PA's Petrochemical Subsidy Legislation: What's Next

Update, May 26, 2020: Governor Wolf vetoed House Bill 1100 on March 27. "Rather than enacting this bill," he stated, "we need to work together in a bipartisan manner to promote job creation and enact financial stimulus packages for the benefit of Pennsylvanians who are hurting as they struggle with the substantial economic fallout of COVID-19." Wolf added that he "could be supportive of awarding an incentive such as this," but only after "a thorough analysis of a proposed project" and the inclusion of mechanisms to ensure that construction workers receive prevailing wages. Immediately afterward supporters of the bill vowed to override the veto. Reportedly the General Assembly may attempt an override as early as Memorial Day week. 

The Pennsylvania Senate today sent House Bill 1100—a broad petrochemical subsidy passed by the General Assembly in February—to Governor Tom Wolf, who has pledged to veto the bill.

After Wolf's veto, the General Assembly will likely attempt an override. That attempt, however, is likely to fail, with some Democrats who initially voted for HB 1100 choosing to uphold Wolf's veto. In that case, whether Pennsylvania enacts some kind of new petrochemical subsidies this year will be decided this spring, when Wolf and the legislature negotiate a state budget for fiscal year 2020-21 (which starts on July 1), likely in the midst of a COVID-19-induced recession.

Last month, I discussed the push for petrochemical subsidies in the Commonwealth in the context of national and international trends in petrochemical use and manufacturing. This blog takes a closer look at HB 1100 itself, along with the economic and political considerations that are driving the debate, and examines how COVID-19 may affect that debate.

What would HB 1100 do?

HB 1100 is modeled on Act 85 of 2012, the "Resource Manufacturing Tax Credit" that Pennsylvania enacted for the now-under-construction Shell cracker. Under Act 85, Shell will be able to claim a tax credit of 5 cents for every gallon of ethane (a liquid found in fracked gas) it buys to produce ethylene, as long as it has invested at least $1 billion in the cracker and created at least 2,500 full-time equivalent jobs during construction. Shell will be able to claim credits until 2044.

Titled the "Energy and Fertilizer Manufacturing Tax Credit," HB 1100 differs from the Shell subsidy in three main ways:

1. HB 1100 would provide tax credits for the purchase not just of ethane, but also of methane and other compounds found in natural gas. (Whether it was intended to be so broad is less clear: the bill authorizes a tax credit of 47 cents for every "thousand cubic feet" of gas purchased, a metric that would probably work only for methane).
2. Credits under HB 1100 could be claimed for manufacturing any "petrochemicals or fertilizers," not just ethylene. 
3. More modest job creation requirements (800 jobs, between construction and operation) and capital and investment requirements ($450 million per facility) would make tax credits available to petrochemical projects smaller than Shell's cracker. Also credits under HB 1100 could be claimed until 2050, and there is no limit on how many plants that could claim them.

HB 1100 also differs from Act 85 with respect to labor standards. Under HB 1100, companies must make "good faith efforts" to employ local workers, and show that "individuals employed... have been paid the prevailing minimum wage rate for each craft or classification as determined by the Department of Labor and Industry under the ... Pennsylvania Prevailing Wage Act.."

According to state Senator John Yudichak (I-Luzerne), these provisions were intended "to promote the creation of thousands of prevailing wage construction jobs" in Pennsylvania. But the provisions do not ensure this result, both because what "good faith" means is anyone's guess and the use of "individuals" rather than "all individuals" means that a company could receive tax credits while paying prevailing wage to only a handful of employees.

No doubt, many legislators would have liked pro-labor language with more teeth. But both chambers of the legislature are controlled by Republicans who scorn prevailing wages (which typically to projects that get more than $25,000 in state money) even more than they dislike the idea of raising Pennsylvania's low minimum wage. Republicans' support for HB 1100 is largely about creating a new market for gas companies.

How much would HB 1100 cost?

Initial analyses of HB 1100 by the House Republicans and Democrats contained no cost estimate. An analysis by the Department of Revenue (DOR) before the bill was amended in February concluded that a small ammonia plant would receive $26.5 million in tax credits per year. A Senate Committee later calculated that under the amended version of HB 1100, a typical urea plant would receive $6.6 million in credits annually. But the DOR arrived at a different answer: $22 million per year per plant, or more than $500 million over the lifetime of a plant that operated for 25 years. 

