Marcellus Shale/Severance Tax Panel

Tomorrow night (Thurs, Mar 3, 7:30pm, LC Forum @ Bucknell), the Bucknell Institute for Public Policy is hosting a forum to discuss the issue of severance taxes (which currently don't exist in PA) and the Marcellus Shale with speakers PA State Senator Gene Yaw (R) and PA State House Rep. Rick Marabito (D).

The following information is set to be mailed out tomorrow a.m. to the CSCC list, but I thought I'd also post it here. It's a collection of key facts and suggested questions for the speakers (mostly Mr. Yaw, since he's our representative) that I hope will inspire more. For more in-depth research and analysis, I'd recommend the PA Budget & Policy Center's website at http://www.pennbpc.org/severance-tax

Key Facts:

1. The 14 states with greater natural gas production than PA have severance taxes, and they have booming industries that have grown at an average of 5% per year since 2004.
2. During the recent recession, the states with severance taxes fared better than those without because of high energy prices generating significant tax revenue.
3. Natural gas drilling generates predictable costs to the state (new roads, road reconstruction, bridge repair) and unpredictable costs (environmental hazard cleanup, emergency medical services, additional environmental inspection and testing). Severance tax revenue in other states is often shared with local governments to recoup these costs.
4. PA's proposed tax (in the House-passed bill) is an effective 7.3% tax rate, which is comparable to or lower than Montana (7.9%), New Mexico (8.4%), Wyoming (10.2%) and West Virginia (5.8%).
5. Studies in western states have shown that companies go where the gas is located, and that different tax rates in different states have little impact on their decisions.
6. PA gas is going to be more profitable because wells are cheaper to drill than in other shale formations, the reserves are larger, and PA is closer to the northeastern market.
7. PA already exempts the drilling industry from property taxes, taxes on drilling equipment, and most companies (LLCs) pay the lower Personal Income Tax rates instead of the corporate tax rates.
8. The drilling industry often cites a 2008 "Penn State Report" that claimed a severance tax would reduce drilling activity by 30%. This report was the work of two professors, one who has left Penn State, and was funded by the Marcellus Shale Coalition (an industry trade group), a fact that was never originally disclosed by the authors. Dean Easterling of Penn State has since said that there were "flaws in the way the report was written and presented to the public," and suggested "the authors may well have crossed the line between policy analysis and policy advocacy." The PA Budget and Policy Center, a Harrisburg-based nonpartisan group has said the report overstates the 30% figure, overstates industry tax impacts and economic impacts, and doesn't disclose its mathematical modeling assumptions so that they could be reviewed by other experts, so it basically serves the narrow financial interests of its funder, the gas industry.

Suggested Questions for Senator Yaw:

1. Former DEP Secretary John Hanger, whom you praised in Tuesday's Daily Item newspaper, has called on DEP to order immediate testing for all public water systems for radium or radioactive pollutants. It seems that a severance tax on the drilling industry, who makes this testing necessary, would be a very sensible way to pay for this type of testing. Without the severance tax, the cost would fall to the water utility companies, or taxpayers. Why would you favor the gas companies over the water companies or taxpayers on this issue?

2. Studies in Wyoming and Utah in the past decade have both found that reductions in their oil severance tax did not increase production, while raising tax rates had negligible impact on production. Even so, let's assume for a moment that implementing a severance tax did somehow slow production. The natural gas is not going anywhere--companies that want to harvest the Marcellus Shale gas have to do it here in PA. The price of natural gas will also surely go up, not down, in the future. Thus, the longer it takes to harvest, the more money for the industry, the more long-term careers for our workers, the more motivation for companies to invest in staying here, and a longer period of prosperity for Pennsylvania. So even in a worst-case scenario, if a severance tax slowed production, why wouldn't you support such a measure that helped build a longer-term, stable economic situation for everyone involved, while also providing revenue to the Commonwealth?

3. The 14 states with greater gas production than PA have severance taxes, and booming industries. Pennsylvania, unlike other states, already exempts drilling companies from paying property taxes on oil and gas reserves, and drilling equipment is not taxed, either. Most natural gas companies are also registered as LLC's which mean they pay the same Personal Income tax (3.07%) that individuals do, not the corporate income tax (9.99%). From the perspective of any other industry who plays by the rules, this is not a "free market" competitive situation, it is basically a "free ride." Companies go where the gas is; different tax rates in the western states have not resulted in more or less investment from state to state. Why would you support a free ride for one industry, and also deprive PA of the same revenue that other states enjoy?