Is Pennsylvania Wasting Its Fracking Wealth?

The state is going its own way in a plan to tax natural gas, but critics say the state is missing out on millions.

With AFP Story by Veronique DUPONT: US-Energy-Gas-Environment A worker walks toward a part of a Consol Energy Horizontal Gas Drilling Rig exploring the Marcellus Shale outside the town of Waynesburg, PA on April 13, 2012. It is estimated that more than 500 trillion cubic feet of shale gas is contained in this stretch of rock that runs through parts of Pennsylvania, New York, Ohio and West Virginia.Shale gas is natural gas stored deep underground in fine-grained sedimentary rocks. It can be extracted using a process known as hydraulic fracturing "“ or 'fracking' "“ which involves drilling long horizontal wells in shale rocks more than a kilometre below the surface. Massive quantities of water, sand and chemicals are pumped into the wells at high pressure. This opens up fissures in the shale, which are held open by the sand, enabling the trapped gas to escape to the surface for collection. 
National Journal
Clare Foran
April 15, 2014, 3 a.m.

In a dec­ade, Pennsylvania has fracked its way from a minor en­ergy play­er to one of the na­tion’s largest sup­pli­ers of nat­ur­al gas. But as im­press­ive a feat as that is, the state’s toughest chal­lenge lies ahead: how to turn its en­ergy boom in­to last­ing wealth and wel­fare for its cit­izens.

Most of the na­tion’s largest en­ergy states are try­ing to make that trans­ition by way of a sev­er­ance tax — a levy im­posed on the value of the re­source pro­duced. When the tax is ap­plied to nat­ur­al-gas pro­duc­tion, the more gas that comes out of the ground, the more money goes to the state.

Un­der the lead­er­ship of Re­pub­lic­an Gov. Tom Corbett, however, Pennsylvania is one of the few ma­jor pro­du­cers that has passed on a sev­er­ance tax, opt­ing in­stead for an al­tern­at­ive rev­en­ue col­lec­tion sys­tem.

Corbett says a sev­er­ance tax would be a mis­take, and that his sys­tem is fa­cil­it­at­ing the en­ergy boom while still giv­ing the state a fair cut of its profits. But by pur­su­ing an al­tern­at­ive ap­proach, Corbett has left him­self vul­ner­able to crit­ics who say he’s tak­ing too light a touch on the com­pan­ies de­vel­op­ing his state’s re­sources — and cost­ing Pennsylvani­ans mil­lions in the pro­cess.

De­term­in­ing who is right — the gov­ernor or his crit­ics — re­veals the dif­fi­culty of cal­cu­lat­ing just how much frack­ing does to fill a state’s cof­fers and yields a ques­tion with no easy an­swers.

THE CASE FOR THE CRIT­ICS

In 2012, the Key­stone State en­acted a fee on un­con­ven­tion­al wells drilled in the state. Pennsylvania’s im­pact fee is paid out an­nu­ally over a 15-year time frame at a rate that’s ad­jus­ted each year based on the price of nat­ur­al gas and the age of the well. In 2013, the fee meant that wells drilled in the state’s Mar­cel­lus shale form­a­tion came with an ad­di­tion­al $50,000 price tag.

Rev­en­ue from the fee has helped fund a broad set of pri­or­it­ies ran­ging from in­fra­struc­ture con­struc­tion and re­pair to im­ple­ment­ing en­vir­on­ment­al safe­guards. Sixty per­cent of the rev­en­ue goes dir­ectly to counties where drilling is tak­ing place, while the re­main­ing 40 per­cent is dis­trib­uted through a vari­ety of statewide pro­jects. It has made a sig­ni­fic­ant im­pact in com­munit­ies that have been the most heav­ily af­fected by drilling. In some of the counties with the highest well counts the fee has pro­duced an an­nu­al check whose value ap­proaches half of the jur­is­dic­tion’s total op­er­at­ing budget.

But rev­en­ue gen­er­ated by the fee has not kept pace with pro­duc­tion. Gas pulled from the ground in Pennsylvania doubled from 2011 to 2012, soar­ing from a yield of roughly 1 tril­lion cu­bic feet the first year to more than 2 tril­lion the next. Yet the flow of money from the im­pact fee ac­tu­ally de­creased in that same in­ter­val. The state brought in roughly $204 mil­lion from the fee in 2011. The fol­low­ing year, rev­en­ue dropped to $202.5 mil­lion.

