Giving up billions to the gas industry

May 15, 2013

Facts are facts. That seems fairly simple, unless the subject at hand is taxation of Marcellus Shale drilling. Then politics and self-interest enter in.

The latest focus of the long-running debate is a study released by the Pennsylvania Budget and Policy Center that says Pennsylvania will lose billions in potential tax revenue because its Marcellus Shale impact fee is much lower than the 5 percent levy imposed in neighboring West Virginia.

Gov. Tom Corbett’s energy executive, Patrick Henderson, responded by saying that the Budget and Policy Center, which describes itself as a nonpartisan group, has a liberal bias. No refutation of the numbers or the methodology, mind you, just an ad hominem attack on the supposed political leanings of those who conducted the research.

According to an Associated Press report, Pennsylvania’s impact fee is tied to the number of gas wells drilled and the wholesale price of gas. That led to a situation last year in which the amount of gas produced nearly doubled, but revenue from the impact fee fell, because the price of natural gas declined. The AP conducted an independent review and found that if Pennsylvania’s gas production continues at the current pace and the price of gas stays around the current level, energy companies will generate about $16 billion in revenue in 2015. If West Virginia’s 5 percent tax rate were applied, that would mean somewhere in the neighborhood of $800 million for the state.

But Pennsylvania’s tax – or fee, as the governor prefers to call it – is nowhere near that level. The Budget and Policy Center projects that the fee will generate between $237 million and $261 million in 2015. Not chump change, to be sure, but not close to $800 million, either. The center also estimates that by 2020, the impact fee will result in an effective tax rate of just 1.3 percent. What that means over 20 to 30 years, according to the group, is that the state’s fee will bring in $10 billion to $15 billion less than a flat production tax.

John Hanger, former chief of the state Department of Environmental Protection, points out – correctly, in our view – that “the math is the math” and that the Budget and Policy Center’s assessment of the situation is spot-on.

“We have this ridiculous fee,” Hanger told the AP. “First, it’s way too little. It amounts to a huge subsidy to the gas industry at the expense of schools and other vital services. We need a tax like Texas and West Virginia.”

We should point out that Hanger is currently vying for the Democratic nomination to run for governor next year. We presume he won’t attract nearly as much in political donations from Marcellus Shale interests as Corbett, who benefited handsomely from their largesse in 2010.

Henderson, the governor’s point man on energy, argues that Pennsylvania’s low fee – our description, not his – drives investment. Says Henderson, “A job for a Pennsylvanian beats enacting a new tax.” His position is echoed by the Marcellus Shale Coalition, an industry mouthpiece.

That, of course, suggests that were Pennsylvania to impose a tax like the ones already in existence in other states, the Marcellus Shale drillers would pick up their ball and go home. That dog just doesn’t hunt. According to the Pennsylvania Oil & Gas Association, the Keystone State has 2.8 trillion cubic feet of natural gas reserves. Does anyone really believe that nudging up the tax on gas production would send the gas drilling industry fleeing from the hundreds of billions of dollars to be made here? No, we don’t either.

No one is suggesting that the gas industry has not been a financial boon to the state, and to this area in particular. Its impact can be measured in the billions of dollars, both for the commonwealth’s coffers and the pockets of our citizens. But with the tax rate as low as it is, the state is effectively giving away money, and if you read the newspapers regularly, you know that’s something it can ill afford to do.



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