Marcellus Shale Tax Issues And Opportunities

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As we reported in a previous edition of this newsletter, Act 46 of 2010, more commonly known as Pennsylvania's 2010-2011 budget bill, contained a commitment by the General Assembly to pass a natural gas severance tax by October 1, 2010, with an effective date of no later than January 1, 2011. Despite much posturing and negotiating, the Democrats and Republicans were not able to come to an agreement on the final form of a severance tax. Therefore, we find ourselves in the midst of an administration transition, in which incoming Governor Corbett has pledged not to enact any new taxes or tax increases. At this point the likelihood the enactment of a severance tax seems remote. Still, there are rumblings from the Democratic leadership in the House that the severance tax may not be totally dead.

One of the main sticking points with the negotiations of last summer and fall was where the revenue from a severance tax would go. Each of the several competing bills and ideas sliced the revenue pie up in a different way, with the General Fund often being the main beneficiary. We understand that the current Democratic leadership is prepared to alter the content in what was last session's H.B. 1489 and introduce a new bill that would devote all of the revenue to: (1) paying for local costs stemming from drilling; (2) providing environmental safeguards; and (3) infrastructure. The new proposal would be a volume-based tax, set at .30 per thousand cubic feet of gas extracted (MCF). H.B. 1489 would have imposed tax at .35/MCF. Even with these changes, any severance tax proposal faces a huge and likely insurmountable hurdle—at least in the short term—given Governor-elect Corbett's no new taxes pledge.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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