Between 2012 and 2013, rev­en­ue from the fee in­creased by 11 per­cent, jump­ing to a re­cord high of close to $225 mil­lion last year. But the leap was sig­ni­fic­antly smal­ler than the over­all rise in pro­duc­tion. Nat­ur­al-gas out­put in­creased by more than 37 per­cent in the same peri­od, when it rose to 3.1 tril­lion cu­bic feet, ac­cord­ing to Pennsylvania state es­tim­ates.

Skep­tics say the math doesn’t add up. “We haven’t cap­tured the gains we’re see­ing in pro­duc­tion and that means we’re es­sen­tially giv­ing away money right now that oth­er states are col­lect­ing,” said Shar­on Ward, the ex­ec­ut­ive dir­ect­or of the left-lean­ing Pennsylvania Budget and Policy Cen­ter.

A re­port re­leased last month by a state data agency has ad­ded fuel to the fire. It con­cluded that Pennsylvania has the low­est ef­fect­ive tax rate on nat­ur­al-gas pro­duc­tion in a sur­vey of 11 of the largest shale-gas-pro­du­cing states.

The ana­lys­is — done by the Pennsylvania In­de­pend­ent Fisc­al Of­fice — was an at­tempt to com­pare tax rates in the pro­du­cer states, which range from Louisi­ana, which ranked as the second-largest nat­ur­al-gas-pro­du­cing state in 2012, ac­cord­ing to the En­ergy In­form­a­tion Ad­min­is­tra­tion, to Ohio, which came in at No. 19 on the same list of nat­ur­al-gas heavy hit­ters. And the res­ults — at least for Pennsylvania — were not pretty.

The agency cal­cu­lated an ef­fect­ive tax rate on nat­ur­al-gas pro­duc­tion for each state, a met­ric de­term­ined by adding up the value of taxes and fees levied on an un­con­ven­tion­al gas well di­vided by the mar­ket value of nat­ur­al-gas pro­duc­tion from the well over a 30-year peri­od. (The re­port did not, however, in­clude rev­en­ue gen­er­ated by cor­por­ate in­come tax, and Pennsylvania has one of the highest cor­por­ate tax rates in the na­tion at 9.99 per­cent.)

By this meas­ure, Pennsylvania had the low­est ef­fect­ive tax rate per well out of all the states when state and loc­al taxes were ad­ded in­to the equa­tion. The re­port cal­cu­lated the ef­fect­ive tax rate for an un­con­ven­tion­al well in the Key­stone State at only 0.6 per­cent un­der a high-pro­duc­tion, high-price scen­ario. The second-low­est rate came in at 1.4 per­cent in Ohio, while West Vir­gin­ia topped the charts with an ef­fect­ive rate of 7.5 per­cent.

THE CASE FOR CORBETT

But when it comes to the policy, Corbett stands be­hind his sys­tem, and he stands be­hind it loudly. The Re­pub­lic­an in­cum­bent is fa­cing a host of Demo­crat­ic chal­lengers in what is sure to be a close race for reelec­tion — and talk­ing up the fee every chance he gets.

“Thanks to Tom Corbett … Pennsylvania has … be­come Amer­ica’s second-largest pro­du­cer of nat­ur­al gas, and the be­ne­fits to Pennsylvani­ans have been re­mark­able,” a nar­rat­or in­tones in a Corbett cam­paign com­mer­cial be­fore go­ing on to say that the Mar­cel­lus shale gas in­dustry has “res­ul­ted in over 400 mil­lion dol­lars re­turned to loc­al com­munit­ies for loc­al pro­jects.”

The gov­ernor, in a bid to get more bang for his polit­ic­al buck, prefers to look at the num­bers in ab­so­lute terms and takes is­sue with ef­forts to com­pare the im­pact fee to tax policy in oth­er states. Corbett’s deputy chief of staff and en­ergy ex­ec­ut­ive, Patrick Hende­r­son, called the IFO re­port an “abysmal fail­ure.”

