This Pittsburgh Tribune-Review article discusses the recent state Supreme Court ruling that Allegheny County must reassess because it is taxing homes based on their 2002 worth, which is no longer accurate. With over 500,000 homes in the county, which includes Pittsburgh, the cost of reassessment is estimated to exceed $40 million.
The ruling is causing a lot of concern in the western counties near Pittsburgh. But should we care in Susquehanna County? Maybe.
According to the article, Supreme Court Justice Max Baer's concurring opinion to the court's order suggested setting a statewide standard of how accurate assessments need to be. That could take the heat off local officials. Under Baer's proposal, Allegheny, Westmoreland and 57 other counties ( including Susquehanna) would need to reassess, according to state data.
I'll discuss possible "standards" in a bit, but first some good tidings. Chief Justice Ronald D. Castille wrote in the majority opinion that regulation is best left to the Legislature. And it seems the Legislature is not inclined to force reassessments on almost all counties in the current economic climate. So, we may be saved by political inertia; unless the courts decide to extend the reassessment ruling to all counties.
What statewide standard might be used to judge the accuracy ( or fairness) of assessments? The proposal seems to be to require the county Coefficient of Dispersion (COD) to be less than 20 or preferably less than 15. That standard makes most counties in need of reassessment.
The COD is a measure of the degree of nonuniformity in the ratio of assessed value to market value of properties within a jurisdiction. It is calculated as the average deviation of a group of numbers from the median expressed as a percentage of the median. The smaller the COD, the closer all assessment ratios are to the median value and the "fairer" the assessment process.
At least, that would be the case if market value could be determined accurately for properties. In fact, it is much harder to determine market value in rural areas with lots of high acreage parcels and low turnover than in cities with more uniform properties and high sales turnover.
At any rate, regardless of the accuracy, the state has a data table of each counties COD, at this website :http://www.steb.state.pa.us/Assessmain.asp?OptionCounty=ALLOptionChoice=Disp.
The table lists Huntingdon County at the highest COD of 51.8; and Cumberland County at the lowest COD of 13.1. The mid-point in this range, and also the median, is 32.5 - by definition, half the counties have CODs higher than the median and half have lower CODs. Susquehanna County is right at the median with a COD of 32.5. The five northern tier counties average COD is 31.3.
Allegheny County has a COD of 30.3 and the state Supreme court ruled that it must reassess - but remember that it is a relatively high density county with relatively uniform properties and high sales turnover. That is a very different case from the rural counties and the court's reasoning, being specific to Allegheny County, may not apply more broadly.
As to a statewide COD standard, that seems to be only a judicial suggestion without much legislative interest. Let's hope it stays that way.
Showing posts with label Taxes. Show all posts
Showing posts with label Taxes. Show all posts
Sunday, May 17, 2009
Thinking about School Funding
This Susquehanna Independent article - Montrose school district enters into gas lease got me thinking about school funding and state aid as well as gas revenues. Probably related to dread of the upcoming August school property tax bill.
The bottom line is the Montrose Area School District will get a 3.3% one time funding increase this year from the gas lease and the federal stimulus, resulting in no property tax increase. Hopefully, some of those funds are being retained to keep taxes down next year. The State allocation of discretionary funds (e.g. Stimulus) does not seem fair to Susquehanna County. Read on for the details.
Montrose Area SD will get $2400/acre for a seven year gas lease on 90 acres; that's a one-time payment of $216,000. Sounds big, but it's less than 1% of the district's $25.2 million 2009-2010 budget. Or, at 3078 taxpayers, think of it as $67 per taxpayer.
The article also states that "3,078 taxpayers had been approved to get a homestead exemption and would realize a tax savings of an average of $361 each, down about $40 each from last year, when fewer persons qualified." You can find the exemption reduction numbers for counties here (pdf Object) as released by the PA Department of Education, showing a total of $613,200,000 in state-funded tax relief with $1,o98,584 going to Montrose Area SD.
In addition, the Federal Stimulus bill provided $720,163,740 to PA for it's school districts. This data table ( PA School District Aid Under SB 850) shows that the stimulus bill allocation to school districts averaged an 11.7% gain over the regular state SB850 funding, which was held constant for the 2009-10 school year. So, Montrose Area SD got another one-time plus up of $610,200.
Susquehanna County districts got stimulus plus-ups ranging between 5.4% and 8.5% ( average 6.9%), with Montrose getting a 7.3% gain. Basically, the stimulus allowed the state to increase school funding without increasing the state education budget. Even so, Susquehanna County's share was well below the state average of 11.7%. So where did the Federal stimulus funds go?
