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On July 23, 2020, Pennsylvania Gov. Tom Wolf approved House Bill 732, enacted as Act 66, establishing a transferable Local Resource Manufacturing Tax Credit (LRMTC) that will provide up to approximately $26.67 million annually to attract new investment from businesses manufacturing petrochemicals or fertilizers using dry natural gas.1
Up to four facilities are eligible to receive the tax credit each year, limiting the applicable credit to a maximum of approximately $6.67 million per business per year. Eligible businesses will be required to meet minimum capital investment and job creation thresholds, among other requirements.
Pennsylvania is the second largest producer of natural gas in the United States, extracting much of its natural gas from the Marcellus Shale.2
Among the largest formations of natural gas shale in the United States, the Marcellus Shale stretches across much of Pennsylvania, Ohio, West Virginia, and New York, and into Maryland, Kentucky, Tennessee and Virginia, and is a key driver of domestic natural gas extraction.3
Legislation was first introduced in April 2019 to capitalize on the abundant natural resource by incentivizing investment in downstream manufactured dry natural gas products.4
The bill passed the Pennsylvania legislature, but was vetoed by the governor in March 2020 due to concerns over job creation and financial stimulus.5
However, the governor came to an agreement with state Republican lawmakers on House Bill 732, a revised version of the original bill that expands the financial relief available to taxpayers in order to offset the economic impact of COVID-19.
Local Resource Manufacturing Tax Credit
Act 66 establishes the LRMTC for up to four businesses locating in Pennsylvania and involved in the manufacture of dry natural gas products. The legislation authorizes up to approximately $26.67 million annually in incentives over a 26-year period for qualified in-state businesses manufacturing dry natural gas products –- most notably, petrochemicals and fertilizers.6
Under the legislation, eligible businesses may claim a $0.47 per unit tax credit on the purchase of dry natural gas in the manufacture of petrochemicals or fertilizers.7
Qualified businesses may apply the credit against up to 20% of their income tax liability incurred during the tax year for which the credit is approved, with the excess credit allowed to be assigned or sold.8
The qualified business is first required to offer the credit for sale to downstream businesses in the natural gas industry, and next, to upstream businesses, before being able to open negotiation with businesses in other industries.9
Act 66 authorizes qualifying businesses to begin applying for the LRMTC on purchases of dry natural gas beginning on Jan. 1, 2024, and ending on Dec. 31, 2049.10
In order to be eligible for the tax credit, an in-state facility must purchase dry natural gas for use in manufacturing petrochemicals or fertilizers, make a capital investment of at least $400 million to construct the project facility, and create a minimum aggregate total of 800 new and permanent jobs.11
The business and related project contractors are required to make “good faith efforts to recruit and employ…workers from the local labor market…during the construction of the project facility.”12
Additionally, the business and project contractors are required to pay at least the prevailing minimum wage and benefits for each job classification set by the Pennsylvania Department of Labor and Industry.13
The legislation provides for a clawback of 10% of the amount of credits awarded in any year if the taxpayer intentionally fails to pay a prevailing wage or benefits.14
Tax credit applications must be submitted by March 1 of the year in which the credit is intended to be taken for dry natural gas purchased and used at the project facility during the prior calendar year. Applications are to be filed with the Pennsylvania Department of Revenue, detailing the project scope and proposed production process.15
Applicants will be notified of final award determinations by May 1.16
Representing a compromise between the governor and Pennsylvania lawmakers to incentivize downstream natural gas processes, the LRMTC legislation signals the governor’s willingness to support investment in the downstream natural gas industry in Pennsylvania, thus helping to scale up the infrastructure of the greater natural gas industry in the region. The governor’s support of the legislation departs from his recent criticism of the natural gas industry, which consisted of proposed severance taxes on natural gas drilling in previous budget proposals.
Certified through 2049, the long-term nature of the LRMTC serves as a commitment to the future of the natural gas industry in Pennsylvania. The program is structured to incentivize the purchase of natural gas in a manufacturing process, rather than the actual investment in a new downstream manufacturing facility. As such, the Commonwealth is not committing to subsidize the creation of new natural gas manufacturing facilities, but rather provide an incentive for the sale of an abundant home state resource.
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