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Taxing the drillers

Cabot Oil and Gas Drill in Pennsylvania
Cabot Oil and Gas Drill in Pennsylvania
Photo by Spencer Platt/Getty Images

In Pennsylvania, gubernatorial candidate Rob McCord is talking about taxing natural gas drilling, technically "fracking". He says the state is missing the opportunity to capture millions of dollars being pulled out of the ground, and he wants ten percent of that to go to the state.

Let's be clear, though. Drillers are not pulling money out of the ground; they are pulling methane and other valuable gases out of the ground and selling them, ultimately to consumers, people who buy natural gas, propane, butane, and other products. It costs the drillers money to get that gas--fracking exists today precisely because energy prices are high enough to make the expensive process worthwhile. They have to pay for the equipment, and for maintaining the equipment; they have to pay for the safeguards and systems involved in protecting the environment from contamination; they have to pay worker salaries. When they have paid all this, they hope to show a profit--which does not mean that the company grows richer, but that the company has money to invest in trying to find more fuel and those who have invested in the company receive dividends. Those investors include some wealthy people, certainly, but also include the pension plans and savings accounts and investment portfolios of ordinary working class people. The price at which they sell the gas is dependent on what it costs for them to bring it to the consumer.

McCord wants you to believe that a ten percent tax on the gas drawn from the ground is a tax on a corporation; it is not. It is a tax on the consumer. If we suppose that the company can bring that fuel to the next step at one dollar per unit (a convenient number for our purpose), then McCord thinks ten cents should go to Pennsylvania, leaving ninety cents for the company; but the company can't produce the gas for ninety cents, it needs a dollar. So in order to deliver the gas and pay the tax it has to raise the price so that the ten percent tax is covered on top of the other costs. Of course, if they raise it to a dollar ten, suddenly McCord wants eleven cents, so they need another penny, and McCord wants another tenth--well, the math works out that the dollar it cost increases to a dollar eleven and one ninth cents; but the point is that this expense is passed through to the end consumer, the people who buy the gas. It does not necessarily mean that the retail prices will rise; it could mean that that ten percent tax makes fracking in Pennsylvania too expensive to compete with other sources--the same Marcellus Shale formation stretches under New York, West Virginia, Ohio, Maryland, and Kentucky, although Pennsylvania has the largest area. That would mean that supplies are more restricted and prices remain high, and that fracking will wait until the retail price has reached high enough to make it economically feasible to get gas from Pennsylvania.

Of course, there is one part of McCord's plan that makes sense. He has managed to create the smokescreen that suggests he is not taxing the citizens of Pennsylvania who use natural gas and propane, but the real advantage of his plan is that he is also taxing all those investments, all those pension plans and savings accounts whose growth is dependent on the dividends from the energy stocks. More than that, he has found a way to tax people who do not live in Pennsylvania--wherever that gas is sold, as methane, propane, butane, ethane, or helium, or electricity generated from it, the price will include a little bit that pays Pennsylvania. So whether you buy gas in New Jersey or Colorado or Alaska, the price will reflect the fact that Pennsylvania is collecting tax on its local drillers, whose product becomes part of the national energy supply.

In short, McCord has found a way for Pennsylvania to tax energy sold in the rest of the country. Normally that would be banned by the Commerce Clause of the Constitution, but by couching it as a tax on gas produced within the state he avoids that.

I'm sure this is not the only state tax on fuel production; but then, already more of the pump price of gasoline is paid as tax to the government than is profit to the producers. Energy producers have a vested interest in keeping their profit margins slim, because they are already in competition in an international multi-source market. Governments are not in competition with anyone, and they don't care how much they increase the consumer price of products as long as the increase is tax money going into government budgets. I'm sure that more states will follow suit, as they figure out how to tax gas production in their own jurisdictions.