WGRC Interview Wrap-Up

This morning, CSCC was pleased to be invited to appear on WGRC's "The Matter at Hand" radio talk show with host Larry Weidman. As chair of CSCC, I was a guest on the show along with a policy analyst from the conservative Commonwealth Foundation in Harrisburg. Audio of the show is available here, and I thought I would try and publish some of the information that CSCC prepared for the show but I didn't have time to cover.

Fact Check on Commonwealth Foundation Talking Points
Commonwealth Foundation: “This is a mobile industry that can pick up and leave.” This general argument—that higher taxes will drive companies away--sounds good at first glance, but it doesn’t actually make sense. The gas is physically located underneath the ground, and the gas companies want it. If they want our gas, they can’t go anywhere else. This is not a situation where a big store like Walmart is trying to decide whether to open a location here, or across the state border. Natural gas production is based on the physical location and size of reserves, and the price of gas which is set at a national market level. Furthermore, 29 other states have severance taxes, including our neighbor West Virginia (5.79%). In fact, West Virginia has always produced more gas than us, despite the fact they have a severance tax and we don’t. Of the five gas-producing states in the Rocky Mountains, Wyoming had the highest tax rate over the last 30 years, and it also saw the fastest growth in gas production. [Source: http://pennbpc.org/sites/pennbpc.org/files/Reality_Check_on_Emerging_Giant_Report_1.pdf]

Commonwealth Foundation: “…Pennsylvania’s high corporate tax rate….”: Over 70% of wells in PA are owned by companies registered as LLC’s which means they primarily pay the personal income tax rate of 3.07% not the corporate rate of 9.99%. In fact the 3 biggest companies, Atlas, Chesapeake and Range Resources are ALL LLC’s. In 2008, only 120 drilling companies paid corporate net income tax while 818 companies paid personal income tax. This is a statewide issue, not just for the gas industry: overall, only about 20% of corporate tax filers paid any corporate income tax in 2010. [Source: http://www.pennbpc.org/gas-drillers-escape-taxes]

Commonwealth Foundation: “the $1.1 Billion in taxes paid by the industry….”: First of all, this is a horribly-inflated number from Governor Corbett’s Department of Revenue. This is not an independently-calculated number. It includes every possible thing they could think of related to drilling, not just the taxes paid by those who would pay a severance tax. It includes the income taxes paid by their employees, it includes sales tax collected from their customers, and it includes taxes paid by pipeline operators and sand suppliers that would be paying taxes anyway even if the industry weren’t here. The point is that drillers themselves pay few taxes in PA. [Source: http://www.pennbpc.org/department-revenue-analysis-goes-well-beyond-taxes-paid-drillers]

Second of all, just because someone pays one tax doesn’t normally mean they get a free pass on other taxes. If I go buy a CD and pay sales tax on it, does that mean I get out of paying my gasoline taxes? So the fact that they pay “some” taxes isn’t an argument against a severance tax.

Finally, $1 billion sounds like a huge impressive number, sure. But let’s say, hypothetically, that I paid $1000 in state income tax last year. Can you tell me if I paid my fair share or not? No, you would have to know what my income was, what that’s a percentage of. So what is $1 billion compared to the total income of the industry over that time period? That number is unknown.

Commonwealth Foundation: “A severance tax hurts Pennsylvania citizens directly, because a lease splits tax obligations between drilling companies and landowners.” This is an intentionally vague statement that I believe is intended to scare people into thinking we want to “hurt” landowners by advocating for a severance tax. For better or worse, there is no “standard” lease in Pennsylvania. You cannot make any blanket statements about what a lease does or does not do: it depends completely on the lease agreement signed between a landowner and a gas company. At very worst, the landowner would see their royalty payments reduced by a proportionate share of the drilling tax. If the tax were 5%, then their royalties would be cut by 5%. If you are willing to sign a lease, with the expectation that you might get $1 million in royalty payments, are you not going to sign if you will only get $950,000? Most leases already often allow things like treatment and production costs and transportation costs to be deducted, all of which take a MUCH bigger bite out of royalty checks.

