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Natural Gas Impact Fees on a Roller Coaster Ride

The roller coaster ride that Pennsylvania impact fee totals have been on in recent years is expected to continue in 2023, with the state descending from the top of the hill to another dip. While the recently announced impact fee distributions for 2022 were $278.8 million, the highest in the program’s 10-year history, the state Independent Fiscal Office’s outlook for 2023 estimates that significantly less will be collected. The IFO projects that just $185 million will be collected this year, a drop of $94 million to $99 million from the previous year. The Act 13 impact fee was instituted in 2013 after the surge in unconventional drilling in the Marcellus and Utica plays in the state and is based on a formula that takes in the average annual price of natural gas and the age of the well, with new wells being taxed at a higher rate than aging wells. The majority of the money is distributed to counties and municipalities based on the amount of drilling there, with portions going to the Marcellus Legacy Fund to help finance environmental and infrastructure projects, and small amounts used to help fund several state agencies and conservation districts. Washington and Greene counties in Southwestern Pennsylvania are in the top five in impact fee payments, and most municipalities in those counties receive significant yearly amounts because of the amount of natural gas drilling occurring in the area. But budgeting for that expected payment has become trickier in recent years as the amounts collected have been on a roller coaster ride due to gas prices, production, and the pandemic. In 2018, impact fees set a record at $251.8 million, before dropping to $200.4 million in 2019, and reaching an all-time low in 2020 at $146.3 million due to the COVID-19 pandemic. Collections rebounded strongly in 2021 and reached the new all-time high of $278.8 million in 2022. This is due, in part, to the formula by which the fees are calculated, which takes into account the average annual price of gas, and the number of new wells drilled, since wells in their first year of production pay at the highest level, with the revenue collected dropping as wells age. In 2022, the average price of natural gas reached $6.64 per MMBtu, over the threshold for the highest level of impact fee. The jump was in part due to the increase in liquefied natural gas exports to help Europe meet its energy needs in the wake of Russia’s invasion of Ukraine, but also because of increased demand and economic activity post-pandemic. But in 2023, the average price of gas has fallen to $2.76 per MMBtu through June and is not expected to jump significantly. In addition, the number of new wells being drilled through June is 22 percent lower than the previous year, adding to the revenue decline. While counties and municipalities have benefitted from the millions they have received in impact fee payments, the recent roller coaster ride demonstrates that officials should exercise caution and restraint in building these amounts into their budgets.

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