Severance tax might make a comeback, will push alternative energy too

State Rep. Greg Vitali (D-Delaware) is a long-time member of the House Environmental Resources and Energy Committee, as well as one of the leading lawmakers on conservation issues in the state.

With the proposed severance tax on natural gas drilling failing to pass the General Assembly in 2010, Mr. Vitali is calling for a renewed effort to pass the tax in 2011, despite opposition from the Republican majority and Republican governor-elect Tom Corbett.

Earlier this week, Mr. Vitali sat down with PA Independent for an exclusive interview on the status of the severance tax effort, the political difficulties Democrats will face in passing the tax this year and his plans to boost the use of alternative energy over the next decade with a state mandate.

By far the biggest environmental issue in Pennsylvania state politics last year was the effort to pass a severance tax on natural gas drilling. Despite strong support from Gov. Ed Rendell and a supportive Democrat majority in the state House, none of the proposals were able to make their way through the state Senate. What’s the status of the severance tax debate in 2011, with Republicans in control of the House and governor-elect Corbett opposed to all new taxes?

What I plan to do is to work with others to reintroduce severance tax legislation, for two reasons. One, I think it’s the fair thing to do. I think gas drillers need to pay their fair share. Almost every other state that extracts natural gas has a severance tax. These companies can afford it and they should be paying it.

Two, we desperately need the revenue. We are dealing with a $4 billion to $5 billion budget shortfall in June as predicted by Auditor General [Jack]Wagner.

Additionally, Growing Greener, which is an environmental stewardship fund, is running out of money. That funds important conservation programs that are really important and have widespread support in Pennsylvania. So, we need a source for that and the severance tax would be an excellent source of funding for Growing Greener programs.

The severance tax per se is a fiscal issue, but what makes it an environmental issue is that money can be used for environmental programs. The severance tax we’re proposing – and I know Chairman [Bud] George has a bill and some of us are working on taking a slightly different tack. The division of monies will be some combination of General Fund, local government share and environmental funds.

What does your proposal look like, in terms of rate and distribution of revenues?

As far as the rate goes, I would favor a rate like the West Virginia model, which bases the taxes both on the market value of the gas extracted and the volume of the gas extracted. We’re working on something that is going to be similar to West Virginia, maybe slightly less.

And then the distribution piece, we’re developing something that would be a one-third, one-third, one-third distribution between the General Fund, the local government share and the environmental funds.

The tax rate was really the big sticking point last summer, when House Democrats passed a tax which would have been the highest in the nation and Senate Republicans refused to touch it. Now with Republicans in charge of both chambers, it is realistic to think you’re going to get a West Virginia-style tax?

We want to lay out what we think is good public policy. We want to use that as a tool to educate people on what it should be. We understand that we don’t have the votes, but I think it’s important to at least put out there what we think is right and hopefully it will influence the debate so the end result is better than it would have been if we started immediately with a compromised position.

Rep. Bud George (D-Clearfield), the chair of the committee, is going to introduce a bill dropping the General Fund portion of the revenue distribution so the severance tax would only fund the environmental funds and the local governments. Is that more politically palatable to the Republicans who balked at the General Fund getting a large portion of the revenues last year?

I think in the legislation I’ve been tinkering with…the one-third, one-third, one-third is something that would have broad based support. You can’t ignore the General Fund because of our budget shortfall and you have to also deal with the other constituencies out there: the local governments in the communities being impacted by increased road traffic and court systems and emergency services. You have to address conservation concerns because that’s an important source of revenue for them.

The other piece of that is that if you don’t look to the severance tax, then you start to look to things like state forest leasing. That is a much poorer choice from a policy perspective.

One of the other proposals out there is to raise the fees on the industry rather than taxing them? Would you support that?

Certainly. I don’t care what it’s called. I think it just has to be fair. I’m more concerned as to the amount of money we’re talking about and where the monies are going. I’m very concerned that the conservation sources get a fair share of the funds.

That phrase – “fair share” – gets thrown around a lot in the severance tax debate. In your mind, what is the bar drilling companies must clear in order to be paying their fair share?

I think the West Virginia model is fair. The one advantage to going with a tax like that is that we know it’s working in another state. You can’t argue that if we impose this it will kill the industry because it hasn’t done that in West Virginia. It’s good to use a working model because you allay fears about what’s going to happen.