His reas­on­ing and that of the in­dustry is that the im­pact fee is fun­da­ment­ally dif­fer­ent than a sev­er­ance tax. “From the be­gin­ning the ef­fort to try to shoe­horn these two dif­fer­ent met­rics to­geth­er to bring about a com­par­is­on was fatally flawed,” Hende­r­son said.

The Mar­cel­lus Shale Co­ali­tion, a nat­ur­al gas in­dustry trade as­so­ci­ation, and the gov­ernor’s of­fice also say the re­port fails to draw an apt com­par­is­on by leav­ing out the im­pact of the Key­stone state’s cor­por­ate in­come tax, which is one of the highest in the na­tion, along with a slew of oth­er state-spe­cif­ic pro­vi­sions like the fact that Pennsylvania makes the in­dustry bear the cost to re­pair roads when they be­come dam­aged due to nat­ur­al-gas pro­duc­tion activ­ity.

An­oth­er de­fense offered up by the ad­min­is­tra­tion is that the gov­ernor be­lieves a sev­er­ance tax would send the wrong sig­nal to the in­dustry — and could even drive drillers out of town.

“There’s al­ways been the men­tal­ity in Pennsylvania that if you have a good thing you tax it to death. We don’t want to do that this time around. We have an op­por­tun­ity to get this right so that cap­it­al con­tin­ue to flow in­to the state and we can cre­ate eco­nom­ic op­por­tun­ity rather than crush it,” Hende­r­son said.

WHO’S RIGHT?

There’s no easy an­swer. It’s ex­tremely dif­fi­cult — if not im­possible — to fairly com­pare rev­en­ue and tax­a­tion from nat­ur­al-gas pro­duc­tion across state lines, as each state has dif­fer­ent levels of pro­duc­tion and its own idio­syn­crat­ic tax code.

Calv­in Kent, a pro­fess­or at West Vir­gin­ia’s Mar­shall Uni­versity and a tax-policy spe­cial­ist, says Corbett’s ar­gu­ment that high­er taxes dampen busi­ness pro­spects has some valid­ity, but it’s not as com­pel­ling a case as the gov­ernor may think.

“The main de­term­in­ant of drilling activ­ity is the price of nat­ur­al gas, and the gas is go­ing to be where it’s go­ing to be no mat­ter what,” Kent said. “So if the goal here is to raise rev­en­ue for the state then clearly Pennsylvania is for­go­ing an op­por­tun­ity.”

Corbett’s Demo­crat­ic chal­lengers see the de­bate as an op­por­tun­ity and they’ve been quick to weigh in. Each one of the four ma­jor con­tenders say they would en­act a sev­er­ance tax if elec­ted to of­fice, and pledge to use the tax to fund edu­ca­tion and in­fra­struc­ture as well as oth­er state pri­or­it­ies.

Yet while many claim Corbett could be do­ing more, it’s equally clear his policy has yiel­ded some be­ne­fits for Pennsylvania. And without the gov­ernor, the cur­rent fee would be but a fantasy. He helped shep­herd the nat­ur­al-gas rev­en­ue-col­lec­tion mech­an­ism through the state Le­gis­lature — a feat his Demo­crat­ic pre­de­cessor, former Gov. Ed Rendell, was un­able to achieve.

“Some people think taxes should be high­er. but the bot­tom line is that the dol­lars gen­er­ated by the fee aren’t be­ing talked about at a press con­fer­ence or on pa­per,” Hende­r­son said. “You have to ac­tu­ally be able to get what you’re pro­pos­ing across the fin­ish line or else it’s just empty air.”

THE CASE FOR THE CRITICS

In 2012, the Key­stone State en­acted a fee on un­con­ven­tion­al wells drilled in the state. Pennsylvania’s im­pact fee is paid out an­nu­ally over a 15-year time frame at a rate that’s ad­jus­ted each year based on the price of nat­ur­al gas and the age of the well. In 2013, the fee meant that wells drilled in the state’s Mar­cel­lus shale form­a­tion came with an ad­di­tion­al $50,000 price tag.

