Study: Pa. shale-gas fees lowest among 11 states

Posted: March 22, 2014

Pennsylvania's fee on Marcellus Shale natural-gas wells is the lowest among 11 states examined in a study released Thursday by the Independent Fiscal Office, the state legislature's nonpartisan budget agency.

The IFO said Pennsylvania could collect less than 1 percent of the value of the production from shale-gas wells during their lifetime. Under the same scenario in neighboring West Virginia, the wells would generate nearly 12 times the tax revenue.

The state agency's report will likely rekindle a smoldering debate in the coming gubernatorial election over whether Pennsylvania set its impact fee too low in 2012.

"Generally speaking, I think this report highlights what we've said for a while: The impact fee is low compared to other states," said Michael Wood, research director for the Pennsylvania Budget and Policy Center, a liberal-leaning Harrisburg think tank.

The Marcellus Shale Coalition, an industry trade group, was quick to denounce the report's analysis because it did not take into account other costs and taxes that the group said were comparatively high in Pennsylvania.

"Those who oppose shale development will inevitably seek to leverage this flawed analysis as a rallying cry," the trade group said in a statement, "based purely on politics rather than objective facts and economic realities, for higher energy taxes on businesses and families."

Pennsylvania is unique among gas-producing states in that it does not tax the volume or value of natural gas extracted, but assesses a uniform impact fee per well.

The authors of the impact fee, which was included in the 2012 oil and gas law known as Act 13, were careful not to call it a tax, but an assessment to compensate government for some of the social and environmental impacts of gas drilling.

The impact fee, which is collected and distributed by the state Public Utility Commission, varies according to the market price of natural gas. In 2012, the first year the fee was imposed, the rate was $50,000 per well. Last year, when gas prices were low, the rate was $45,000 per well.

In its first two years, the fee generated about $400 million in revenue, which was distributed to state agencies, municipalities, and counties. Local governments in shale-gas-producing areas receive the bulk of the funds, but every county gets a sliver.

Comparing Pennsylvania's impact fee with production or severance taxes in other states is a challenge because of the highly politicized nature of the debate - some analyses by advocacy groups tend to include or exclude items that reflect their biases.

The Independent Fiscal Office, created in 2010 and modeled on the nonpartisan Congressional Budget Office, conducted its analysis at the request of state Sen. David G. Argall (R., Schuylkill). The 72-page report contains no policy recommendations.

"We can only present data and our findings," said IFO director Matthew J. Knittel.

The IFO calculated an "effective tax rate" assessed on individual wells. Its analysis also included property taxes, which are levied on gas reserves in states such as Texas and West Virginia, but not in Pennsylvania.

The IFO's effective tax rates are based on the lifetime of a well that comes on line in 2014. Advances in drilling technology have dramatically increased the amount of gas produced from wells, which reduces the effective rate in Pennsylvania, where the impact fee is fixed regardless of how little or how much gas is produced.

According to the IFO, Pennsylvania's effective lifetime tax rate ranges from 1.6 percent for a low-production well when gas prices are low, to 0.6 percent for a high-production well when prices are high.

In Texas, the only state that produces more natural gas than Pennsylvania, the effective severance tax is 3.7 percent. In West Virginia, where the Marcellus formation is attracting much drilling activity, the effective severance tax rate is about 5.8 percent.

When local taxes are added in - mostly property tax - the effective Texas rate jumps to 4.6 percent, and the West Virginia tax rate comes in about 7.2 percent to 7.5 percent.

Using IFO's analysis, only Ohio's production tax comes close to Pennsylvania's fee. The Buckeye State assesses an effective rate ranging from 1.4 percent to 1.8 percent, it said.

Industry advocates say Pennsylvania's higher permit fees, higher sales tax, higher well-bonding fees, and high corporate tax rate - 9.9 percent - are not included in the IFO analysis, and so the comparison is skewed. Texas and Ohio do not have a corporate income tax.

"While Pennsylvania does not have a severance tax on oil and natural-gas development, nor any other extractive industry, the commonwealth has a host of taxes and fees that other oil- and gas-producing states do not have," the Marcellus Shale Coalition said in its statement.

Knittel said it was impossible to include income taxes in the equation because gas producers did not disclose their profit for each well and because many producers were multistate corporations that had "unique factors" to apportion income to the states in which they operate.

"Hence, even if total profits could be identified," the IFO report said, "it is unclear how much would be taxed at a particular state corporate income tax rate."

215-854-2947 @maykuth

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