Governor Wolf made taxing natural gas drillers the centerpiece of his campaign. As he prepares to give his first budget address Tuesday, the issue has once again taken center stage in Harrisburg.
Pennsylvania is the only major gas-producing state without a severance tax, but it does levy many other levy taxes on drillers. A gas tax has been a hot-button political issue for years– but how does Pennsylvania actually stack up against other states?
The answer to that question gives a window into why the debate is so complex and controversial.
Impact fee vs. severance tax
When Governor Wolf first announced his severance tax proposal at a recent press conference, he posed a question:
“How radical would that be?” he asked reporters. “Texas does it. Oklahoma does it. North Dakota does it. Alaska, Louisiana.”
He thinks Pennsylvania should do it too. He wants to model it on West Virginia, with a tax on both volume and sales. Gas companies would pay a 5 percent tax on the value of the gas, plus 4.7 cents for every thousand cubic feet. Wolf says it could generate a billion dollars in its first year, which he’d use to boost funding public education.
Pennsylvania currently imposes a flat impact fee, every time a well is drilled. More than a year ago, State Senator David Argall (R- Schuylkill) tried to figure out how this system compares to other states.
“I think the college professor in me was asking questions other people were not asking,” says Argall.
He was the first legislator to reach out to the state’s Independent Fiscal Office.
“We’re modeled after the Congressional Budget Office,” says IFO director, Matthew Knittel. “We provide nonpartisan analysis for budgetary purposes. We also undertake special studies at the request of the General Assembly.”
At Argall’s request, Knittel and his team compared Pennsylvania to nearly a dozen major shale-gas states.
“What we found is the effective tax rate in Pennsylvania is one of the lowest across the 11 states we looked at,” says Knittel.
Apples to apples?
But it wasn’t an easy thing to analyze—and here’s why:
Pennsylvania’s per-well impact fee is unique. Other states levy what’s known as a “severance tax”—when gas is severed from the earth. Typically, other states charge drillers the price of that gas, or the volume.
But things can quickly get confusing. For example, a drilling-friendly state like Texas has a seemingly high severance tax rate of 7.5 percent. But it turns out, most shale wells get an exemption and don’t pay that rate. And unlike Pennsylvania, Texas lacks a corporate income tax.
In order to make it an apples-to-apples comparison, Knittel converted Pennsylvania’s impact fee into a severance tax.
“And when you do that, you find the impact fee converts to a severance tax of about 1 to 1.5 percent,” he says. “Whereas most other states have a severance tax of 4, 5, or 6 percent.”
Argall was not too happy with the IFO analysis.
“We were disappointed,” he says. “Because they came back and said the numbers they needed to perform the study were simply not available.”
Which numbers were missing?
Aside from the impact fee, drillers pay all sorts of other taxes. At 9.9 percent, Pennsylvania’s corporate net income tax is among the highest in the nation. Put simply, the IFO analysis did not examine the industry’s entire tax burden.
Knittel explains why in the report. He says since drillers are often multi-state or multi-national corporations that do a small portion of their business here, it wasn’t possible to know precisely how much tax money they pay to Pennsylvania.
“Once you get into income taxes and sales taxes, everything gets a lot cloudier,” says Knittel. “We’re not sure we can accurately account for those.”
Drillers are lobbying aggressively against the tax. Stephanie Catarino Wissman heads Pennsylvania’s division of the American Petroleum Institute and says the industry is already struggling with poor market conditions.
“You’ll see companies cutting back significantly on capital expenditures,” she says. “You’re already seeing it now. To add an additional tax to that would compound the problem.”
In a commercial from the industry trade group, the Marcellus Shale Coalition, the narrator tells viewers natural gas companies are heavily taxed: “$2.7 billion and counting,” he says.
But that number – $2.7 billion dollars — simply isn’t accurate, says Elizabeth Brassell, a spokesman for the state Department of Revenue.
“We have never provided data that suggested natural gas drillers have paid more than $2 billion in state taxes,” says Brassell. ”Instead, what our data suggests is that natural gas and oil drillers combined have paid about a tenth of that over the past six years.”
So why does the industry say it pays $2.7 billion?
That number includes a lot more than taxes paid directly by Marcellus Shale drillers. It’s more like the statewide tax footprint of the entire oil and gas industry. It includes the impact fee, plus taxes paid by driller’s employees, taxes paid by property owners who receive royalty money, and taxes paid by related industries—like pipeline companies.
“The devil’s in the details,” says Brassell. ”It really is all about how the data is represented, or misrepresented.”
“They’re the ones that make jobs”
Brassell says most drillers don’t actually pay Pennsylvania’s high 9.9 percent corporate tax rate either. Since major drilling companies often do a portion of their business in Pennsylvania, they end up with a lower rate.
“We know that somewhere south of that 9.9 percent is where the effective rate really is,” she says.
Public opinion polls show most Pennsylvanians support enacting a new severance tax on the gas industry. But Wolf still faces stiff headwinds from the Republicans controlling the legislature. They’ve made it clear they want to overhaul public pensions and rein in costs, before discussing a new tax.
State Senator Gene Yaw (R- Bradford) represents one of the most heavily-drilled parts of Pennsylvania. Given the downward spiral of energy prices and glut of gas on the market, he thinks it’s a particularly bad time for a tax. He also doubts it will generate a billion dollars.
“This industry is like any other business in this Commonwealth. You know, it’s not a bad thing to make a profit. They’re the ones that make jobs.”
Wolf’s plan anticipates gas production continuing to grow year after year. But it’s unclear whether that will actually happen, since current market conditions have already caused many drillers to cut back.