Pennsylvania’s fracking competitiveness

January 27, 2012

In a post earlier this week I said that Pennsylvania would be forgoing approximately $24 billion in fracking royalties and that the adoption of an “impact fee” would shortchange the citizens of the state.

The Pennsylvania governor’s office responded to my post claiming that I had neglected to include other taxes collected related to gas drilling:

First, any fair consideration as to the value that Pennsylvania taxpayers will receive from natural gas development would include ALL taxes paid by operators, and landowners, engaged in the activity. Nowhere in the analysis is consideration given to the hundreds of millions of dollars paid annually already under the state’s existing corporate net income, personal income, capital stock and franchise, liquid fuels and other taxes.

Although I didn’t spell them out, I did include a link to a summary from the Pennsylvania Department of Revenue that summarized tax revenues the state had collected from the oil and gas industry. These collections totaled $373 million in 2011. Here is a chart of that data:

Pennsylvania is in the fortunate position of being very close to the East Coast, which consumes substantial quantities of energy that is now piped from the Gulf states and Northwest Canada. In the east Pennsylvania competes with New York, West Virginia and Ohio to service regional needs. Pennsylvania has a very good business tax climate compared with the other states it competes with, ranking 19th on the Tax Foundation’s Business Tax index. This compares with 23rd for West Virginia and 39th for Ohio. New York is not even in the running on how it taxes business — at 49th.

Neither Ohio nor New York have determined how they will tax gas drilling. But West Virginia imposes a 6.1 percent effective royalty rate. I agree with the governor’s office that energy producers take all factors, including royalty levels, into account when they do their cost analysis. But Pennsylvania has a substantial advantage in its proximity to the East Coast, which lowers transportation costs and gives the state room to impose royalties on gas production.

Shale gas is needed by the United States to break its dependence on Middle East oil and fuel economic growth. But giving away royalties for a state’s natural resources only fattens the profits of energy producers. Once these gas plays are tapped out and Pennsylvania Governor Corbett is gone from office, drillers will move on and Pennsylvania will be left regretting that none of that wealth was deposited in the state treasury.

Finally there have been a lot of claims about the number of jobs created by fracking in Pennsylvania. Direct employment created by drilling Pennsylvania’s 2,300 wells was 4,140  according to data from the Bureau of Labor Statistics. These workers earned average annual wages of $38,098, or approximately $147 million in total, in Pennsylvania. Of course there are jobs hauling materials and gas and building pipelines. But it’s hard to verify the claim of 140,000 new jobs that has been floating around. Generally drilling is not that labor-intensive. It is, instead, a capital-intensive industry.

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All of this is irrelevant if they can’t figure out how to stop fracking from causing earthquakes, and it doesn’t look like that will happen so look for the whole fracking industry to collapse within the next ten years.

Posted by RJFlorida | Report as abusive