Don’t kill the golden goose

Raising taxes on the Pennsylvania gas industry would be a big mistake, warns energy lawyer KEVIN COLOSIMO

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The energy industry is a proven job creator whose operations have poured millions into Pennsylvania’s state and local governments and whose economic impact is in the billions. Despite these facts, some politicians in Harrisburg try time and again to cripple it. And that defies reason.

During the primaries, candidates seeking to oppose Gov. Tom Corbett advanced various versions of a severance tax on Marcellus Shale drilling, each one-upping the other’s proposals as in a high-stakes poker game. They even made oil and gas drillers a scapegoat for public-education problems.

The rationale is simple: Pennsylvania has one of the lowest effective tax rates on shale gas drilling in the country. Therefore, according to political logic, energy companies should pay more. But this is no game, and their logic is absurd.

It’s important to look at what’s not being said.

Pennsylvania’s effective corporate tax rates are already among the highest in the country, and energy companies are already paying them.

Shale-boom states like Texas and Wyoming, which have a severance tax and are often pointed to as poster children for why Pennsylvania needs one, don’t have a corporate income tax. According to the Tax Foundation’s 2014 State Business Tax Climate Index, while Pennsylvania ranks 24th in overall business-tax climate, it ranks 46th in the corporate income tax, worse than such tax-and-spend states as California and New York. We’re also the only state in America to levy a corporate net income tax and a capital stock and franchise tax.

Beyond that, they won’t tell you that the existing gas-drilling impact fee — which is expected to generate $224.5 million this year — is paid immediately to local communities. In states that pro-tax legislators cite as having a severance tax, there are capital recovery periods and revenues aren’t available for a number of years. That is bad news for cash-strapped municipalities whose needs cannot wait.

Finally, they don’t admit publicly what everyone in the industry knows: Drillers pay 100 percent of the impact fees whereas a severance tax falls proportionately on landowners as well. This is not just a tax on industry, it’s yet another tax on Pennsylvania property owners.

Then there is a lingering uncertainty over what would happen if a severance tax replaced the impact fee. No one really knows. But local government officials whose communities rely on the fees for vital services have voiced concern over the potentially negative impact of losing it, a prospect one said would be “tragic.”

The fact is, the severance tax is really just a way for lawmakers to raise taxes. In a state that already has one of the highest corporate tax rates in the country and is struggling to move into the top tier of business-friendly locations, that just doesn’t make any sense. How can we possibly recruit industry and create jobs, wealth and prosperity when decision-makers and candidates try to punish one industry just because it’s successful?

The steel industry is coming back, thanks in no small part to affordable natural gas. Will Harrisburg come after it next?

As if that’s not enough, the debate over whether drillers can deduct post-production costs from royalties paid to landowners could damage the state’s business climate even further. Some lawmakers want to eliminate the deductions. That means the government would force changes in legal contracts already in place. This is unconstitutional and could set a chilling precedent: If the state can void contracts in one industry, what’s to prevent it from voiding contracts in other industries?

The combination of higher taxes and more government intrusion into private business matters would lead to only one outcome: Drillers would go to another state and take their jobs, tax payments and capital investments with them. If that happens, we all lose.

Finally, let me address the hyperbolic rhetoric coming from the activist community regarding hydraulic fracturing.

Fracking, done properly, is safe. Steven Chu, President Barack Obama’s former energy secretary — and no fan of fossil fuels — has said it. Ken Salazar, Mr. Obama’s former interior secretary, has said it. Ernest Moniz, the current energy secretary, has said it. Lisa Jackson, the former head of the Environmental Protection Agency who was known as an activist administrator, told a congressional committee she knew of no proof that fracking had ever contaminated groundwater.

As for all of the environmentalists who gathered recently in Harrisburg to protest natural gas drilling — and especially those who paid for the airplane hauling the banner that said “shale gas = dirty energy” — consider this:

• “After decades of increases, U.S. CO2 emissions from energy use (which account for 97 percent of total U.S. emissions) declined by around 9 percent between 2008 and 2012, largely due to a shift from coal to less CO2-intensive natural gas for electricity production.”

• “An increase in natural gas consumption could lead to a reduction in U.S. greenhouse gas emissions compared to continued use of other fossil fuels.”

• “Continued declines in sulfate aerosol cooling are projected for the future, particularly if coal continues to be replaced by natural gas (which contains far fewer sulfur impurities) for electricity generation.”

Don’t take my word for any of this. These are all direct quotes from the Obama administration’s National Climate Assessment.

So here we have an economic sector that has paid close to $2 billion in state and local taxes and impact fees, has made direct investment in infrastructure improvements in excess of $1 billion, employs more than 240,000 Pennsylvanians in Marcellus-related industries and has supported local government efforts to provide essential services to the people they serve. Yet we continue to see efforts aimed at taxing it, weakening it and reducing its positive impact on Pennsylvania and its citizens — despite a poll earlier this year that showed 64 percent of those surveyed favored natural-gas development in our state.

A lot of cliches come to mind here, from “don’t bite the hand that feeds you” to “don’t kill the goose that lays the golden eggs.” Here’s hoping that someone, somewhere in Harrisburg, acknowledges another one — that the Marcellus Shale is as good as gold — and that these unreasonable, unnecessary attempts to obstruct its development are bad for business, bad for the economy, bad for state and local governments and bad for Pennsylvanians.

Kevin Colosimo is managing partner of the Canonsburg-based regional office of energy law firm Burleson LLP.

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