Natural Gas Taxes and Services

What's a fair and reasonable way for townships to tax natural gas ?

That's the essence behind a discussion at the NTC January meeting. The discussion was about a PSATS (Pennsylvania State Association of Township Supervisors) proposal to levy property taxes based on the value of leases. It was a pretty vague proposal and the consensus was that it would be too hard to administer and should be opposed. One person argued that it was fair to tax the underlying gas value since some properties were being sold without gas rights. So, the gas rights owner escaped property taxes while the surface rights owner paid the full tax burden.

Interesting issue - I agree with both positions.

The problem is that Pennsylvania tax policy has a serious imbalance between the taxes municipalities can levy and the services demanded by gas extraction. While I can't comment on the PSATS proposal because the specifics were not defined, I can discuss the issues involved in making a fair tax and offer some suggestions.

If you don't want to read the full discussion, here is my bottom line. The state should allocate a significant part of its gas-based royalty income and, if passed, severance taxes to the counties and towns from which those tax revenues were generated. The new revenue can pay for the new services and reduce local property taxes. It can be administered as easily as the gasoline/fuel tax allocation for road maintenance.

Municipalities rely mainly on property taxes, which are split roughly 1/4 to town, 1/4 to county, and 1/2 to school. While they can impose a 1% earnings tax ( shared 50-50 with schools), that tax does not apply to gas royalties. So a town gets no additional revenue from gas extraction; but the town is expected to keep the roads open under heavy truck traffic. This results in an imbalance between service demand by and revenue from gas operations. Much the same happens for county bridges and for other social and law enforcement costs.

Seeking extra revenue for the extra costs is reasonable. If the only source is a property tax, everyone pays the price for services required for only a few. Of course, one way out is to charge the gas companies a high enough fee for heavy weight truck volume on the roads under a Post and Bond ordinance to pay for damage repair. Every town should be doing this. And the state legislature should increase the bond limits and fees appropriately.

There is still the question of other costs and of how to split fairly property taxes between the surface owner and the gas rights owner. Today, the surface owner pays the full tax. If he does not own the gas rights, perhaps he is being overcharged compared to someone who owns both.

But how to compute fairly the percentage of taxes due to each owner? How do we assess or price the "value" of underground gas rights separately from the "value" of surface rights? If the gas rights are leased instead of owned, should the leasing company pay a property tax for its fair share? Companies do get loans and financing based on the value of their leased gas reserves, but they also change those values based on market factors, just as they pay more or less to lease equivalent properties at different times. If it gas can't be extracted from a property, the value of those gas reserves have zero value.

As an example, the Wall Street Journal reported today that Chesapeake Energy " said it will record a $1.8 billion fourth-quarter impairment charge to its natural gas and oil properties, ... The charges are an admission that some of the assets the nation's largest natural-gas producer acquired are no longer worth as much as once thought." This is a quarterly change in assessed value made by one leading gas company; others may change differently. How can county tax assessors keep up with this sort of changing market value and be fair to all?

Furthermore, since the Rule of Capture law applies to Marcellus Shale gas, the gas is considered "fugitive" (like a deer) and able to flee from parcel to parcel and belongs to whoever drains (captures) it with a well. That's not a good basis for tax assessment. I agree with the man who said it would be too hard to administer.

So what to do? The problem is hard to solve locally because the state has created this imbalance by its tax policy and the state should correct its policy to solve the problem.

The State gets additional gas-based income taxes from the companies and from the royalty owners. Some of that should be sent to the counties and towns that are providing the services that make possible the added revenue.

The legislature considered a severance tax bill last session. A severance tax taxes the value of gas removed or sold as it happens. No one pays unless they also are making money from the gas sale. If one is passed, it should have explicit provisions for sending a high percentage of the tax revenue to the specific counties and towns that are producing the revenue. That would assure that the gas profits pay for the added services. The additional revenue could be used to reduce property taxes in those towns and counties.

By allocating gas-based state royalty income or severance taxes back to the towns and counties that produce those revenues, the gas-rights owners pay a tax not paid by surface-only owners. By allowing some property tax reductions for the surface owners, this approach provides a fair tax balance for the two types of property owners. And it is easy to administer.

If you agree, let your state Representative and Senator know.