They are spread out quite a bit, but Lancaster County did well and Philadelphia County got a 20.1% increase or $212,594,400 over it's SB850 funds. Philadelphia's % gain is not the biggest, but it's $ gain is by far the biggest. Philadelphia got about 30% of the total stimulus funds. Of course, it is a very large school district and gets about 17% of the usual state (SB850) funds. Still. it managed to get proportionally almost double its fair share and about 3 times as big a % gain as Susquehanna County.
Doing a little math on these numbers is interesting.
First, the average Montrose Area SD taxpayer did well this year - gaining $198 from stimulus funds and $67 from gas leasing while losing $40 from homestead/farmstead reductions for a net gain of $225. Of course, those gas and stimulus funds won't be there next year. So, we won't get a tax increase this year; but no reduction is planned either. Maybe, some of the extra funds are being retained for tax savings next year. I hope so, they add up to 3.3% of the district's budget this year. I'd hate to have a "balanced" budget this year followed by a 3-4% tax hike next year.
Next, looking at the available state aid funds, we see that Montrose Area SD got about 1.8% of the state homestead/farmstead exemption funds, 1.4% of the state SB850 funds, and 0.9% of the federal stimulus funds. I can't explain why these ratios are so different.
I wonder if it could be related to the amount of political discretion the State Administration has in allocating the funds? The exemption funds are set by formula in the legislation; the stimulus funds are very discretionary. Just another thought.
The bottom line is the Montrose Area School District will get a 3.3% one time funding increase this year from the gas lease and the federal stimulus, resulting in no property tax increase. Hopefully, some of those funds are being retained to keep taxes down next year. The State allocation of discretionary funds (e.g. Stimulus) does not seem fair to Susquehanna County. Read on for the details.
Montrose Area SD will get $2400/acre for a seven year gas lease on 90 acres; that's a one-time payment of $216,000. Sounds big, but it's less than 1% of the district's $25.2 million 2009-2010 budget. Or, at 3078 taxpayers, think of it as $67 per taxpayer.
The article also states that "3,078 taxpayers had been approved to get a homestead exemption and would realize a tax savings of an average of $361 each, down about $40 each from last year, when fewer persons qualified." You can find the exemption reduction numbers for counties here (pdf Object) as released by the PA Department of Education, showing a total of $613,200,000 in state-funded tax relief with $1,o98,584 going to Montrose Area SD.
In addition, the Federal Stimulus bill provided $720,163,740 to PA for it's school districts. This data table ( PA School District Aid Under SB 850) shows that the stimulus bill allocation to school districts averaged an 11.7% gain over the regular state SB850 funding, which was held constant for the 2009-10 school year. So, Montrose Area SD got another one-time plus up of $610,200.
Susquehanna County districts got stimulus plus-ups ranging between 5.4% and 8.5% ( average 6.9%), with Montrose getting a 7.3% gain. Basically, the stimulus allowed the state to increase school funding without increasing the state education budget. Even so, Susquehanna County's share was well below the state average of 11.7%. So where did the Federal stimulus funds go?
They are spread out quite a bit, but Lancaster County did well and Philadelphia County got a 20.1% increase or $212,594,400 over it's SB850 funds. Philadelphia's % gain is not the biggest, but it's $ gain is by far the biggest. Philadelphia got about 30% of the total stimulus funds. Of course, it is a very large school district and gets about 17% of the usual state (SB850) funds. Still. it managed to get proportionally almost double its fair share and about 3 times as big a % gain as Susquehanna County.
Doing a little math on these numbers is interesting.
First, the average Montrose Area SD taxpayer did well this year - gaining $198 from stimulus funds and $67 from gas leasing while losing $40 from homestead/farmstead reductions for a net gain of $225. Of course, those gas and stimulus funds won't be there next year. So, we won't get a tax increase this year; but no reduction is planned either. Maybe, some of the extra funds are being retained for tax savings next year. I hope so, they add up to 3.3% of the district's budget this year. I'd hate to have a "balanced" budget this year followed by a 3-4% tax hike next year.
Next, looking at the available state aid funds, we see that Montrose Area SD got about 1.8% of the state homestead/farmstead exemption funds, 1.4% of the state SB850 funds, and 0.9% of the federal stimulus funds. I can't explain why these ratios are so different.
I wonder if it could be related to the amount of political discretion the State Administration has in allocating the funds? The exemption funds are set by formula in the legislation; the stimulus funds are very discretionary. Just another thought.
Saturday, February 28, 2009
Mathematics, Gas, and Taxes
Let's have fun with mathematics, starting with some interesting numbers about Susquehanna County.
We have 823 square miles of land area and 9 square miles of water; about 932 sq. miles total.
