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Those Fracking Taxes, No Fees, No Taxes …

Gov. Tom Corbett told reporters Wednesday that he remains opposed to any severance tax on natural gas drilling in the state, but he is open to proposals allowing counties and municipalities to levy their own “fees.” He also said that he will hold off a final judgment until he receives a report from the Marcellus Shale Advisory Commission, due out in July. However, it is fairly likely that the final report will be very business-friendly as the Patriot has reported that business and industry representatives on the 30-member board far outnumber those generally aligned with environmentalists. The full list of members is posted here and their first meeting is Friday, March 25 in Harrisburg.

Corbett also told the media not to confuse a “fee” with a “tax.” Presumably, shifting the responsibility for levying a financial burden on the industry from the state to the counties would fulfill the governor’s “no tax hike” pledge. However, just such a proposal was floated at a January hearing about the impact of the industry, particularly on rural, northern tier counties where much of the drilling is happening.

Severance Tax Proposals

While there is no proposal yet to allow local and county governments to assess such fees, six Democrats and a Republican introduced SB 352 in early February to actually levy a severance tax on natural gas extraction. It was referred to the Senate Finance Committee, which has not scheduled a hearing on the bill. Two of the bill’s Democratic co-sponsors sit on the finance committee.

SB 352 would impose a tax of five percent of gross profits plus 4.6 cents per thousand cubic feet of natural gas extracted. In contrast, a proposal that nearly passed in 2010 would have imposed a tax of 39 cents per thousand cubic feet.

Sen. Ted Erickson, the sole Republican co-sponsor of the senate bill and chair of the Senate Majority Policy Committee held a hearing on natural gas drilling in late January. He said:

Clearly, there is a need for some sort of consistent funding mechanism to help local governments address the issues that arise when wells are built in their area, as well as funding for the Commonwealth for its activities related to monitoring, inspecting and updating regulations. By working with all levels of government and the industry, we have the opportunity now to address many of these issues.

In the House, Rep. Greg Vitali is the lead sponsor of a companion bill, HB 33, which mirrors the language in SB 352. Vitali said:

Pennsylvania is the only major natural gas producing state in the nation that does not have a severance tax or fee in place. Out-of-state companies are profiting from the Commonwealth’s resources, and the Commonwealth should benefit too.

He also explained that the tax would raise an estimated $245 million for the upcoming fiscal year and $570 million by 2015. The revenues would be shared by the general fund, local governments and environmental projects, including the depleted Growing Greener fund.

The problem for severance tax advocates, of course, is Corbett’s vow not to raise taxes of any kind. Even if SB 352 or another natural gas tax would make it through the legislature, Corbett would likely veto it. That would mean both houses would need a two-thirds majority to override the veto. Even if the tax would appear as part of another bill, Pennsylvania governors have a line-item veto power.

Support and opposition

Despite Corbett’s pledge, Pennsylvanians seem supportive of a natural gas tax. A Franklin and Marshall College poll conducted this month found that 62 percent favor a tax on natural gas extraction. According to the crosstabs, 57 percent of Republicans favor such a tax. The only other tax proposal with more support was a tax on smokeless tobacco products. Apparently, the governor’s budget address did nothing to swing public sentiment as a January poll conducted by Susquehanna Polling and Research found 63 percent support for such a tax.

The Marcellus Shale Coalition, an industry group representing the interests of the natural gas drillers, does not necessarily object to a severance tax. However, they disagreed with the 39 cent rate proposed last year as too high to be competitive. In that statement issued last year, the coalition said, “(O)ur industry maintains its support for a competitively structured severance tax that allows for capital recovery and reinvestment, comparable to other leading shale gas producing states, such as Arkansas, Texas and Louisiana.”

The Pennsylvania Chamber of Business and Industry also opposed last year’s tax proposal, but left the door open for a compromise at a lower rate, which the current proposals offer. Chamber Vice President Gene Barr of Government and Public Affairs said last year:

It is possible for the legislature to pass a responsible severance tax that addresses the various concerns that have been raised, environmental and otherwise, while not harming the economic promise of the Marcellus Shale industry.

The progressive Pennsylvania Budget and Policy Center supports a severance tax and have created a graphic on their website showing how many millions of dollars the state has already lost from failing to levy a tax. They explain that most states tax either tax the gross profits on a wellhead or levy a flat fee per thousand cubic feet. While the HB 33/SB 352 proposals would tax both, PBPC notes most producers prefer the flat fee as it is easier to calculate and more predictable. Another progressive group, PennFuture, supports a “substantial” severance tax, a moratorium on drilling leases on public lands and additional environmental regulations. Renew Growing Greener, a group working to replenish the state’s environmental fund, supports putting a significant portion of any severance tax toward Growing Greener.

The conservative Commonwealth Foundation, on the other hand, argues that a significant severance tax would drive drillers away from the state. They also note that other states delay implementation of such taxes in order to allow drillers to recoup upfront costs.

