Marcellus Shale Drillers Do Not Pay Business Tax, New Severance Tax Would Be Benefit

A new report by the Pennsylvania Budget and Policy Center this week confirms almost all of the companies involved in drilling for natural gas in the Marcellus Shale formation do not pay Pennsylvania's corporate net income tax and recommended a well-structured severance tax on natural gas production to protect Pennsylvania taxpayers from shouldering the public costs that come with increased drilling.

 

“Natural gas extraction in the Marcellus Shale has substantial risks and substantial costs that have not yet been fully explored in the rush to drill,” said Sharon Ward, Director of the non-partisan policy research center. “A severance tax is a well-tested mechanism to shift these costs back to producers, where they belong.”

 

The report, “Responsible Growth: Protecting the Public Interest with a Natural Gas Severance Tax,” examines the potential costs of increased natural gas drilling on taxpayers and the environment, how severance taxes are structured in other states, and what lessons Pennsylvania can learn from them.

Interest in the severance tax has been stirred by increased natural gas production in the Marcellus Shale, a deep geologic formation that underlies 54 of Pennsylvania’s 67 counties. New drilling techniques and rising natural gas prices have made it economically feasible and profitable to exploit the vast gas reserves.

 

The Center’s report recommends that Pennsylvania assess a natural gas severance tax at the state level and that local governments’ authority to assess property taxes on gas and oil interests – a practice banned by a state court ruling in 2002 – be restored. Ward said the court treats the oil and gas industry differently from other mineral industries and from other businesses, whose production is a factor in local property tax assessments.

 

“School districts, municipalities, and counties have lost millions of dollars because of this court case,” said Dan Fisher, Superintendent of the Bald Eagle Area School District. “The legislature should have corrected this oversight in 2003, but six years later we are waiting for action.”

 

 

The report notes that almost all the companies drilling for natural gas in the Marcellus Shale formations are limited partnerships, according to a Department of Environmental Protection survey. Because of that they do not pay Pennsylvania's 9.99 percent Corporate Net Income Tax (page 31).

They are taxed at the 3.07 percent personal income tax rate. The companies do pay the state's Capital Stock and Franchise Tax, but that is due to be phased out in 2011.

 

A statement released after the Center's report by the Independent Oil and Gas Association of Pennsylvania, the Pennsylvania Oil and Gas Association and the Marcellus Shale Committee did not dispute this point.

 

 

Natural gas drilling has an unavoidable impact on the environment, and the waste water generated during the drilling process in the Marcellus Shale poses particular concerns. According to a marketing manager at GE Water & Processes Technologies, which develops filtering technologies used to clean the water, “the Marcellus water is the worst water on the planet.”

 

Even with adequate environmental monitoring, increased drilling in the Marcellus Shale could cause water contamination, soil erosion, disturbance to natural environments, and noise and air pollution, said Michael Wood, the Center’s Research Director and lead author of the report.

 

A severance tax is one way to ensure that taxpayers aren’t asked to pay those environmental costs, the report found. It also will compensate Pennsylvanians for the removal of a non-renewable resource and offset the costs of new roads and bridges, public safety, building, and emergency response needs that accompany growth in natural gas drilling.

 

“What will our great grandchildren be left with when the last gas well is exhausted? A severance tax reinvested in Pennsylvania’s natural resources and communities will help balance the damages caused by drilling operations and pipelines,” said Andy Loza, Executive Director of the Pennsylvania Land Trust Association.

 

 

Severance taxes are common across the United States as a way to cover the public costs created by resource extraction. Nationally, 34 states levy the tax on a wide range of renewable and non-renewable resources ranging from coal to timber. All of the 14 states with greater natural gas production than Pennsylvania levy a severance tax or a conservation fee.

 

Severance tax revenue is used for a number of different purposes in other states, including environmental monitoring, public education, and reinvestment in a fund for future environmental needs. Some states share revenue with local governments.

The Center recommends that some of the revenue from the tax be set aside for future environmental cleanup and for a “permanent fund,” which would generate revenue and help communities transition once the resource boom is over.

 

“The natural gas in the Marcellus Shale formation holds both tremendous opportunity and tremendous risk for Pennsylvania,” said Steve Stroman, Policy Director for Citizens for Pennsylvania’s Future. “A modest and reasonable severance tax, consistent with other states, will help address the risks to our environment and our communities while providing a lasting investment in the Commonwealth’s natural heritage.”

 

The severance tax is an important new revenue source for state and local governments, although the decline in energy prices has slowed well production. Still, experience from Arkansas and Texas, whose gas booms began when prices were comparable to today’s market price, suggests that well development can proceed very rapidly.

 

“During this recession, even small amounts of new revenue can help avert cuts to agriculture programs, education, health care and public safety, and prevent increases in property taxes at the local level,” Ward said.

 

The report recommends that the tax be set up as simply as possible, with no deductions or exemptions, to make administration easier and to prevent producers from finding loopholes in the law.

 

 

In the lucrative northeastern market, natural gas produced in Pennsylvania – with or without a severance tax – will be an attractive alternative to natural gas imported from western energy-producing states because of transportation costs.

 

“Transportation costs account for nearly half the price of natural gas, so gas produced in Pennsylvania will have a natural price advantage in the northeastern market,” Wood said.

 

Severance taxes in Texas, Wyoming, and West Virginia have not deterred resource exploration or production, or the growth of related employment, in those states, the report found. Several studies have confirmed little impact on supply, demand, or commodity prices from raising severance taxes, which many states have done in recent years. A Wyoming study found that a 2 percent reduction in the 5.7 percent severance tax would increase production by only 0.7 percent over 60 years.

 

The market price for natural gas – along with other business factors – will have a much bigger impact on the development of the Marcellus Shale, Wood said.

 

A copy of the report is available online.