Marcellus Shale - Gas Wells

October 28, 2010

Gas tax plan suggested

Policy center proposes options for Pennsylvania to raise revenue.

By Steve Mocarsky smocarsky@timesleader.com
Staff Writer
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The Pennsylvania Budget and Policy Center on Tuesday released a new report recommending how the state Legislature should structure a fair severance tax on natural gas extraction.

When the General Assembly passed the state budget for fiscal year 2010-11 earlier this year, it set a deadline of Oct. 1 for enactment of a severance tax that would take effect in January 2011.

According to the report author, policy center research director Michael Wood, a severance tax makes sense for several reasons: Every state with mineral wealth, except Pennsylvania, imposes a severance tax; states with greater natural gas production than Pennsylvania all have booming gas industries; and during the recent recession, states with severance taxes fared much better than those without.

A severance tax is typically structured as either a percentage of the sales price or as a fixed rate per thousand cubic feet of natural gas, which is reset each year. Some producers have expressed a preference for a fixed rate that is updated annually, as it may be easier to calculate and is more predictable, Wood notes.

Severance tax revenue would grow as more new wells begin producing and, Wood estimates, a tax rate comparable to neighboring West Virginia’s would raise $71 million in 2010-11 and nearly $400 million in 2014-15.

If lawmakers agree to a fixed rate, it would make sense to make it comparable to West Virginia’s so there would be no incentive or disincentive for drilling in one state or the other, Wood notes.

Pennsylvania could set a rate between 30 and 35 cents per thousand cubic feet and be more than competitive with other gas-producing states, but a higher rate could be justified because Pennsylvania, unlike other states, does not levy property taxes on oil or natural gas deposits, Woods writes.

And, Pennsylvania’s proximity to major markets, the potential size and richness of the Marcellus Shale, the relatively low cost of extraction and the ability to link into the existing gas pipeline infrastructure will continue to make it an attractive place to drill, Wood claims.

The report recommends limiting “unnecessary loopholes” and deductions for production, processing and transportation costs from its tax calculations advocated by the gas industry.

The report also recommends against the industry-backed capital recovery tax break – exempting or reducing the severance tax rate in the first years of production to allow drillers to recoup drilling costs more quickly.

The report calls such a tax break unnecessary and costly because the federal government provides significant tax breaks for energy companies – most notably allowing them to fully deduct drilling costs in the year they are incurred rather than over the productive life of the well.

And, most natural gas production occurs in the first five years of an estimated 40-year well lifespan. Exempting this production from tax, or significantly reducing the tax rate during these early years, would reduce potential collection by up to half, Wood estimates.

The report also recommends that legislators not exempt low-producing wells, enact legislation to apply local property taxes to oil and gas, create a sensible plan to share revenue with local governments and environmental programs and ensure transparency in collecting and reporting drilling and production data.

Marcellus Shale Coalition spokesman Travis Windle would not comment on the report itself, but did on the report’s author.

“It seems like Mr. Wood’s real-world budgetary background leaves a lot to be desired,” Windle said, referring to media reports on Tuesday that the city of Harrisburg was unable to make a $3.29 million general-obligation debt payment.

Before joining the policy center as research director in 2007, Wood had been budget manager for Harrisburg.

Wood said the budget manager manages the budget, not sources of financing, and noted that there were three levels of financial management over him – the mayor, business administrator and finance director.

“The city of Harrisburg, like most third-class cities, has a lot of balls in the air when it comes to operating under limited taxing abilities and a declining tax base,” Wood said.

“When the natural gas industry group stoops to personal attacks rather than discussing the policy issues that will impact every Pennsylvanian, it is a sad day for public discourse. Apparently, they want to change the subject. I am a bit amused that this multi-billion dollar trade group is so threatened by our publications. We must be on to something,” Wood said.

Wood’s other credentials include a master of public administration from Penn State and a bachelor of arts in accountancy from Western Michigan University, more than 10 years experience in state tax research and local government budgeting, and experience as a revenue forecasting analyst for the state Department of Revenue.

The policy center is an arm of the Keystone Research Center, which was established in 1986 and operates through the collaborative efforts of Pennsylvania citizens drawn from academia, labor, religious and business organizations, according to the center website.

Steve Mocarsky, a Times Leader staff writer, may be reached at 970-7311.

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