Rev­en­ue from the fee has helped fund a broad set of pri­or­it­ies ran­ging from in­fra­struc­ture con­struc­tion and re­pair to im­ple­ment­ing en­vir­on­ment­al safe­guards. Sixty per­cent of the rev­en­ue goes dir­ectly to counties where drilling is tak­ing place, while the re­main­ing 40 per­cent is dis­trib­uted through a vari­ety of statewide pro­jects. It has made a sig­ni­fic­ant im­pact in com­munit­ies that have been the most heav­ily af­fected by drilling. In some of the counties with the highest well counts the fee has pro­duced an an­nu­al check whose value ap­proaches half of the jur­is­dic­tion’s total op­er­at­ing budget.

But rev­en­ue gen­er­ated by the fee has not kept pace with pro­duc­tion. Gas pulled from the ground in Pennsylvania doubled from 2011 to 2012, soar­ing from a yield of roughly 1 tril­lion cu­bic feet the first year to more than 2 tril­lion the next. Yet the flow of money from the im­pact fee ac­tu­ally de­creased in that same in­ter­val. The state brought in roughly $204 mil­lion from the fee in 2011. The fol­low­ing year, rev­en­ue dropped to $202.5 mil­lion.

Between 2012 and 2013, rev­en­ue from the fee in­creased by 11 per­cent, jump­ing to a re­cord high of close to $225 mil­lion last year. But the leap was sig­ni­fic­antly smal­ler than the over­all rise in pro­duc­tion. Nat­ur­al-gas out­put in­creased by more than 37 per­cent in the same peri­od, when it rose to 3.1 tril­lion cu­bic feet, ac­cord­ing to Pennsylvania state es­tim­ates.

Skep­tics say the math doesn’t add up. “We haven’t cap­tured the gains we’re see­ing in pro­duc­tion and that means we’re es­sen­tially giv­ing away money right now that oth­er states are col­lect­ing,” said Shar­on Ward, the ex­ec­ut­ive dir­ect­or of the left-lean­ing Pennsylvania Budget and Policy Cen­ter.

A re­port re­leased last month by a state data agency has ad­ded fuel to the fire. It con­cluded that Pennsylvania has the low­est ef­fect­ive tax rate on nat­ur­al-gas pro­duc­tion in a sur­vey of 11 of the largest shale-gas-pro­du­cing states.

The ana­lys­is — done by the Pennsylvania In­de­pend­ent Fisc­al Of­fice — was an at­tempt to com­pare tax rates in the pro­du­cer states, which range from Louisi­ana, which ranked as the second-largest nat­ur­al-gas-pro­du­cing state in 2012, ac­cord­ing to the En­ergy In­form­a­tion Ad­min­is­tra­tion, to Ohio, which came in at No. 19 on the same list of nat­ur­al-gas heavy hit­ters. And the res­ults — at least for Pennsylvania — were not pretty.

The agency cal­cu­lated an ef­fect­ive tax rate on nat­ur­al-gas pro­duc­tion for each state, a met­ric de­term­ined by adding up the value of taxes and fees levied on an un­con­ven­tion­al gas well di­vided by the mar­ket value of nat­ur­al-gas pro­duc­tion from the well over a 30-year peri­od. (The re­port did not, however, in­clude rev­en­ue gen­er­ated by cor­por­ate in­come tax, and Pennsylvania has one of the highest cor­por­ate tax rates in the na­tion at 9.99 per­cent.)

By this meas­ure, Pennsylvania had the low­est ef­fect­ive tax rate per well out of all the states when state and loc­al taxes were ad­ded in­to the equa­tion. The re­port cal­cu­lated the ef­fect­ive tax rate for an un­con­ven­tion­al well in the Key­stone State at only 0.6 per­cent un­der a high-pro­duc­tion, high-price scen­ario. The second-low­est rate came in at 1.4 per­cent in Ohio, while West Vir­gin­ia topped the charts with an ef­fect­ive rate of 7.5 per­cent.

THE CASE FOR CORBETT

But when it comes to the policy, Corbett stands be­hind his sys­tem, and he stands be­hind it loudly. The Re­pub­lic­an in­cum­bent is fa­cing a host of Demo­crat­ic chal­lengers in what is sure to be a close race for reelec­tion — and talk­ing up the fee every chance he gets.

