News

April 29, 2009

Proposed tax on natural gas production debated

Agency: Plan aids taxpayers, only small hit to drillers; industry exec disagrees.

Natural gas drillers wouldn’t feel much of a sting from a severance tax on production, but it would relieve taxpayers of part of the public costs of extracting the resource, according to a report released on Tuesday by the state policy-research organization.

Researchers from the Pennsylvania Budget and Policy Center said during a news conference that the proposed tax would compare with those of other states. And it wouldn’t be a new one, stressed a school superintendent whose district used to see income from a gas tax that’s been ruled unconstitutional.

“Before 2002, for 100 years, it wasn’t called a severance tax. It was a property tax,” said Dan Fisher, superintendent of Bald Eagle Area School District. “We need to look at this not as a new tax, but as a tax that was ruled unconstitutional by our state Supreme Court back in 2002.”

Stephen Rhoads, the president of the Pennsylvania Oil and Gas Association, looks at it as an unfair industry killer. “Any other industry gets huge economic incentives from our state government to get it off the ground. And our industry isn’t even asking for them. We’re asking to be left alone,” he said. “What’s so special about natural gas that it’s the only one that gets a tax, a special gross income tax? Where’s the equity? … That’s policy schizophrenia. And it’s pathetic. Why would you want to tax something before it becomes established?”

Pennsylvania is ranked 15th of 32 gas-producing states, and the 14 states ahead of it all have severance taxes, the report notes. Gov. Ed Rendell’s proposal mirrors neighboring West Virginia’s tax, researchers said, but Rhoads argued that West Virginia is “unusual” because it doesn’t provide the incentives or industry protections that other states’ tax structures do. Other states either don’t have corporate or income taxes, or have incentives in their tax structures to create an incentive for drilling expensive wells, he said. “You can’t compare apples and oranges here, which is what this study does by focusing solely on West Virginia,” he said.

Rendell’s proposal of a 5-percent tax on the sales price and $0.047 per thousand cubic feet of production funnels all of the revenue directly to the state, which the researchers acknowledged would need to be adjusted to channel money to local governments and school districts. However, similar taxes in Texas, Wyoming and West Virginia haven’t affect production, related job creation or sale prices, the report concludes.

“We conclude that the impact on the industry is relatively small for a variety of reasons,” said Sharon Ward, the PBPC’s executive director. “The severance tax is a proven way that shifts these costs off the taxpayers and back onto the producers.”

The only thing it’ll do, Rhoads said, is “choke the shallow-gas producers.” He argued that landowners would have their royalties taxed unless they stipulated against it in their leases, and the value of the play in the state hasn’t been confirmed yet. “Give the industry a chance to establish itself and grow. Once you know what you have, then you can rationally discuss the severance tax. That’ll be five to seven years from now,” he said. “Now would we support a tax then? Probably not. But who would?”

Rory Sweeney, a Times Leader staff writer, may be reached at 970-7418.

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