According to a new report by the Pennsylvania Budget and Public Policy Center, had the Corbett Administration back in 2012 simply adopted the effective rate of neighboring West Virginia’s severance tax formula on shale gas drilling operations, it would have doubled this year's shale gas revenues going into the state's coffers. The report, "A Look at Other States Shows Marcellus Impact Fee Shortchanges Pennsylvanians" details how Pennsylvania would currently be earning an estimated $532 million on shale gas production as opposed to the estimated $229 million the Commonwealth will earn under its one of kind impact fee formula for 2013-14. Michael Wood, Research Director at the Center, has provided detailed analysis also showing how adopting the West Virginia formula would lead to generating nearly $1 billion more per year by 2019-20 than under the current Commonwealth formula.
Virtually all the 38 U.S. states having natural gas, oil, coal, collect revenue and taxes from the companies which drill and extract these resources within their states. Such revenues according to Research Director Woods, “… provide these states with an important source of funding for investments in education, colleges, transportation, and other infrastructure that help to build a strong economy."
Pennsylvania, despite its long history of oil, coal and natural gas mining, did not enact any such extraction fees until 2012 when state legislators under a plan largely driven and supported by the Corbett Administration enacted an unusual “impact fee” on natural gas wells drilled into Pennsylvania’s Marcellus Shale.
The state’s impact fee formula has to date generated an estimated $202 million in 2011 and $204 million for 2012. However the Center’s analysis of Act 13 fee structure states, “ … due to the unusual structure of the impact fee in Act 13, which generates revenue based on the number of wells drilled each year, the number of years since a well was drilled, and the price of natural gas, rather than the value of gas production. The fee was structured this way to generate a relatively fixed amount of revenue without being considered a traditional tax.”
According to the Pennsylvania Department of Environmental Protection, Pennsylvania’s latest shale gas production doubled in the first half of 2013 over the same time period in 2012 and is now more than three times the amount of shale gas produced in the first half of 2011. Critics of current state impact fee argue that it is structured in such a way as to in effect provide non-transparent subsidies to the oil and gas industry because it avoids taxing the actual overall shale gas production volume, a common practice of virtually all the other states having oil and gas resources.
Researcher Woods states the current Pennsylvania formula “…generates a relatively small amount of revenue from the expanding gas industry.” He added, “Replacing Pennsylvania’s impact fee with a modest 4% severance tax could generate $1.2 billion annually by 2019-20, three times that of the current fee.” He also noted that studies show other states with significant shale gas operations typically impose far higher fee rates than Pennsylvania, often in excess of 7% and have not seen any significant falloff in drilling operations.
The majority of oil and gas companies operating in Pennsylvania are from Texas and Oklahoma and multi-billion dollar international giants such as Royal Dutch Shell and Exxon-Mobil. Ironically most of the companies operating in Pennsylvania have been and continue to pay higher revenue fees in their home states despite such claims by industry interest groups that imposing fees on the industry will drive it away. Shale gas industry data shows in almost all cases these states, including Pennsylvania, report ongoing increases in drilling activities including demands to open up more state protected lands and watersheds which supply drinking water.
Governor Corbett has been quick to defend the state’s current formula. At a recent shale gas industry conference sponsored by the Keystone Energy Forum, the Governor stated, “First thing they wanted to do was impose a tax on this new industry just as it was growing in Pennsylvania,” He further stated, ”Well, instead of a tax we enacted an impact fee. I reminded many people the companies were already paying taxes. They pay the corporate net income tax. They pay sales and use tax, their employees pay their income tax. Their taxes are being paid.”
However according to tax attorney Stephen J. Blazick, a partner in Reed Smith's state tax group, which advises major corporate clients in all jurisdictions on multi-state tax issues tax planning, he wrote a recent legal industry article titled “Taxing the Marcellus Shale” wherein he stated flatly, “Miners Should Pay Little or No Pennsylvania Tax”.
Blazick wrote, “Pennsylvania's mainstay taxes — the sales tax, the corporate net income tax and the franchise tax — also apply to producers with Marcellus operations in Pennsylvania. But these taxes provide some important exemptions that all Marcellus operators should know.” Included are state sales tax exemptions for extracting natural gas from the Marcellus Shale and sales tax exemptions for “pollution control” devices used in drilling operations which can include such common drilling field equipment as plastic tarps, piping, storage tanks and bulldozers.
Tax attorney Blazick further stated drillers can realized certain exemptions to Pennsylvania’s franchise tax and how locating their business in any of state’s 12 Keystone Opportunity Zones (KOZs) can greatly minimize state tax liabilities. He stated, “Many KOZs are fortunately located near gas-rich shale. For Marcellus operators, the important thing to remember is that their actual mining operations need not be located in a KOZ to reap the benefits. It's enough to simply have a nearby base of operations located in a KOZ.”
The Williamsport/Lycoming County Chamber of Commerce aggressively states on their web site, “Economic Development - Keystone Opportunity Zone - Get your business up and running, virtually tax-free!” Lycoming County is in the top 10 county producers of shale gas within the state.
Since becoming governor, Corbett has aggressively pushed through more than $1 billion in state budget cuts for education. Last month, Pennsylvania Transportation Secretary Barry Schoch said some 1,400 of the state’s 25,000 bridges could shortly face travel restrictions without additional transportation funding for repairs. The state budget which passed June 30th of this year provided no additional funding for PennDOT.
Public Policy Center’s Woods concluded his report with, “Both West Virginia and Texas get a better deal for their citizens from the development of a one-time and non-mobile resource than Pennsylvania does. If Pennsylvania were to replace its impact fee with a severance tax rate comparable to those in effect in either Texas or West Virginia, there would be a substantial revenue gain.”
To read the Pennsylvania Budget and Public Policy Center’s reports on the impact fee, go to: http://pennbpc.org/look-other-states-shows-marcellus-impact-fee-shortchanges-pennsylvanians#footnotes
To read Gov. Corbett's position on the Act 13 Impact Fee, go to: http://stateimpact.npr.org/pennsylvania/2013/06/14/corbett-defends-impact-fee-over-severance-tax/
To read tax attorney’s Steven Blazick’s article on state tax exemptions for shale gas drilling, go to: http://www.law.com/jsp/pa/PubArticlePA.jsp?id=1202611305579&thepage=1
To read more about the Governor’s stance on education and other social services funding programs, go to:
Financial Interests Disclosure: The writer does not work for or have any financial interests or arrangements with any of the people or entities mentioned in this article. He is not being paid to write by any special interest or lobbying group.