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NEW STUDY: PA Budget & Policy Center. "Reality Check: Natural Gas Industry Report Falsely Claims Sky Will Fall if Severance Tax Enacted", October 2009.

Excerpts:

A gas industry-financed study titled An Emerging Giant: Prospects and Economic Impact of Developing the Marcellus Shale Natural Gas Play claims that a severance tax on the extraction of natural gas could undermine the development of Pennsylvania’s Marcellus Shale. The July 24 report, however, overplays the positive impacts of increased natural gas production, while minimizing the negative. Among other flaws, it exaggerates the impact a severance tax would have on development of the Marcellus Shale and overstates what taxes the industry now pays, going so far as to count fishing and hunting license fees paid by those who benefit from the industry as a tax due to industry activity. Notably, the report acknowledges that many drillers in the Marcellus Shale will avoid corporate taxes, paying the much lower Personal Income Tax or avoiding taxes altogether through deductions. The report also inflates the economic impact of
expanded gas production in Pennsylvania to puff up the industry’s economic promise. READ MORE

 

Wood, Michael and Sharon Ward. PA Budget & Policy Center. "Responsible Growth: Protecting the Public Interest with a Natural Gas Severance Tax", April 2009.

Excerpts

"Natural gas extraction in the Marcellus Shale has substantial risks and substantial costs that have not yet been fully explored in the rush to drill. A severance tax is a well-tested mechanism to shift these costs back to producers, where they belong.”

—Sharon Ward, Executive Director, Pennsylvania Budget and Policy Center

 

On April 28th, the Pennsylvania Budget and Policy Center released the report “Responsible Growth, Protecting the Public Interest with a Natural Gas Severance Tax”. According to the report, a well-structured severance tax on natural gas production will protect Pennsylvania taxpayers from shouldering the public costs that come with increased drilling.

The report examines the potential costs of increased natural gas drilling on taxpayers and the environment, how severance taxes are structured in other states, and what lessons Pennsylvania can learn from them. One of the report’s conclusions is that “severance taxes help governments pay external costs and protect the environment.”

 

Executive Summary, from “Responsible Growth, Protecting the Public Interest with a Natural Gas Severance Tax”

The Commonwealth of Pennsylvania is rich in mineral resources and has a long history of extracting those resources for export.  Since the drilling of the nation’s first commercial oil well in Titusville in 1859, Pennsylvania fortunes have been made in the production and export of coal, oil, and natural gas.

Within the next decade, Pennsylvania is poised to enjoy a new mineral development boom. The rising price of natural gas and the advent of advanced drilling techniques have made it economically feasible to extract natural gas from the nation’s vast oil shale formations, including the Marcellus Shale, a deep formation that underlies 54 of the 67 counties of Pennsylvania – all but the southeastern corner of the state. [1]

Like the mineral booms before it, gas production from the Marcellus Shale will likely spur substantial economic growth with the promise of revitalizing local communities.  Evidence from the exploitation of similar formations in Texas and Arkansas suggests that both employment and incomes in mineral rich counties will rise. [2]   Besides jobs for Pennsylvanians and economic development, there are other substantial benefits to the development of the shale.  Natural gas can help lessen the nation’s dependence on imported oil and, of all the fossil fuels, natural gas is the cleanest burning. [3]   Natural gas use also produces fewer greenhouse gases (nitrogen oxides and carbon dioxide, in particular) than burning coal or oil. [4]

Still, the legacy of Pennsylvania’s mineral extraction tradition is a mixed one.  Coal and oil production created tens of thousands of jobs, built individual wealth, and sustained thriving communities for generations. At the same time, they imposed infrastructure costs that were paid for with tax dollars and left behind mountains of slag and contaminated rivers and wells. Once booming communities slowly withered as mines were shuttered and wells ran dry.  

Increased natural gas production will impose substantial costs on state and local governments for environmental permitting, monitoring, and damage (e.g., groundwater contamination and depletion, , forest fragmentation and other habitat loss, soil erosion, and noise and air pollution); worker and public safety in and around wells; emergency response teams; and, according to local officials, roads and bridges.  Under the current system, these costs will not be fully paid for by the producers – as a result, they will not be taken fully into account by producers or consumers in making investment or consumption decisions.  Instead, these costs will be borne substantially by state and local taxpayers.

Economists call these sorts of costs “externalities,” as they are created by the economic activities of natural gas production but are not paid for by the firms and individuals enjoying the economic benefit.  Severance taxes are a mechanism for “internalizing” these costs by properly imposing them on the activities that produce the costs. Thirty-five states have recognized that resource extraction produces externalities and impose severance taxes of some type to help recover these costs. 