In fact, no one really knows how many millions (or billions) of dollars Pennsylvania would spend to subsidize petrochemical plants if HB 1100 is enacted. It depends on the number of plants built, their size, how much and for how long they operate, what chemicals they make, and whether they locate in Keystone Opportunity Zones (which would enable them to claim additional tax breaks). In any case, even the small numbers are big: if you use the Senate's conservative estimate, two plants operating from 2025 to 2050 would receive $330 million in tax credits. Are petrochemical plants worth this kind of public investment?

The question of value

When tax credits work, they work by incentivizing companies and individuals to engage in activities that create public value and wouldn't happen in the absence of the credits. The state loses tax revenue that would otherwise fund disaster response, schools, road maintenance, and other public goods, but those losses are counterbalanced by other benefits, such as more good-paying jobs. 

When a new tax credit is proposed, then, we should ask three questions. First, what public value would it create? Second, are the costs commensurate with the value created? And third, will the design of the credit ensure that that value actually materializes?

HB 1100 would create value mainly for two constituencies, in addition to petrochemical plant developers: the fracking industry and labor unions that work on construction projects (often known as the "building trades"). The fracking industry—which was in a slump, if not a bust, even before the arrival of COVID-19—would get a new market for its gas; in the long run this would increase revenues, and in the short term it would enable companies to refinance their sizable debts at lower interest rates.

The trades, on the other hand, would get much-needed construction jobs for their members (if few prevailing-wage jobs) as the global economy lurches toward recession. (COVID-19 aside, a recession has long seemed inevitable: the last decade's economic expansion has been fueled too much by speculation with cheap borrowed money and too little by investment in the real economy, and the benefits have flowed mostly to a small number of Americans as the rest incur debt). 

Is this value (and the value of the indirect economic benefits HB 1100 would create) worth a tax credit of at least $6.6 million annually per plant until 2050? Based on the Senate's fiscal note, the amount of the credit in HB 1100—47 cents per thousand cubic feet of gas is not the product of any economic analysis, let alone a determination of value or need. It was chosen because it's equivalent to the 2012 Shell tax credit—in other words, it's arbitrary. Certainly it doesn't account for the costs of petrochemical development, from the impacts of the pollution on human health and the climate to the increased need for various state services (environmental permitting, workplace safety, healthcare, etc.).

And as I noted last month, HB 1100 is not designed to ensure that its benefits materialize. In addition to the problems with the labor standards provisions, the DOR would have only 19 days to review companies' applications to ensure they meet the eligibility standards, and companies could count investments made in other jurisdictions toward their $450 million threshold as long as they're tied in some way to a project's construction and operation.

What could Pennsylvania do differently?

First, right now policymakers in Harrisburg should be focused entirely on ensuring Pennsylvanians' health and well-being during the COVID-19 pandemic. They should not be working on petrochemical subsidies. Thankfully, Governor Wolf is acting aggressively to limit the spread of the disease and the Public Utility Commission has entered an emergency order temporarily prohibiting utilities from disconnecting customers' electric, gas for non-payment.

When Wolf vetoes HB 1100, the outlook for Pennsylvania's economy will be much worse than when the bill passed in early February. Pennsylvania will need an economic stimulus package, and legislators should create one.  

Where energy is concerned, legislators' focus then should be on expanding clean energy through policies that support prevailing-wage jobs and other good jobs, while also funding workforce development for hard-working Pennsylvanians as the Keystone State shifts to clean energy. And any support for petrochemicals projects should ensure pollution reductions and  less impact on human health and the climate—through pollution limits, efficiency requirements, directives for carbon capture, etc.

We should eliminate single-use plastics and use far less nitrogen-based fertilizers through more sustainable farming practices. But even if we do those things, we will not soon re-engineer our society to eliminate all petrochemical use. So why not use narrowly tailored economic incentives to push petrochemical development toward "an alternative, more sustainable pathway," in the words of the International Energy Agency? That might have public value.