Don't tax shale yet
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While the alternatives available to resolve Pennsylvania's estimated $3 billion budget deficit are numerous, none would be more counterproductive than the proposed severance tax on natural-gas extraction as the state begins to exploit the potentially vast reserves in the Marcellus Shale.
The practical reasons start with the uncertainty in how much gas can be produced -- and therefore in the tax-generation estimates of $107 million in revenue from a severance tax in 2009 and $1.8 billion by 2013-2014.
The tax projections in the early years are not realistic. The industry is now drilling exploratory vertical wells and some horizontal wells that are producing less gas than government estimates. Pennsylvania also lags drastically behind in the infrastructure necessary to bring natural gas to market. As a result, many completed wells sit idle, awaiting pipelines and facilities.
The uncertainty of the economy, commodity prices and related factors come to play in the latter part of the five-year revenue estimate. At best, projecting the growth of drilling in Pennsylvania during this period is a moving target, especially given our position among other shale-producing states.
Landowners and the state's traditional oil and gas industry would be hit hard by the severance tax. Landowners receiving royalty payments would pay at least 9.33 percent on that income, including the personal income tax, and more if they negotiated higher royalties.
Imposing the tax on the conventional oil and gas industry would make the development of marginally profitable wells impossible. Drilling companies and the many service businesses that support their operations are an important part of the economy in a number of rural counties across the state, providing family-sustaining jobs to hard-working people.
Market-based factors working against the tax include the fact that natural-gas prices continue to drag near an eight-year low, along with poor economic conditions that have idled nearly 60 percent of the nation's 2,000 on-shore drilling rigs.
Decisions about deploying those rigs, along with supporting equipment and technology, are driven by a number of factors. A severance tax would damage Pennsylvania's competitive position by piling on to the regulatory, terrain, climate and infrastructure challenges that are more burdensome in the commonwealth than in other states with proven natural gas resources and better cumulative tax structures.
Pennsylvania's corporate net income tax of 9.9 percent is the highest in the country. A number of other states with productive shale reserves, such as Arkansas, Louisiana and Oklahoma, impose corporate taxes at much lower rates. Texas has no personal income tax.
Because shale wells are among the most expensive to develop, several of those states also defer taxes on natural gas extracted from them for up to 10 years, in recognition of the risk and cost of drilling them. In other cases, competing states impose severance taxes based only on commodity-price or gas-production thresholds.
A number of comparisons have been made to West Virginia's severance tax, with claims that it has not impacted production. This is false. Since 2000, when natural gas prices began to rise, drilling activity in West Virginia has lagged dramatically behind Pennsylvania, with the number of wells drilled in Pennsylvania outpacing that of West Virginia by more than 260 percent.
Two other aspects of competitiveness should be raised.
First is that the natural-gas industry receives no government giveaways that are so often thrown at the feet of retailers, hoteliers and other businesses that provide relatively low-paying jobs. This is private investment, being infused into the state when it is most needed, paying wages well above the national average. The state is already benefiting from the infusion of nearly $5 billion from the industry in the last few years. This investment has been paid directly to local landowners, earned by working Pennsylvanians or spent with local businesses.
Second is to question the argument that a severance tax will provide a more "level playing field" with other gas-producing states. As cited above, tax structures vary greatly, as do regulatory programs, geologic challenges, work-force availability and a host of other factors. With those variables, shouldn't Pennsylvania consider tipping the playing field in its favor by holding off on a severance tax until the industry firmly establishes itself?
The Marcellus Shale has the potential to be the largest natural-gas field in the nation. It will take time for it to become the economic engine it can be. Imposing a severance tax this early in the development process will forever slow that engine's speed.
First Published July 13, 2009 12:00 am