Commonwealth Foundation: “The state oversight for drilling is entirely funded through natural gas permits.” We can find no evidence to support the claim that it’s “entirely” funded. A natural gas well permit costs something like $3600, and that money goes toward the cost of inspections. However, the DEP is responsible for many other activities (air quality monitoring, erosion control, groundwater protection) that are not funded at all by drilling permits. Even simpler than that, though, there’s the fact that the number of inspectors aren’t keeping up with the number of wells being drilled. If you have more wells, and the same number of inspectors, that means you have less oversight.

Whenever anyone brings up the issue of regulation, those who oppose a severance tax act as if we are insulting the DEP or saying they are bad at their jobs. We are not saying that. They are doing their best, but to handle an industry that has grown exponentially, they need additional staff, they need additional support and resources and the severance tax would ensure they have those resources.

The Commonwealth Foundation also said, “Pennsylvania has very strict environmental laws.” That may be true, but laws do not magically enforce themselves. If we had the strictest criminal laws in PA, could we fire all of the police and judges? The departments that are supposed to be monitoring the industry and protecting us need resources to operate at increased capacity, and they are facing a larger workload than ever before, directly as a result of the natural gas industry. It is having an impact that permits and other current taxes do not “cover.”

Commonwealth Foundation: “The industry has paid $200 million for road repair... one landowner had his road repaired by the gas company on Easter morning.” First, $200 million is a large impressive number, but how does it compare to the actual cost of road repair? The fact is that local governments can require drillers to post bonds of up to $12,000 per road mile to help pay for damage. But this amount hasn’t been adjusted in 30 years, and township supervisors have been quoted as saying that it can cost over $100,000 per road mile to replace some of these roadways. Second of all, it is great to hear anecdotes about gas companies fixing particular roads, even “on Easter morning.” However, there are many other local officials who say the roads are being destroyed by the water truck trips and the bonds the drillers must take out are insufficient for real repair. They weren’t designed for such heavy traffic. The people living in these communities--and anyone living near a road that the trucks use to get in and out of Pennsylvania—have to deal with increased traffic congestion, and more traffic means more accidents, plain and simple. Also, the trucks don’t magically appear and disappear when they get to the end of those bonded roads near the well sites. We’ve got more heavy trucks on the state and interstate roads as well.

More importantly, isolated stories do not reassure us that that all gas companies are always going to do the right thing, or that they’ll be around to do the right thing when it counts, even if they wanted to. Compare our situation now with the coal industry. Coal mining activity peaked in Pennsylvania in 1918 and some communities are still paying the costs of companies that are long gone. Millions have been spent to address abandoned mine problems, and there are problems with polluted streams and unreclaimed mine land that would cost billions of dollars to fix. Having a severance tax is about supporting the long-term interests of Pennsylvania residents. The drillers’ goal is to quickly make as much money as possible. Fine, that is just the nature of their business. But as soon as the gas is gone, the drillers will be gone, too. Our business (citizens and lawmakers) should be to see that the people of Pennsylvania are not stuck with footing a huge bill as the industry heads out the exit doors.

Final thought:
The Corbett administration, some of our lawmakers, and the Commonwealth Foundation are out-of-step with both the people of Pennsylvania AND even with the industry itself. The Director of Corporate Communications for Chesapeake Energy Corporation, the largest drilling company in our state, has been quoted as saying, "We gladly pay a severance tax in every state where we’re active, except New York and Pennsylvania." Gladly. Why shouldn't they? They are used to paying this tax in 29 other states. A public poll released one week ago by Quinnipiac University found that 69% of Pennsylvania voters, including 69% of Republicans polled, support this tax. Our lawmakers need to step up, and institute a real severance tax (not the 1% tax in the current version of the Scarnati bill) that creates a fair playing field and pays for the impacts of this industry.