The Democratically-controlled House approved an extraction tax on natural gas drilled in Pennsylvania that both Republican and Democrats said would end up being little more than a starting point for negotiations.

Senate Republican Leaders said the tax has no chance of approval there, but Senate Pro Tem Joe Scarnati, R-Jefferson, 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.

An October 1 deadline imposed by lawmakers and Governor Rendell for approval of a tax will be missed. But lawmakers still have enough session days remaining to reach agreement before the end of the 2009-10 legislative, if talks go well. 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.

Of the revenue, $5 million would be used for job-training programs, $7.2 million to local governments in communities with drilling activity, $10 million for a job-creation tax credit, and $14.5 million to the Environmental Stewardship Fund. The remainder would go to conservation districts, the Hazardous Sites Cleanup Fund, the Game Commission, the Fish and Boat Commission, the Low-Income Home Energy Assistance Program, an environmental disaster recovery account, and dam projects.

Industry, through its Marcellus Shale Coalition, blasted the tax for being the highest in the nation.

“Some don't seem to understand that global competition for capital will react to the magnitude of the tax, evidenced by their consideration of a tax that would be the nation's highest and least competitive,” Kathryn Klaber, President of the Marcellus Shale Coalition, said in a statement released before the vote. “In fact, it would be higher than West Virginia's, which stands as one of the least competitive in the nation. And, as of last month, there were 16 horizontal rigs operating in West Virginia's Marcellus and more than 60 here in Pennsylvania. That's not a coincidence.”

Industry favors a tiered tax, with lower rates for new wells.

“We have to get a return on our capital costs,” one industry representative said. “If you tax all wells at the same rate, it will discourage exploration and drilling.”

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. The package 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.

“I’ve seen parts of the language and it’s not doing what it’s supposed to do for industry,” said one industry representative who didn’t want to be identified. “We’re hoping that changes as the negotiations really get under way.”