Corbett gas tax "impact fee" may be more industry-friendly than the industry's own proposal | Blogh

Tuesday, October 4, 2011

Corbett gas tax "impact fee" may be more industry-friendly than the industry's own proposal

Posted By on Tue, Oct 4, 2011 at 5:34 PM

One percent. 

According to one left-of-center think tank, that would be the approximate tax rate on natural gas under Gov. Tom Corbett's plan to set an "impact fee" on Marcellus Shale gas wells.

If that estimate is correct, Corbett is asking for a tax rate even lower than the one sought last summer by the industry itself. In a memo circulated among legislators, the Marcellus Shale Coalition was seeking a tax rate of 1.5 percent on the first five years of a well's production -- the period when wells produce the most gas.

Corbett's proposal, announced yesterday, would allow counties to set a maximum annual fee of $40,000 per well head. That amount would decrease each year, phasing out to zero after 10 years. Most of that money -- 75 cents of every dollar raised -- would be split between counties and municipal governments, to help them defray the local disruptions caused by drilling, like wear-and-tear on roads. The rest would be divided among state agencies like the Department of Transportation, the Department of Environmental Protection, and Emergency Management Agency. 

Corbett estimated that as drilling kicks in, the fees could raise as much as $200 million a year.

Peanuts, say some.

The Pennsylvania Budget and Policy Center says that effectively, Corbett's tax amounts to about 1 percent of the value of the natural gas being taken from state wells. (In fact, for reasons we'll discuss in a second, it's likely to be even lower.) By comparison, a year ago Gov. Ed Rendell was proposing a tax rate over 5 percent. Two House Republicans have come out in favor of a tax rate closer to the Rendell proposal. 

Corbett's proposal is already raising eyebrows. State Rep. Adam Ravenstahl (D-North Side), for one, has issued a release citing the Budget and Policy Center's estimate. Noting that Texas charges a 7.5 percent levy on gas, Ravenstahl argues, "The governor is wasting an opportunity to make big corporations that profit from Pennsylvania's natural resources pay their fair share."

It is very difficult to compare tax proposals, or tax rates from one state to the next, because they tend to be structured differently. Some, like the Shale Coalition's proposal last year, have "phase in" periods, setting lower tax rates early in a well's production. Revenue projections are also often based on guesswork about how much gas a well is likely to produce, and estimates about how prices will fluctuate. 

But according to Budget and Policy Center researcher Michael Wood, the agency is basing its estimates on numbers provided by state Sen. Joseph Scarnati (R-Jefferson) for his own shale tax plan. Using those numbers, Wood says, at least gives a consistent basis for evaluating various plans. 

Those numbers, Wood says, assume that each Pennsylvania well will produce 3.8 billion cubic feet of gas in its lifetime, and that the price of gas will be $4.28 per thousand cubic feet. That would generate more than $16 million for the well owner, who under Rendell's proposal would shell out $160,000 in impact fees over the well's first 10 years. That works out to a tax rate of slightly under 1 percent. 

In fact, the rate could be much lower, depending on future prices. $4.28 per thousand cubic feet is a reasonable estimate at today's prices -- but today's prices are very low, reflecting the glut of gas on the market. If gas prices increased, obviously, so would the profit from drilling. But because the impact fee is a flat rate, tax revenue wouldn't change at all ... meaning the effective tax rate will drop as prices rise.

Of course, there are few guarantees in any of this. It's not certain, for example, that Marcellus Shale wells really will produce 3.8 billion cubic feet of gas. "We have a couple years of data," says Wood, so it's hard to estimate what a well will produce over a couple decades.

So at this point, there are still plenty of questions. Only one thing seems clear: The gas drilling industry certainly sounds happy with Corbett's proposal. And probably for good reason. 



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