especially now, after all the oil and gas industry has been doing business in PA since 1859? Some argue its fair because it is severing valuable resources, the size of unconventional vs conventional operations, impacts to local government and the environment? Or perhaps the biggest reason is “just because it is the gas industry.” But is that fair? Would Pennsylvanians tolerate this type of debate for any other industry?

For example, agricultural has always been a “protected resource and industry” of the state. There is no severance tax for farmers who sever valuable resources (crops) from the land. According to a 2012 FIC Census of Agriculture, PA had over 7.7 million acres of farm land or used about 27% of the land. The runoff from farms has had an adverse impact on the health of PA’s streams and the Chesapeake Bay for decades. Measures have been imposed to reduce the runoff but according to the Chesapeake Bay Magazine, in 2016 only 40% of farms were in “compliance.”  However, there is no loud public outcry or protests seeking a tax on farmers due either to its size or environmental impact.

Why? Because we need to eat? Because the Ag industry has a strong lobbying presence? Because we have a lot of small farmers trying to make a living? Or is it “just because” farming is not considered a “sin industry” unlike the gambling, tobacco, and anything fossil fuel.

Furthermore, everyone agrees we need to protect our drinking water sources whichhas resulted in strict water management regulations for businesses. However, there are little to no regulations for residential private water wells for drinking and there is no consumptive use fee (tax) for consuming water like businesses are charged. A homeowner can have a well drilled that does not meet drinking water standards, yet still be able to drink from it. Some water wells have high levels of sulfur and other minerals that can cause health problems, but you don’t see people protesting or demanding that the legislature and DEP do something about it.

Why? Because people don’t protest about something that will make them have to do something, such as pay a tax. Because a person is not viewed the same as “big
oil” with deep pockets? Because no elected official wants to interfere with a person’s use of their own land. Why does it seem that those in charge listen more to the uninformed masses then common sense and science?

That is where the tide is turning, which is why a severance tax bill is getting loaded down with regulatory reform. Because the perception is that if you must have a severance tax, then you should get something for it, such as regulatory reform.  With the heightened interest to tax the gas industry has also come one to regulate it and in the past 8-years the PA Department of Environmental Protection’s (DEP) has issued numerous regulations, general permits and guidance documents.

But to be fair, don’t automatically jump to the conclusion that it was all DEP’s idea to regulate. Let’s go back to Act 13 which created the Impact Fee as well as required DEP to draft regulations regarding water supply protection, water management plans, gathering lines, well control, etc. Sure, some may say that DEP used this as a stepping stone to then make other changes, but some of the regulations needed updated.

If you are reading this and conduct business in PA, then you are affected by decisions and regulations made by DEP, but do you know that DEP is only 22 years old? Kind of. In 1901, the legislature created the Dept. of Forest and Waters (DFW) to protect those resources. In 1970, DFW was abolished and replaced with two agencies: The Dept. of Conservation and Natural Resources (DCNR) and The Dept. of Environmental Resources (DER) until 1995 when DER was changed to DEP. However, DEP must abide by statues that were written since 1901.

DEP is made up of 6 main substantive Bureaus: 1) Waste, 2) Air, 3), Radiation, 4), Remediation, 5) Active and Abandoned Mine Operations), and 6) Oil and Gas.  Each has its own book of codes, statutes, and/or regulations. Have you ever tried to read all of them? They are old, convoluted, outdated, and in some cases conflict with each other. Due to this, disparities are created simply due to which bureau your operations fall under.

For example, to permit a piece of equipment under one bureau’s regulations you may only have to fill out a simple form which typically would be approved in less than 30-days. But take that same equipment to do the same functions and permit it under a different bureau, you may be required to complete a complicated form, hold a public hearing, and approval typically takes about a year. This doesn’t make sense, but its not DEP’s fault – it is the statute they must follow which could have been written up to 50 years ago or more.

So, who’s to blame or right in wanting more or less regulations or the changing from an impact fee to a severance tax? Perhaps somewhere there is some middle ground yet to be determined. However, I thought these sayings were befitting in the scenario below.

Problem: Permits are not being issued in a timely manner. The regulated community points a finger at DEP and blames them for not getting permits issued on-time and sometimes seek legislative reforms as a result. Perhaps not in all cases, but in helping numerous clients get permits approved, I have often found that the blame is on all three (applicant, DEP, legislature) sides. I.e., the application was not complete or clear; DEP reviewers are new and inexperienced or simply not enough reviewers; or perhaps what is being permitted is not addressed in statute or at least in a way that allows DEP to easily approve the permit.

Solution: Work together and use a mediator. On the permittee side: Remember writing a paper for school and you were told to have someone proof your work before you hand it in because a fresh pair of eyes will find things you missed because you already read it 60 times. The same goes for submitting a permit, a news story or even a picture book. I created a picture book with captions. After reading the fine print on screen numerous times, I hit publish. Later my 12-year old niece points out my spelling/typos. Why? Because I wrote it and read what I thought it said rather than what it actually did. Important take away is to have a pre-application meeting with DEP to ensure you are on the same page before you submit your “complete” application.

On DEPs side: An amendment to the severance tax bill would provide for the use of third party reviewers to help with the lack of staff due to budget cuts or reduced revenue from fees. Under the right conditions this could help reduce the backlog of permits while reducing overhead for DEP. Furthermore, by having DEP staff act like a manager and review the permits along the way and give final approval, DEP is still maintaining control.

On the Legislative side: A bill has been introduced to require the Legislative Reference Bureau to review the cumbersome statues and provide recommendations. This is a good start but it must be done working together with the regulated community and DEP staff who are in the weeds everyday. The three cannot continue to operate in silos and hope that these issues will go away.

I know that the three do talk, but not always together and not with a common goal to fix the root of the problem which in part is the state statutes and laws. Yes, there are other problems, but the article is short. So I leave you with a challenge; the next time you find a fault, present a solution. In all of my years of working with DEP, members of the General Assembly and any Administration; I have never seen such a genuine commitment to wanting to resolve this problem. It may not feel that way to some that are reading this, but the climate is ripe for a change.

If you have a problem and/or a solution, Teresa would love to hear from you by contacting her at 717-329-6402 or Teresa@TDConnections.com.

 

 

 

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