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Energy Extraction Tax Would Help Fill Budget Gaps
On July 21, 2017
By: Sen. Jim Brewster
The governor, legislative leaders and lawmakers have spent a good portion of the last six months looking in every nook and cranny in search of revenue to balance the state’s $31.9 billion budget. What they have been unable to do, however, is to push past ill-founded arguments and industry scare tactics to tap the reservoir of available funding that lies 5,000 to 9,000 feet beneath most of Pennsylvania.
A reasonable shale extraction tax is a readily available source to ease current budget pain, maintain assistance to local governments impacted by drilling and provide a long-term funding stream for critical budget needs.
I have offered a proposal that would fashion a responsible Marcellus Shale extraction tax to be layered over the current Act 13 impact fee. The rate of the total levy would be capped at 5 percent – split between the current impact fee and a new severance tax. This rate is well in line with rates imposed on energy extraction in other states.
The value of unconventional gas well production was $7.8 billion in 2016. Gas extraction companies paid $173 million in impact fees for an effective tax rate of 2.2 percent. The impact fee rate is expected to decline to 1.2 percent by 2018. The average effective tax rate since 2011 has been 2.4 percent.
If my proposal had been adopted in 2016, impact fee payments of $173 million could have been made to counties and municipalities statewide — while an additional $216 million would have been available to fund investments in education.
The effective rate of the impact fee of 2.2 percent would have been augmented by a 2.8 percent severance tax. If a 5 percent tax rate had been imposed since 2011, Pennsylvania citizens would have benefited by having an extra $2.4 billion in tax revenues available to meet needs, instead of the $1.2 billion in impact fees that were generated. Arguably, had this tax been imposed, the annual scramble to cobble funds together to balance the budget would have been a thing of the past.
An energy severance tax is limited in scope and its burden would not fall on working families. In fact, an increasing portion of the tax would be paid by international purchasers as pipelines and distribution networks are completed. Plus, if the tax is levied responsibly, the market would remain competitive and shale drillers would be able to continue to invest and create jobs in Pennsylvania. It’s a win-win-win for the taxpayer, consumer and the industry.
Given the recent swoon in the development of new gas wells and the low price of the commodity, there has been considerable reluctance to move in the direction of a shale tax. While the market has been recently stagnant, ample evidence exists that a burst of drilling activity is on the horizon.
New pipelines are under construction, or being planned, to transport Pennsylvania energy to both domestic and international markets. In fact, the International Energy Agency predicts that production from the Marcellus Shale will increase by 45 percent by 2022.
Still, in the face of this positive news, detractors pan the potential of a new energy tax because they fear disinvestment by gas drilling companies. Lost in their argument is the clear lesson learned by the existence of the current meager impact fee. There is a tenuous relationship between energy tax rate and new development.
If low taxes or a shallow impact fees result in heightened investment and booming growth, then Pennsylvania – because it has a low tax rate — should be benefitting now from a drilling bonanza even in a soft market, regardless the price of gas. Moreover, with the paucity of gas and deep reserves, Pennsylvania will always be attractive to gas drillers. If some drillers feel the need to leave, they will be replaced by others who are interested in developing the play. That’s a free-market driven economic choice.
The truth is, a decision whether a well is drilled has little to do with energy extraction tax rates. The industry will drill a well when there is demand. It’s been that way in the energy industry since the days of the Drake oil well.
The cost of failing to responsibly tax the energy industry for last half decade have been steep and significant. In an era when taxpayers are being asked to do more, shale drillers need to do their part. It’s well past time.