I think if you look at the West Virginia model, it’s neither the highest or the lowest, so I think that would be something which would be fair.

Let’s shift gears to the Alternative Energy Portfolio Standards bill, which is something else you plan to introduce early in 2011. Where are the standards at now and where do they need to go up to?

The standards now are in Tier One, which is pure renewables – wind, solar, and hydro – and they go up to 8 percent by 2020. We’re going to try to push it up in this legislation to 20 percent by 2025. Other states are even going further, and Pennsylvania used to be a leader but we’re not anymore.

With regard to something they call the Solar Carve-out, which is the percentage of that renewable energy that has to be earmarked for solar-generated electricity, that currently is half of a percent by 2020. We want to increase it to 3 percent by 2025. That won’t make us a leader, but I think it would send a good signal to renewable energy industries contemplating coming to Pennsylvania. It would help us compete with New Jersey and other states for these “green” jobs.

How do you make sure the industry is going to meet those goals?

The way it works is that you set these goals and they are goals you are imposing on utilities like PECO and PPL. So we’re saying you must get 20 percent of your power from renewable sources by 2025. So that creates a demand – utilities have to look for those sources – and that demand draws companies in because they know there will be a demand.

You build safeguards in there so you don’t put the utilities in the position where they have to pay exorbitant prices. You give them an option called an alternative compliance payment, so if you choose not to get the renewable, you can make a payment to a fund in lieu of that.

General speaking, renewable energy is more expensive to generate than traditional power. So does this mean consumers will be forced to paying higher prices as more alternative energy is mandated by the state?

Yes, it’s more expensive but it’s coming down. Wind is almost competitive now. I think the idea of this is that you bring these industries along by giving them protection and creating demand and you allow them hit some economies of scale. If you have huge solar arrays, you can start to produce more power than the smaller solar industries. You can do it cheaper.

In the long run there are a number of benefits. I look at it in terms of having a stock portfolio, you have to diversify. If you simply rely on coal and natural gas, there can be fluctuations in the market. But if you add wind and solar, you have a more diversified market.

That does a couple of things: you’re staving off price fluctuations because it’s more diversified, but in the long run you’re increasing supply of power relative to demand. If you can increase supply relative to the demand by bringing on solar and wind, it’s going to put downward pressure on price.

I agree with the Intergovernmental Panel on Climate Change and other groups who feel that manmade CO2 is putting us on a course that risks changing our climate in a damaging and irrevocable way.

And since Pennsylvania produces a full percent of the world’s greenhouse gasses, for us to shift – even if it’s a little more expensive – it’s something we have a responsibility to do. And of course the more energy we produce at home the less we have to get from abroad, so we have less pressure to shed blood in Iraq or deal with oil-producing countries.

As it stands now, this bill means the state is essentially subsidizing the industry on one hand and then mandating the use of the industry on the other hand. Is it the state government’s role to do that? If alternative energy was profitable, wouldn’t these companies be investing in it on their own?

We were trying to bring an industry along for the social good. We subsidize nuclear too, you simply could not build a nuclear plant if the federal government did not subsidize it. Coal has these enormous negative externalities. Every industry has its own form of subsidization.

We’re trying to encourage the bringing along of renewable because we realize it is the future. The market simply wouldn’t work here to deal with the long-term problems. Frankly, climate change is a problem that is going to affect us 10, 20, 50 years down the road and if we shop for energy simply on cost today the market really wouldn’t work in that regard.

Do you think the alternative energy industries could exist without government support in the form of subsidies and mandates?

I think eventually, yes. That’s the goal.

I think wind is getting very cost competitive right now. Solar is a little further away, but the idea is to bring the technologies on so they can compete fairly. These alternative energy standards aren’t going to be indefinite, but it’s something that will help bring the industries along so they can be cost competitive. Coal is cheap and dirty and extremely damaging to the environment. If we didn’t care about what happens in the future, we could burn all the coal we want.

But we do have to worry about the future, and the future is not coal. The future is renewables.

Politically, this is something else that didn’t get done last year, so again I have to ask: Can you get this through when it’s not one of the priorities of the Republican majorities?

There’s no doubt it’s a difficult issue, but the political climate is cyclical and we need to keep the issue out there. We need to educate the public and keep the pressure on. Maybe we’ll get a small piece of it, or maybe we’ll prevent a back slide. That’s the role of the loyal opposition.