Pennsylvania

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2014 Governor’s Race: Face off over the sweet spot on taxing Marcellus Shale

Governor Pennsylvania Debate

Tom Gralish / The Philadelphia Inquirer

Governor Tom Corbett (L) with Democratic challenger Tom Wolf (R) at a debate in Philadelphia in October.

Here’s something Governor Tom Corbett and his democratic challenger Tom Wolf agree on: Each calls Pennsylvania’s Marcellus Shale natural gas a “game-changer” for the state’s economy. But they disagree on how to get the most out of the gas boom for all Pennsylvania residents. Comparisons to Texas keep coming up in the race. And natural gas production has recently put Pennsylvania second only to Texas. So how exactly does Texas tax the gas drillers, and how is it different in Pennsylvania. StateImpact Pennsylvania drills down into the sometimes taxing and dull fiscal policy to get at the answer.


 

 

How does Pennsylvania tax natural gas?

In 2012 the state implemented the “impact fee.” This is a flat fee charged to each well. The levy can change from year to year based on natural gas prices and the Consumer Price Index, but in 2013, gas companies paid $50,000 for each new well they drilled. Smaller, vertical wells were $10,000. The impact fee has so far generated $636 million in three years.

Sixty percent of the impact fee revenue stays at the local level, going to counties and municipalities hosting wells. The rest goes to various state agencies involved in regulating drilling and to the Marcellus Legacy Fund – which gets spread out around the state for environmental and infrastructure projects.

Like other businesses in Pennsylvania, the gas industry gets charged corporate taxes as well. At 9.99 percent, Pennsylvania’s corporate tax is considered high. It’s unclear how much the drillers actually pay, because many are not registered in the state and do business elsewhere. Governor Corbett says he has not done an analysis on what the drillers pay in corporate taxers. But he says when combined with the businesses that support and serve the industry, the total revenue is $2.5 billion for the past six years.

What happens in Texas?

Texas took in about $1.5 billion through a tax on natural gas production last year. On the books, the state charges a 7.5 percent severance tax. But there are a number of exemptions that can reduce the tax all the way down to zero. About half of all natural gas wells in the state pay the 7.5 percent. But because shale gas wells fall into the high cost exemption, most of those wells are taxed at an average of 3 – 4 percent. Technically, 25 percent of those severance tax revenues are supposed to go toward education.

Texas also has a formula for assigning part of the oil and gas severance tax toward a “rainy day fund.” Today, that fund is close to $7 billion dollars. This November, Texans will be voting on a ballot initiative seeking to dedicate some of that money toward transportation.

Another way Texas generates oil and gas revenue is through state lands dedicated to paying for education. Texas’ Permanent School Fund was established before the Civil War when Texas was a Republic and had more land than cash. Largely due to fracking on those lands, that fund has just recently become the largest school endowment in the country. And at $37.7 billion dollars, it tops Harvard University. The fund pays out about $400 per year, per student to public schools. That’s enough to cover books. It also backs local school bonds with a triple-A rating.

Governor Corbett points out that it’s unfair to compare Pennsylvania to Texas because of the disparity in corporate income tax. Texas has a “franchise Tax” that works out to about 1 percent, while Pennsylvania taxes corporations at ten percent.

But Texas also taxes the supportive industries that serve oil and gas drilling. And the Lone Star state charges a tax on the value of the reserves, which Pennsylvania does not do.

Governor Corbett’s conservative approach to taxing natural gas

Governor Corbett says if you tax the natural gas industry in Pennsylvania more than the current $50,000 a well impact fee, drillers will pack up their rigs and ride them down to south Texas.

“Because they are going to go where they are going to get the best return on their investment, where the margins are quite small, because the investment of drilling a well is quite an expensive investment,” Corbett told StateImpact Pennsylvania.

Corbett says in addition to the impact fee, Pennsylvanians have benefited with new jobs, and cheaper energy prices. He says maybe ten years down the road, when all the pipelines are laid, then a tax would make sense. That’s because one of the problems Pennsylvania drillers have now is too much gas for the limited miles of pipeline. If a tax is too high, he says, it just won’t make economic sense to drill new wells if the gas companies can’t get the gas to market. Corbett has also said that rather than tax the gas at the wellhead, it may be better to tax it at the transmission lines.

Tom Wolf’s gamble on the natural gas tax

Democrat Tom Wolf says Corbett’s refusal to impose a severance tax leaves too much money on the table. Wolf’s proposed a five percent tax on the market value of the gas, which he says at current production levels, will bring in about $1 billion a year. Wolf has staked a lot on replacing the current impact fee with this tax. He wants to fix the state’s faltering education system and boost funding at the Department of Environmental Protection.

But he’s counting on the industry continuing the same level of activity. He says the tax is not high enough to drive drillers away. And he says it will actually strengthen the industry. That’s because he sees the tax benefiting all Pennsylvanians, unlike the current impact fee which primarily returns to drilling communities. Wolf says if all Pennsylvanians see real improvements in things like education, there will be less opposition to gas drilling, and the companies won’t face community backlash on pipeline construction. He also says Pennsylvanians already help pay for Texas’ severance tax through higher consumer prices in oil and gas.

Is there a sweet spot for gas taxation?

Right now, Pennsylvania is considered a cheaper place to drill. James Lebas is a fiscal analyst who advises the Texas Oil and Gas Association. He agrees with Corbett that states compete for a fixed number of gas rigs nationwide.

“Generally speaking, Pennsylvania is considered to have a low tax climate,” said Lebas, “which makes it attractive for those investments, for those jobs, for those drilling rigs.”

Lebas says a 5 percent severance tax in Pennsylvania will drive some drillers to move more resources to Texas. But he says each one would have to look at the math.

“If you’ve already secured a lease, and spent millions, you’ll go ahead and drill that,” said Lebas. “But there could be a significant curtailment in new leases.”

Some drillers say they’re already preparing to slow down in anticipation of an increased tax. But other things factor into their decisions as well, like the price of natural gas, the volume of gas pumped out of their wells, and their connections to pipelines.

In weighing all these numbers, remember that Texas’ natural gas production is larger than Pennsylvania’s. But Pennsylvania’s Marcellus Shale production has jumped to number two in the nation, second only to Texas.

So the question remains, should Pennsylvania use Texas as a model to get a better deal on natural gas? Corbett says no, it’s still too risky for an industry just getting its drills in the ground.  Wolf says, yes tax now, the state needs the revenue and it won’t drive away business.

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