TAX NEWS - JUNE 2010

US Tax: There's a need for an extraction tax

No one knows if Marcellus Shale drilling will have the economic impact of a gold rush, or if the number of jobs gained in Pennsylvania will ever reach the level anticipated by fiscal prognosticators.

But what is certain is that gas drilling impacts the environment and the state does not require the industry to compensate the local communities it affects. Friday's blowout of a natural gas well in Moshannon State Forest in neighboring Clearfield County brought that impact very close to home.

State legislators need to act quickly to pass the Natural Resources Severance Act Tax, which will reverse the 2002 court decision that exempted gas and oil from taxation. If passed, the new tax will return revenue to municipalities, school districts and counties for the use of resources and services associated with drilling operations.

Marcellus Shale drilling involves enormous land disturbance, which includes road degradation, drill site development, potential groundwater contamination, loss of animal habitat and huge water supply withdrawals. In addition, drilling companies require approximately 3 to 4 acres for each new site of operation.

Two companies already plan to construct area pipelines to carry gas from wells to other pipelines and storage fields, one of which will run about 30 miles through Centre and Clinton counties.

Gov. Ed Rendell, business leaders, the Centre County commissioners and local school officials agree that gas drilling should be taxed.

Dan Fisher, superintendent of the Bald Eagle Area School District, recently told county commissioners that the district is losing $1.5 million to $2 million a year because drilling companies are exempt from paying taxes. Costs not charged to drilling companies in property taxes are paid by Pennsylvania residents by default.

Legislators are encouraged to take a proactive step in protecting Pennsylvania's natural resources by following the example of other states.

Both Texas and Oklahoma use a gas production tax as a way to compensate for use of public resources and services.

The industry recognizes the expense as a cost of doing business. A 2009 study by the University of Utah found that changes in severance tax rates, even significant ones, had a large impact on government revenues but not industry production.

As the lawmakers continue to discuss ways to accrue revenue for the state, they need to carefully examine the language used to draft the gas tax proposal. The final bill should include an amendment aimed at ensuring that the taxes collected will go to the local governments that would most benefit.

By instituting a property tax on oil and natural gas wells, legislators will ensure that school districts receive a consistent revenue source and that the burden on the state's homeowners would be eased.

When you consider the deep impact that Marcellus Shale drilling has on the local environment, it is not unreasonable to expect that drilling companies would pay a tax to support the communities they disrupt.