Pennsylvania has 46,058 square miles of surface. Dividing that into 832 yields 1.81% as The County share of the State's surface area.
Geologists and gas companies claim that 60% of the State's area overlays the Marcellus Shale deposits from which we hope to produce large amounts of natural gas. That works out to about 27,600 square miles. Susquehanna County is completely in that area. So, we overlay about 3% of the Marcellus Shale area in the state. The thickness of the shale layer in Susquehanna County is considered to be about twice the average. So, the shale gas value of our deposits is probably a much higher percentage, say perhaps 6%.
There are several estimates of the value of the Marcellus Shale. All are highly speculative until more drilling and production experience is gained. Governor Rendell uses an estimate of $1Trillion in his budget fact sheet on his proposed severance tax. On that basis, at just 3%, the county would have about $30Billion of shale gas under the surface. At higher % estimates for greater thickness, the value could double to $60Billion.
What do those numbers mean in more human terms - like an acre? At 624 acres per square mile times 830 acres in the county, the county has about 518,000 acres. Dividing that into $30Billion gives a value of about $58,000 per acre. At the higher percentages, that could exceed $100,000/acre. Pretty high for most land here!
Of course, these are "averages" and the real value of any specific parcel can be dramatically different depending on what really lies below and can be extracted. In the last couple of years gas companies have paid 5-year lease prices from $25 per acre to over $2,500 per acre for parcels with roughly comparable gas extraction potentials.
The lease prices vary based on the awareness of the landowners, the degree of company competition, the rising price of natural gas, and expectations of high payoffs from a small portion of the large amounts of land leased. Only some of the payoff may come from actually extracting gas from a parcel. The payoff can also come from flipping leases to other companies or from using the land for pipelines at very low annual payments instead of the high gas royalties hoped for by landowners. Some of the leased land will never be worth exploiting and it may be years before that culling is done.
For these reasons, using the lease price as a fair valuation of the underlying gas is apt to be very misleading. Yet, the county commissioners and township supervisors associations propose to use the lease price as the basis for taxing gas rights (or possible deposits) as property. The resulting tax may require companies and landowners to pay disparate amounts for similar parcels regardless of whether they can get any value from the assumed gas deposits.
How a property tax would be written to protect landowners from additional property taxes when they get no revenue is unclear. A severance tax avoids this issue by only taxing the produced gas. If there is no production, there is neither tax nor royalty income. At least, no one is threatened with foreclosure for failing to pay taxes on non-existent gas deposits, as might happen with a property tax.
Unfortunately, the Governor's proposed severance tax is intended to be used to reduce the state deficit and to pay for projects in the cities and counties that have nothing to do with the production of the gas. The burden of paying for gas-production related services (roads, social and law enforcement, etc.)will fall on the producing counties and towns that may see little of the state severance tax.
Before we jump on the need for any new taxes,it's worth noting that successful gas production yields both corporate income taxes and royalty income taxes to the state. The problem is that the state does not allocate a fair share of those taxes back to the local governments that provide the essential services.
The gas-producing counties and towns deserve a fair share of any gas related taxes whether from royalty income tax, corporate income tax, or severance tax. Getting it depends on the effectiveness of our legislators in writing a fair share allocation into the tax laws. And that brings us to some other numbers.
The US Census Bureau estimates Susquehanna County population at 41,123 in 2007. The comparable 2007 estimate for Pennsylvania was 12,432,792 ( the updated Jan09 estimate is now 12,419,930). New county data will be available in April, but the Susquehanna County population will still be about 0.3% of the state population.
So, 3%-6% of the Marcellus Shale gas value is located on land populated by only 0.3% of the voting public. These numbers do not look good for Susquehanna County getting its fair share of any natural gas tax devised in the political horse trading arena of the State Legislature.
Some other numbers may improve the outlook. As a percentage of the state, our population is only 0.3%; but we are 1.5% of the 67 counties; and we elect 1% of the 203 state representatives and 2% of the 50 state senators. Those numbers look more promising.
If we add representatives and senators from other Marcellus Shale areas, the numbers start to look like a strong minority voting block; if we add the other oil and gas producing areas of the state ( mostly the western half), the numbers have the potential to be a decisive voting block. As a reference point, last year,the DEP issued over 7000 gas well permits, but only 450 were for Marcellus Shale gas (about 15% of these in Susquehanna County).There may be a lot of allies for allocating a fair share of state (income or severance) tax revenues derived from gas production back to the producing towns and counties.
Of course, that's just potential; making it real requires a lot of alliance building around some common interests. And that effort is in the realm of politics not mathematics.
We have 823 square miles of land area and 9 square miles of water; about 932 sq. miles total.
