Pennsylvania should rethink tax on natural gas

April 22, 2014

In 2012 I wrote about the foolishness of Pennsylvania adopting an “impact fee” for companies drilling for natural gas in the Marcellus shale formation while it was being debated in the Pennsylvania General Assembly. Energy-producing states generally charge producers a “severance tax,” which is levied on the physical production of a well.

Pennsylvania, led by its Republican governor Tom Corbett, chose instead to apply a flat fee on natural gas drillers. I wrote previously:

There are shale gas fields covering more than half of the United States, but Pennsylvania has emerged as the rising star of domestic energy production with its ‘Mighty Marcellus’ fields. This is a great resource for Pennsylvania, but I’ve been confused about legislation that would impose an ‘impact fee’ on shale gas producers instead of the traditional volume-based royalty structure used by other states. The loss of revenues to the state over the next 20 years using the ‘impact fee’ could be approximately $24 billion using current gas prices. If gas prices double (they are currently at 10-year lows), losses to the state could exceed $48 billion or more.

As Pennsylvania’s fiscal and pension problems mount, pressure is growing to restructure the tax treatment for natural gas extraction and go to a volume-based severance-type fee. The Scranton Times-Tribune wrote in a March editorial:

Even as the Marcellus Shale produces more than 20 percent of the gas behind the nation’s vast energy industry expansion, many Pennsylvania politicians continue to treat the industry as a fragile start-up that would wilt under a fair tax burden.

The argument always has been bogus. The industry is here because the gas is here; it is a disservice to all Pennsylvanians that the Corbett administration and the Legislature continue to pander to the industry by refusing to impose a fair extraction tax on natural gas.

Multiple studies have shown that the local impact fee imposed by the government, which has produced revenue of about $200 million a year, will produce less than half of what a modest extraction tax would produce over the life of each natural gas well. The government deliberately has forfeited billions of dollars worth of revenue over the projected life of the industry.

AP reports that the possibility of a severance tax on natural gas extraction is becoming a bipartisan issue in Pennsylvania:

Slapping Pennsylvania’s booming natural gas industry with a new tax has long been the currency of Democrats, and now an increasingly grim budget picture is turning Republican heads in the GOP-controlled state Legislature.

Some Republicans in the Capitol are predicting that a tax on natural gas extraction could end up in whatever final budget legislation emerges, probably in late June. The multinational industry has been a lightning rod since it arrived in Pennsylvania five years ago, and raising taxes on it would be preferable to cutting aid to schools or the poor, some Republicans say.

One obstacle is Gov. Tom Corbett. The Republican has publicly opposed a tax on the industry, both before and after he was persuaded by the Legislature’s Republican leaders to sign legislation in 2012 that imposed an impact fee on the industry.

Still, the tax-like impact fee is equivalent to a much lower tax rate than many other gas-producing states charge the industry, and the issue of raising taxes on Pennsylvania’s natural gas industry is popular in opinion surveys.

For now, Republican budget makers are watching the performance of April’s state tax collections and keeping their options open.

‘There’s some support for an extraction tax in some quarters,’ said Senate Appropriations Committee Chairman Jake Corman, R-Centre. ‘I don’t think it becomes a real discussion until the budget numbers crystallize. But if there’s a $500 million-plus hole to fill, I don’t know that people are going to want to go into the budget and peel away education spending. Then an extraction tax becomes a more serious discussion than it has in the past.’

It’s astonishing that Pennsylvania has allowed its natural wealth to be extracted while barely taxing it and simultaneously under-funding roads, education and pension systems. The Pennsylvania General Assembly needs to get serious about taxing natural gas extraction in the state and rating agencies need to take notice.

Chart source: Pennsylvania Independent Fiscal Office report: Natural Gas Extraction: An Interstate Tax Comparison

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Poll: Oklahoma Voters Favor Eliminating Tax Break for Horizontal Drilling

(Tulsa, OK: April 8, 2014): A new poll finds that Oklahoma voters strongly support eliminating tax breaks for horizontal drilling in order to provide more funding for education, public safety, highways, and other state needs.

Nearly two-thirds of voters (64 percent) oppose providing tax breaks to oil and gas companies that use the horizontal drilling process after hearing short arguments in favor and against them, while less than a third support the tax break (28 percent). Ending the horizontal drilling tax break is a popular idea across party lines, with a majority of Democrats (73 percent), independents (75 percent), and Republicans (51 percent) all opposed to the tax break. iminating-tax-breaks-horizontal-drilling

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