“Thanks to Tom Corbett … Pennsylvania has … be­come Amer­ica’s second-largest pro­du­cer of nat­ur­al gas, and the be­ne­fits to Pennsylvani­ans have been re­mark­able,” a nar­rat­or in­tones in a Corbett cam­paign com­mer­cial be­fore go­ing on to say that the Mar­cel­lus shale gas in­dustry has “res­ul­ted in over 400 mil­lion dol­lars re­turned to loc­al com­munit­ies for loc­al pro­jects.”

The gov­ernor, in a bid to get more bang for his polit­ic­al buck, prefers to look at the num­bers in ab­so­lute terms and takes is­sue with ef­forts to com­pare the im­pact fee to tax policy in oth­er states. Corbett’s deputy chief of staff and en­ergy ex­ec­ut­ive, Patrick Hende­r­son, called the IFO re­port an “abysmal fail­ure.”

His reas­on­ing and that of the in­dustry is that the im­pact fee is fun­da­ment­ally dif­fer­ent than a sev­er­ance tax. “From the be­gin­ning the ef­fort to try to shoe­horn these two dif­fer­ent met­rics to­geth­er to bring about a com­par­is­on was fatally flawed,” Hende­r­son said.

The Mar­cel­lus Shale Co­ali­tion, a nat­ur­al gas in­dustry trade as­so­ci­ation, and the gov­ernor’s of­fice also say the re­port fails to draw an apt com­par­is­on by leav­ing out the im­pact of the Key­stone state’s cor­por­ate in­come tax, which is one of the highest in the na­tion, along with a slew of oth­er state-spe­cif­ic pro­vi­sions like the fact that Pennsylvania makes the in­dustry bear the cost to re­pair roads when they be­come dam­aged due to nat­ur­al-gas pro­duc­tion activ­ity.

An­oth­er de­fense offered up by the ad­min­is­tra­tion is that the gov­ernor be­lieves a sev­er­ance tax would send the wrong sig­nal to the in­dustry — and could even drive drillers out of town.

“There’s al­ways been the men­tal­ity in Pennsylvania that if you have a good thing you tax it to death. We don’t want to do that this time around. We have an op­por­tun­ity to get this right so that cap­it­al con­tin­ue to flow in­to the state and we can cre­ate eco­nom­ic op­por­tun­ity rather than crush it,” Hende­r­son said.

WHO'S RIGHT?

There’s no easy an­swer. It’s ex­tremely dif­fi­cult — if not im­possible — to fairly com­pare rev­en­ue and tax­a­tion from nat­ur­al-gas pro­duc­tion across state lines, as each state has dif­fer­ent levels of pro­duc­tion and its own idio­syn­crat­ic tax code.

Calv­in Kent, a pro­fess­or at West Vir­gin­ia’s Mar­shall Uni­versity and a tax-policy spe­cial­ist, says Corbett’s ar­gu­ment that high­er taxes dampen busi­ness pro­spects has some valid­ity, but it’s not as com­pel­ling a case as the gov­ernor may think.

“The main de­term­in­ant of drilling activ­ity is the price of nat­ur­al gas, and the gas is go­ing to be where it’s go­ing to be no mat­ter what,” Kent said. “So if the goal here is to raise rev­en­ue for the state then clearly Pennsylvania is for­go­ing an op­por­tun­ity.”

Corbett’s Demo­crat­ic chal­lengers see the de­bate as an op­por­tun­ity and they’ve been quick to weigh in. Each one of the four ma­jor con­tenders say they would en­act a sev­er­ance tax if elec­ted to of­fice, and pledge to use the tax to fund edu­ca­tion and in­fra­struc­ture as well as oth­er state pri­or­it­ies.

Yet while many claim Corbett could be do­ing more, it’s equally clear his policy has yiel­ded some be­ne­fits for Pennsylvania. And without the gov­ernor, the cur­rent fee would be but a fantasy. He helped shep­herd the nat­ur­al-gas rev­en­ue-col­lec­tion mech­an­ism through the state Le­gis­lature — a feat his Demo­crat­ic pre­de­cessor, former Gov. Ed Rendell, was un­able to achieve.

“Some people think taxes should be high­er. but the bot­tom line is that the dol­lars gen­er­ated by the fee aren’t be­ing talked about at a press con­fer­ence or on pa­per,” Hende­r­son said. “You have to ac­tu­ally be able to get what you’re pro­pos­ing across the fin­ish line or else it’s just empty air.”

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