The County Commissioners Association of Pennsylvania contends that a portion of any severance tax should be directed to local governments. However, CCAP is more interested in reversing the 2002 state Supreme Court decision Independent Oil and Gas Association vs. Fayette County that ruled oil and gas cannot be subject to property taxes. A reversal of that decision would be a revenue boon to Marcellus Shale counties. On the other hand, many companies lease land for drilling and the specifics of the lease would determine whether the landowner or the drilling company would shoulder the property tax burden.

Natural gas in Pennsylvania

The public and special interest opinion on a severance tax is only part of the story. On March 10, a public hearing in Pittsburgh illustrated both sides as some people talked about the new and badly-needed jobs as well as environmental impacts. Additionally, the industry creates economic ripples as state sales tax and local tax revenues increase in Marcellus Shale counties. The Marcellus Shale Coalition also notes that producers have invested $4 billion into the state. While the trucks needed for the work do cause damage to the local roads, the companies have been investing in repairs.

But there are significant drawbacks. Anecdotal evidence suggests that hotel rooms in the region are filled with employees of the drilling companies. In rural Wysox Township in eastern Bradford County, a hotel owner is constructing a new 40-unit building out of pre-fabricated units. The owner told the Towanda Daily Review that the demand for more rooms is driving demand for hotel space. However, the region also offers outdoor tourism destinations and there are fears that businesses catering primarily to tourists will suffer — even as restaurants and convenience stores thrive – as tourists compete with drillers for limited hotel rooms during peak tourist seasons during the summer and autumn. Hunters are also concerned that all of the drilling activity could affect harvests in addition to being squeezed out of hotels.

This situation also poses a problem for local governments that use the state and local hotel taxes for tourism promotion. Under state law, anyone who stays in a hotel room for 30 days is considered a “resident” and the tax does not apply. One Bradford County hotel has been completely rented by a drilling company and has paid no hotel tax for months.

Finally, there is the health risk. At issue is the process known as hydraulic fracturing or “fracking.” The Halliburton, the company once headed by former Vice President Dick Cheney, developed the technology in 1949. New horizontal drilling technologies and marketing incentives helped dramatically increase the use of the technology since 2007. Source Watch, a publication of the liberal Center for Media and Democracy, details how Cheney urged the U.S. Congress to exempt fracking from regulation by the U.S. Environmental Protection Agency. This so-called “Halliburton Loophole” does not apply to state regulations, meaning the Pennsylvania Department of Environmental Protection has the responsibility to regulate and enforce those regulations until Congress restores EPA’s authority to regulate fracking. The liberal Center for American Progress in Washington DC called on Congress and the EPA Monday to strengthen water and air pollution measures in regards to fracking operations.

The problem is that the chemicals used in fracking are not particularly healthy to humans, animals and plants if they get into ground and surface water supplies. Halliburton recently began to disclose the chemicals used in this process and they include hydrochloric acid, methanol, acetic acid and formaldehyde. These chemicals are mixed with large amounts of water and sand and injected into the ground in order to get to the natural gas deposits. While there are plenty of reports of suspected contamination, it has been the iconic scene in the documentary Gasland of a man lighting his tap water on fire that sparked the public’s attention to the issue.

The Commonwealth Foundation, writing on their blog “Energy Facts Pa.,” claims that the Fracking process itself is not to blame for contamination. Rather, they claim, contamination is caused by the disposal of wastewater or resurfacing of wastewater caused by poor well design. Commonwealth foundation claims that drillers are constantly making improvements to well designs and adds that current laws fine violators and hold them responsible for remediation efforts.

There have also been scares of radioactive materials getting into rivers as the fracking process unlocks uranium in the rocks underground. DEP sampled seven of them and found no elevated traces of radioactivity. Additionally, there have been documented cases of gas wells blowing out, sending gas and polluted water into the air.

Since January DEP regulations have prohibited dumping wastewater with more than 500 milliliters per liter of dissolved solids into the watersheds, effectively preventing the dumping of frack water. Some industry professionals claim that the new regulations will be a challenge to the industry. In response, drilling companies claim they can recycle most of the water used in the fracking process, minimizing waste water, though critics remain skeptical as millions of gallons of frack water still ends up in municipal treatment plants, often ones not designed to treat that kind of capacity.

Natural gas is currently the country’s most efficient alternative to coal and oil. Washington DC, for example, runs their entire city bus fleet on natural gas. Unfortunately, extracting it from the ground has serious environmental and social impacts. Pennsylvania remains the sole major natural gas producer that does not charge a tax to help address these issues. A high tax might drive the drillers away, but a tax haven would likely attract even more drilling with no revenue benefit to the state or municipalities.

March 24, 2011 at 7:32 am

--Chris McGann

Tags: #PAelect, Fees, Greg Vitali, marcellus shale, pa2012.com, severence tax, Tax, Ted Erickson, Tom Corbett

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