More on Taxes and Gas Extraction

With the release of the Governor's budget, the issues discussed in my last post become more immediate and focused. The Governor proposes a severance tax of 5% plus 4.7 cents per thousand cubic feet (mcf) of gas at the wellhead ( Marcellus Budget ). At the current market price of about $4.60/mcf, that is effectively a 6% tax. This severance tax will be the political ground zero for all legislative negotiations on taxing natural gas.

I have argued against the property tax assessment of gas deposits and rights based on lease value, as advocated by both the CCAP ( County Commissioners Association of Pennsylvania and the PSATS ( Pennsylvania State Association of Township Supervisors) in their 2009 priorities lists. I believe those taxes are neither fair nor practical to administer. With the Governor's proposal on the table, they are a distraction to a political strategy of gaining a local government allocation of any severance tax revenues.

I still believe that the gas extraction business will more than pay its way based on the additional corporate taxes and royalty income taxes that it generates. And it will grow our economy. A substantial portion of those new revenue streams from existing taxes should be allocated to the local counties and towns that are producing the gas and bearing the burdens of servicing the industry's needs.

That should happen in any event; but it may not be practical to get it now. If a severance tax is in our future, we should be sure to get a substantial revenue stream devoted to the producing counties and towns. We also need to be sure we do not overtax and become less competitive than other gas-producing states. A 6% severance tax may seem small compared to Texas's 7% tax; but Texas has no income taxes and that makes them more attractive than us to gas producers.

We need a balanced tax policy that keeps us competitive and fairly recompenses the gas-producing towns, counties, and land owners. That should result in property tax reductions in those towns and counties. From a practical politics standpoint, the best strategy is to abandon the PSATS and CCAP positions on property tax assessment of gas rights and focus on getting a substantial allocation of the severance tax to the producing counties and towns to reduce property taxes and to fund the local services that are essential to efficient gas production. This funds allocation could be administered as easily as the liquid fuel tax for road maintenance.

By the way, the Governor's Marcellus Budget, above, estimates severance tax revenues of $1,819.3 Million over the next 5 years. Susquehanna County overlays about 3% of the Marcellus Shale deposits in Pennsylvania. However, based on shale thickness and drilling activity, our share of the state's gas production is likely to be considerably higher ( maybe 6-10%) over the next 5 years. With a 6% share, Susquehanna county would generate $109 Million of that 5- year revenue stream. A substantial portion of that would pay a lot of local bills.

For the record, I'm attaching a copy of a letter to the local newspapers on this topic; hopefully it will be published in the 18 February editions. The letter :

Fair Taxes from Gas Extraction

Under current state law, towns and counties cannot assess property taxes on gas deposits or rights. Hence, they get no additional revenue from natural gas extraction, but must keep the roads and bridges open under heavy truck traffic and provide social and law enforcement services.

Both county (CCAP) and township (PSATS) associations propose the State allow property taxes on gas rights based on lease values. This proposal is neither fair nor practical.

How do we assess fairly the "value" of underground gas rights separately from surface rights? Gas companies pay different lease prices for comparable land at different times. If gas can't be extracted or the property is not leased, is the value zero? It's hard to make fair assessments and to administer this tax.

Governor Rendell proposes a new severance tax on gas at the wellhead of effectively 6% at current prices in addition to existing income taxes on royalties and corporate earnings. Too much taxation can drive gas producers to other states. We need a balance that keeps us competitive and fairly recompenses the gas-producing towns, counties, and landowners.

If gas is extracted, State tax revenue is increased by the new profits and royalties. By allocating a significant part of gas-based royalty and corporate income taxes and, if passed, severance taxes to the counties and towns from which those tax revenues were generated, the gas-rights owners pay a tax not paid by surface-only owners. The new revenue can pay for the new services and reduce local property taxes. Any severance tax should be kept low to encourage production here and should flow mostly to the gas-producing local governments.

This approach treats both types of property owners fairly, pays for the added community services,and can be administered as easily as the gasoline/fuel tax allocation for road maintenance. For more information, go to www.jessupjottings.blogspot.com.