Pennsylvania has 46,058 square miles of surface. Dividing that into 832 yields 1.81% as The County share of the State's surface area.
Geologists and gas companies claim that 60% of the State's area overlays the Marcellus Shale deposits from which we hope to produce large amounts of natural gas. That works out to about 27,600 square miles. Susquehanna County is completely in that area. So, we overlay about 3% of the Marcellus Shale area in the state. The thickness of the shale layer in Susquehanna County is considered to be about twice the average. So, the shale gas value of our deposits is probably a much higher percentage, say perhaps 6%.
There are several estimates of the value of the Marcellus Shale. All are highly speculative until more drilling and production experience is gained. Governor Rendell uses an estimate of $1Trillion in his budget fact sheet on his proposed severance tax. On that basis, at just 3%, the county would have about $30Billion of shale gas under the surface. At higher % estimates for greater thickness, the value could double to $60Billion.
What do those numbers mean in more human terms - like an acre? At 624 acres per square mile times 830 acres in the county, the county has about 518,000 acres. Dividing that into $30Billion gives a value of about $58,000 per acre. At the higher percentages, that could exceed $100,000/acre. Pretty high for most land here!
Of course, these are "averages" and the real value of any specific parcel can be dramatically different depending on what really lies below and can be extracted. In the last couple of years gas companies have paid 5-year lease prices from $25 per acre to over $2,500 per acre for parcels with roughly comparable gas extraction potentials.
The lease prices vary based on the awareness of the landowners, the degree of company competition, the rising price of natural gas, and expectations of high payoffs from a small portion of the large amounts of land leased. Only some of the payoff may come from actually extracting gas from a parcel. The payoff can also come from flipping leases to other companies or from using the land for pipelines at very low annual payments instead of the high gas royalties hoped for by landowners. Some of the leased land will never be worth exploiting and it may be years before that culling is done.
For these reasons, using the lease price as a fair valuation of the underlying gas is apt to be very misleading. Yet, the county commissioners and township supervisors associations propose to use the lease price as the basis for taxing gas rights (or possible deposits) as property. The resulting tax may require companies and landowners to pay disparate amounts for similar parcels regardless of whether they can get any value from the assumed gas deposits.
How a property tax would be written to protect landowners from additional property taxes when they get no revenue is unclear. A severance tax avoids this issue by only taxing the produced gas. If there is no production, there is neither tax nor royalty income. At least, no one is threatened with foreclosure for failing to pay taxes on non-existent gas deposits, as might happen with a property tax.
Unfortunately, the Governor's proposed severance tax is intended to be used to reduce the state deficit and to pay for projects in the cities and counties that have nothing to do with the production of the gas. The burden of paying for gas-production related services (roads, social and law enforcement, etc.)will fall on the producing counties and towns that may see little of the state severance tax.
Before we jump on the need for any new taxes,it's worth noting that successful gas production yields both corporate income taxes and royalty income taxes to the state. The problem is that the state does not allocate a fair share of those taxes back to the local governments that provide the essential services.
The gas-producing counties and towns deserve a fair share of any gas related taxes whether from royalty income tax, corporate income tax, or severance tax. Getting it depends on the effectiveness of our legislators in writing a fair share allocation into the tax laws. And that brings us to some other numbers.
The US Census Bureau estimates Susquehanna County population at 41,123 in 2007. The comparable 2007 estimate for Pennsylvania was 12,432,792 ( the updated Jan09 estimate is now 12,419,930). New county data will be available in April, but the Susquehanna County population will still be about 0.3% of the state population.
So, 3%-6% of the Marcellus Shale gas value is located on land populated by only 0.3% of the voting public. These numbers do not look good for Susquehanna County getting its fair share of any natural gas tax devised in the political horse trading arena of the State Legislature.
Some other numbers may improve the outlook. As a percentage of the state, our population is only 0.3%; but we are 1.5% of the 67 counties; and we elect 1% of the 203 state representatives and 2% of the 50 state senators. Those numbers look more promising.
If we add representatives and senators from other Marcellus Shale areas, the numbers start to look like a strong minority voting block; if we add the other oil and gas producing areas of the state ( mostly the western half), the numbers have the potential to be a decisive voting block. As a reference point, last year,the DEP issued over 7000 gas well permits, but only 450 were for Marcellus Shale gas (about 15% of these in Susquehanna County).There may be a lot of allies for allocating a fair share of state (income or severance) tax revenues derived from gas production back to the producing towns and counties.
Of course, that's just potential; making it real requires a lot of alliance building around some common interests. And that effort is in the realm of politics not mathematics.
Wednesday, February 11, 2009
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.
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.
Wednesday, January 28, 2009
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.
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.
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