Currently, Pennsylvania is the only major fossil fuel-producing state that does not levy a mineral extraction, or severance, tax to recover some of the costs borne by citizens and to compensate them for the loss of a finite natural resource.  Levying a tax on natural gas extraction will help achieve both of these goals. The revenue collected can serve as a bridge to the future – paying for unanticipated costs and helping to reinvent boom-time communities after the minerals are gone. As Governor Mike Beebe of Arkansas said when seeking a significant increase in his state’s severance tax, “We do not want to hurt a wonderful industry and economic boon to our state that's providing jobs and resources. But we do want them to pay for posterity and fairness and equity; a severance tax that is designed to pay for a nonrenewable, finite resource that our children and grandchildren won't have the benefit of." [5]

In February 2009, Governor Ed Rendell proposed a severance tax on natural gas extraction in Pennsylvania as part of his proposed 2009-10 budget. The proposed tax would be levied based on price and volume, using the same rates in effect in neighboring West Virginia (5% of the sales price and $0.047 per thousand cubic feet of production).  The tax would go into effect on October 1, 2009 and is projected to raise $107 million in new revenue for the state’s General Fund in 2009-10. Increases in natural gas production in the state would boost collections from the proposed severance tax to $632 million by
2013-14. [6]

Mineral extraction activities can be a significant source of revenue for local governments, which generally include the value of minerals in property tax assessments. According to figures from the Perryman Group, the development of the Barnett Shale in Texas produced $379 million in new tax revenue to local governments in 2007. [7]   Here in Pennsylvania, local governments are unable to recover infrastructure and other costs from natural gas drilling through local property taxes due to a court decision. In 2002, the Pennsylvania Supreme Court removed oil and gas from the list of assessable materials, although coal, gravel, and other minerals remain part of the property tax calculation.

Extraction taxes in Texas, Wyoming, and West Virginia have not deterred resource exploration or production, or the growth of related employment, in those states. Several studies have confirmed little impact on supply, demand, or commodity prices from raising severance taxes, which many states have done in recent years. States with mineral wealth and extraction taxes were spared the pain of budget cuts in 2008 as robust production and higher prices brought in significant revenue.

The northeastern states, including Pennsylvania, are the second biggest residential consumers of natural gas in the U.S. The natural gas used in the Northeast is currently imported through pipelines from western states, like Texas, Oklahoma, and Wyoming. [8] These consumers already pay state and local taxes imposed by those western producer states.

For northeastern U.S. markets, natural gas produced in Pennsylvania will be an attractive alternative to natural gas transported from Texas or other regions of the country because of lower transmission and distribution costs – even with a Pennsylvania severance tax. Transportation costs represent on average 48% of the cost of natural gas for consumers, making gas produced in Pennsylvania highly competitive with western producer states. [9]  

States use revenues from severance taxes in different ways. Every state that levies the tax uses a portion for current operations. Many states share a portion of state severance tax collections with the local governments that shoulder a large portion of the public costs generated by mineral extraction.  In West Virginia, for example, roughly 6% of the state’s severance tax is transferred to counties. 

Some states also set aside a portion of the severance tax proceeds for environmental remediation, since resource extraction permanently changes the state’s landscape.  This can be in the form of an environmental fund, or a “permanent fund,” from which fund earnings are spent with the fund principal lasting in perpetuity. 

The reasons that a severance tax is a sensible option for natural gas suggest that the tax should be considered for other non-renewable resources, such as coal.  At this time, a severance tax on coal in Pennsylvania would likely produce more revenue than a tax on natural gas, as the coal industry is more developed and Pennsylvania produces a much larger share of the nation’s coal than gas supply. [10]   It would also remove an artificial incentive for producing coal, a dirtier burning resource, if only natural gas producers paid a severance tax.  Coal has produced substantial environmental costs which are borne by Pennsylvania taxpayers.  Fairness would dictate that the Commonwealth should consider a uniform policy applying a severance tax on coal, oil, other mining, and even timber at a rate competitive with surrounding states.

Pennsylvania can learn much from the natural gas boom in Texas, Arkansas, and Wyoming about how to manage the development of this great resource. [11] Appropriate taxation of natural gas must be part of that learning and part of the plan to protect taxpayers and return some of the benefit of this resource to the citizens of Pennsylvania.

 

 

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