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OP-ED: Natural gas and its economic benefits for south-central Pa.
I begin my comments by disclosing that I have a bias in favor of York County and south-central Pennsylvania over other counties and regions of the commonwealth. I offer no apologies for narrowing my focus as I raise the issue of the proposed severance tax, a tax on Marcellus Shale gas extracted and sold (as opposed to an impact fee on wells drilled, which we currently have in place).
During the early years of natural gas fracking there was extensive debate over whether to tax this industry. I admit other issues were more pressing on my mind at that time, especially since there is no Marcellus or Utica shale in our region. The York County Chamber of Commerce polled its membership in the summer of 2011, and over 65 percent of the respondents said they believed Marcellus Shale revenue should be taxed in Pennsylvania in a manner similar to other Marcellus Shale natural gas producing states. The information was shared for educational purposes but no formal position was adopted.
As budget negotiations continue, the time is right to gather the facts and thoughtfully evaluate the current impact fee versus Gov. Tom Wolf's proposed severance tax.
Here is what the opposition to the severance tax has to say: the natural gas industry already pays significant taxes, gas operators pay the same taxes that every other business in Pennsylvania pays, Pennsylvania is the only state that imposes a special impact tax that will have generated nearly $830 million by April of this year, directly benefitting all 67 counties throughout the commonwealth, Pennsylvanians have realized more than $700 million in royalties from energy-development on public lands, more than 200,000 employed by or support this industry and generate additional tax revenue; energy taxes could discourage capital investment and make Pennsylvania less competitive.
Here is what the proponents to the severance tax have to say: Pennsylvania is now the second-largest producer of natural gas in the United States and the only major producer without a severance tax; proponents research shows that severance taxes have little to no impact on oil and gas production as drilling decisions are driven primarily by expectations about prices; natural gas taxes are often paid by out-of-state consumers so Pennsylvania consumers pay severance taxes imposed by other states but have failed to collect revenue when our Marcellus Shale gas is exported.
While it's important to hear both sides of the debate, I find that an impartial, non-partisan analysis sheds a lot of light on the issue and for that, I turned to the state's Independent Fiscal Office (IFO). I have reviewed the IFO's natural gas extraction interstate tax comparison report from 2014 and their analysis of the FY 2015-16 Executive Budget as well as recent testimony and revenue updates. Once again I have found the IFO's work to be thorough and credible and quite impressive given the complexities associated with analyzing multiple states diverse tax policies. The impact fee is unique to Pennsylvania in comparison to the other states that use various iterations of a severance tax. To make their comparison relevant and meaningful, the IFO's analysis used a summary statistic referred to as the Effective Tax Rate (ETR).
The current Pennsylvania impact fee yields the lowest ETR (state taxes only) whereas the proposed severance tax would yield the highest ETR in the state-to-state comparison. The proposed severance tax includes a value-based tax, a volume-based tax, disallowance of deductions for post-production costs and a statutory price floor.
Time for me to insert my York County bias. While the governor's proposed severance tax contains elements I believe should be re-evaluated, I do believe the impact fee revenue is stagnant and will remain stale, based on IFO projections, because the impact fee is based on the number of wells and not the value of the gas produced by the wells. Impact fee payments to non-fracking counties, like York, will begin to shrink. The production forecasts contained in the IFO analysis indicate in 2016 and beyond 80 percent or more of Pennsylvania's natural gas production will be exported, shifting most of the severance tax impact out of state and bringing revenue into Pennsylvania.
My belief is that a reasonable, balanced approach in discussing an impact fee versus a severance tax in Pennsylvania needs to occur. There is merit to both sides of the argument in this case and all of the analysis should be looked at carefully and spiritedly debated for what is truly in the best interest of Pennsylvania. Our members of the General Assembly should be particularly concerned what the impact will be for those of us in York County and south-central Pennsylvania if the revenues generated by the impact fee erode or stagnate as suggested in the IFO report.
As a leader of the economic development organization of York County I have witnessed first-hand how economic development program funding has steadily decreased in recent budget cycles, leaving economic development organizations like the York County Economic Alliance with fewer tools to compete. Impact fee or severance tax revenues should help support economic development programming in our state.
While the Economic Alliance has not taken a formal position on the severance tax issue, I contend that thoughtful consideration needs to occur on the impact fee versus a reasonable severance tax on natural gas extraction in Pennsylvania. I hope that debate and discussion is one that is deeply rooted on the non-biased analysis of the IFO and what truly is in the best interest for our community.
— Darrell W. Auterson is president and CEO of the York County Economic Alliance.