Tax the frackers? It’s not that simple, noted economist says

Tax the frackers? It’s not that simple, noted economist says


By Joe Benish

While the debate rages about how to raise much-needed revenues for the Commonwealth’s cash-strapped budget, the cry to simply add an extraction tax to the Marcellus Gas fracking industry is a familiar cry, along with the long-standing opposition to such a tax from Gov. Tom Corbett.

Marcellus leaders and critics of a severance tax maintain that it could negatively impact natural gas production and point to the financial benefits local municipalities already enjoy from impact fees.

Proponents of a severance tax counter and say it’s simply unfair that Pennsylvania remains the only fracking state without a severance tax and that the companies will likely not leave one of the most productive shale gas fields in the country, strategically located near new and proposed transmission lines and ultimately LNG export facilities.

Most observers agree that some kind of severance tax will ultimately be part of a budget compromise. Even the Governor has noted he would entertain tax “changes” if pension reform and liquor privatization is part of the budget mix.

But determining just how much to tax the new Pennsylvania energy boom requires a fine balancing act. According to a nationally-renowned economist who visited Harrisburg recently, a number of serious factors should be examined thoroughly before an extraction tax is applied to fracking, not the least of which is the current level of Corporate Net Income (CNI) taxes and the  impact fees the industry already pays.

While extraction tax proponents are quick to note that Pennsylvania is  the only major fracking state not to impose an extraction tax, “they fail to also acknowledge that Pennsylvania has the second highest Corporate Net Income   Tax,” explains Dr. Margo Thorning, Ph.D., Senior Vice President and Chief Economist at the American Council for Capital Formation.

“Every dollar raised by Pennsylvania’s robust fracking industry is now subject to the CNI, “Dr. Thorning says. “Adding an extraction tax to the CNI and impact fees the industry already pays could have unintended consequences and could even result in reduced revenues if it forces a slowdown in fracking activity,” she cautioned.” For example, companies who pay less taxes elsewhere could shift their activity to other states, since the gas in Pennsylvania will be going nowhere.”  This view runs directly counter to the argument put forth by fracking tax proponents who say a tax will have little impact, since the companies are already here and will stay here.

State lawmakers, therefore, should look good and hard on the long-range effects of taxation on Pennsylvania’s new “natural gas” boom, including getting an accurate measure of what the industry now contributes in state and local taxes before levying any new ones.

Local (read State) and Federal taxation policies are just two factors that enter into a complex and exciting global energy shifts.  “With the U.S. now a global energy superpower—and Pennsylvania a major player on the verge of becoming a net energy exporter the potential is there for us to export energy to allies worldwide, encouraging growth at home,”  Dr. Thorning notes.

“This means jobs, revenue and investment—but only against the right policy backdrop.  Permitting delays, punitive taxes and onerous new regulations would only threaten this bright future,” she says.

One big potential: maintaining and increasing current Marcellus gas production by exporting  LNG to allies abroad.   Currently, about two dozen major export projects rest for approval at the U.S. Dept. of Energy and the Federal Energy Regulatory Commission (FERC).  These projects mean billions in investment, thousands of jobs and increased production, Dr. Thorning explains, noting that the failure of act now “cedes market competition to dozens of existing global competitors.”

“The ability to move the gas to LNG facilities and ports is crucial for the U.S.—and Pennsylvania—remains critical if we are to enjoy the benefits of being a net energy exporter,  “  Dr. Thorning notes.  Those benefits include:

  • Economic impacts that include thousands of jobs and almost $75 billion in GDP impact;
  • Access to favorable global markets to help American producers expand output and grow supply & reserves;
  • Boosting  economic and strategic aims, both here and abroad, strengthening national security overall;
  • Surpassing Russia as the leading gas producer, allowing us to export LNG while still meeting domestic demands

Among the Marcellus Shale states, Pennsylvania ranks first in producing wells and in gas production.  In 201, Pennsylvania ranked fourth in overall U.S. energy production and third in natural gas production.  Several critical taxation issues present challenges to Pennsylvania maintaining that key role in U.S. energy production, according to Dr. Thorning. “In addition to the potential impacts of severance taxes and the state’s high CNI tax, pending Federal tax reform plans also have a tremendous potential impact on the fracking/natural gas industry, “she notes.

What can Pennsylvania lawmakers and policymakers do to keep the state’s oil and gas industry dynamic and growing?  According to Dr. Thorning, Pennsylvania leaders must strategically:

  • Help policymakers understand the impact of tax policies on investment and capital formation;
  • Consider the impact of state legislation that raise taxes on the oil and gas industry;
  • Keep an eye on regulatory policies of other Marcellus Shale states to remain competitive.

For example, two possible federal tax reform models—the Bowles/Simpson model and the Growth and Investment Tax (GIT)  model  show little movement in the current Congress, but will be addressed at some point in the near future, possibly in the next Congress. Both impact the cost of capital in very different ways; a big factor large corporations—like energy companies— consider,  when looking to make major new capital  investments.