Shallower natural gas wells, those less than 6,000 feet deep, will be excluded from a severance tax under an agreement between Governor Rendell and Senate Republicans. The agreement effectively excludes wells outside the Marcellus Shale. But differences between the Governor and Senate Republicans remain over the tax rate on the Marcellus wells, and how the tax receipts collected by the state will be distributed.

After a Wednesday, October 14 meeting on the tax where Senate leaders and the Governor Rendell agreed to the shallow well exclusion, the Governor said he was cautiously optimistic that a final agreement could be reached before the end of the 2009-10 session. But Senate leaders were less optimistic. As of this writing, one Senate session day – Thursday, October 14 – remains to send an agreed-to tax plan to the House. Senate leaders have said they will meet after the November 2 General Elections for caucus elections only, not for votes on substantive bills. The 2009-10 legislative session ends on November 30.

Senate Republicans are still holding firm on a first year tax rate of 1.5 percent. The Governor wants a three percent rate the first year, four percent the second, and five percent the third. Disagreements still remain over the portion of the receipts that go to the state’s General Fund, local governments and environmental programs within the Department of Environmental Protection.

In July, lawmakers and the Governor set an October 1 deadline for a natural gas tax as part of the 2010-11 budget agreement. Governor Rendell said that Senate Republicans have failed to honor that agreement. But Senate President Pro Tem Joe Scarnati, R-Jefferson said the caucus has “lived up to their intent" in the fiscal code to work on a severance tax bill.

Earlier, the Democratically-controlled House approved an extraction tax on that both Republican and Democrats said would end up being little more than a starting point for further negotiations.

At the time, Senate Republican Leaders said the tax has no chance of approval there, but Scarnati added that they “were not slamming the door on negotiations.” After the floor vote on the tax, House Democratic Leaders said they hoped for a compromise agreeable to the Senate and industry.

The tax approved by the House would impose a 39-cent per thousand cubic feet levy on extracted natural gas, with an exception for low-producing wells. The tax is projected to produce $120 million in revenue during the six months that it would be in effect this fiscal year, with $88.1 million of that going to the general fund.

At the same time, the natural gas industry is also looking for a package of bills in exchange for an extraction tax. The Senate Republican Caucus is drafting the language in the proposals, which includes language that restricts local governments from using zoning laws to block drilling. Another proposal -- pooling of land -- would allow drilling under land without a lease agreement if it’s contiguous to land with lease agreements. The owner without the agreement would be paid at the market rate. Industry officials say they support the intent of the bills but oppose the current language in the proposals.