Pa. Gov proposes gas-drilling tax in FY11 budget

HARRISBURG, Pennsylvania, Feb 9 (Reuters) - Pennsylvania Gov. Ed Rendell on Tuesday proposed a $29 billion general fund budget for fiscal 2011, a 4.1 percent increase over the current budget that includes $2.76 billion in federal stimulus money.

The new budget avoids any broad-based tax increases but would boost revenue by taxing natural gas drilling, cigars and smokeless tobacco. It also eliminates vendor discounts for on-time payments.

A sales and use tax would be cut to 4 percent from 6 percent and exemptions will be eliminated, while the corporate net income tax would be cut to 8.99 percent from 9.99 percent.

None of the new revenue raised would be used in the coming fiscal year but would be paid into a Stimulus Transition Reserve Fund, designed to prepare the state for the end of economic recovery funding from the federal government. That fund could not be tapped until July 2011, about six months after Rendell leaves office.

The budget “provides a blueprint to close the budget gap expected when federal stimulus funds are no longer available in 2011,” the Democratic governor said in a statement.

The end of stimulus funds would mean a projected revenue gap of $2.4 billion in fiscal 2012, Rendell said. With the addition of significant extra pension costs, the state’s projected deficit would rise to $5.6 billion in fiscal 2013.

The new budget would raise $160.7 million from a new natural gas wellhead tax in the coming fiscal year, rising to $1.8 billion over five years. The tax would be modeled on one imposed in West Virginia and would raise badly needed state revenue from the current boom in drilling in the vast Marcellus Shale gas formation.

Rendell wants to charge drillers 5 percent of the value of gas at the wellhead plus 4.7 cents per 1,000 cubic feet of gas taken from the ground, starting July 1.

The largest revenue enhancement, of $531.5 million, would come from cutting and broadening the sales and use tax. Taxes on cigars and smokeless tobacco would raise $41.6 million, while the elimination of vendor discounts for on-time payments would generate $73.6 million.

The new budget reduces spending by 1 percent in all areas except education, public welfare, aging, corrections and debt service.

Spending of state dollars, at $26.3 billion, is $2 billion less than in fiscal 2009.

Debt service is projected to rise to $1.024 billion in the coming fiscal year from $932.6 million in fiscal 2010. (Editing by Dan Grebler)