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In Pennsylvania, unconventional natural gas is a huge part of

the state’s economy, so of course, it’s also highly political.

Some Harrisburg politicians, including the governor, are claiming shale

gas producers are not paying their fair share of taxes and that

Pennsylvania is the only state that doesn’t have a severance tax.

Is that true? Or do some Pinocchios need to be handed out?

Let’s begin with the severance tax, which is a tax on oil and

natural gas production. It is true that Pennsylvania is the only

major producing state that doesn’t have a severance tax.

But making that claim is highly misleading because

Pennsylvania is also the only state that imposes an “Impact Fee.”

And that impact has been big!

$1.4 Billion has been generated since 2011.

Funds have been spent on such things as public infrastructure like

storm and sewer systems, social services, information technology,

public safety and environmental programs.

Harrisburg politicians complaining about the state not having a

severance tax on unconventional shale gas production, when they are

fully aware there is an Impact Fee are trying to deliberately deceive

the public. For that, we give them 3 out of 5 Pinocchio’s.

Now lets consider the charge that the shale gas industry is not

paying its fair share in taxes. The best way to do that would be to

compare Pennsylvania to other states, but that’s not so easy to do

because no state applies their taxes and tax breaks in the same way.

Pennsylvania’s Independent Fiscal Office calculates an effective tax rate

for the Impact Fee, at an average of 3.6% since the fee was created.

That’s quite a bit less than Texas, for example, which has a

7.5% severance tax. But that tax rate comes down significantly in

real terms because of discounts for unconventional wells over a

decade and another steep discount for drilling costs.

And if you’re comparing Pennsylvania to Texas, you need to mention that PA has

the second-highest corporate income tax rate in the country at a whopping 10%!

And Texas doesn’t even have a corporate income tax.

Nor does Ohio, Pennsylvania’s regional competitor.

Louisiana is another big natural gas producer. In 2017, the Pelican State

charged a severance tax of just under 10 cents per MCF, but Louisiana

doesn’t tax horizontal wells for 2 years or until the well has paid

for itself. That’s not confusing, is it?

West Virginia has one of the highest severance taxes in the

country at 5%. But maybe that punitive tax explains why

Pennsylvania produces nearly three and a half times more natural gas

than West Virginia, even though the two states have similar geology.

This kind of apples to straw- berries to bananas comparison

is what exists across all producing states, so it’s darn near impossible

to compare one state’s taxes to another. However, there is one solid barometer

to consider, which is where investors are putting their money,

and that means where do you find the drilling rigs?

In recent years Texas has claimed the largest number of rigs by far.

Pennsylvania, the nation’s second largest shale gas producer,

hasn’t attracted near the number of rigs as the industry leader.

Certainly low gas prices don’t help, but neither does talk of adding a

severance tax on top of an Impact Fee on top of a sky-high

corporate income tax. Harrisburg politicians who are trying to claim

that Pennsylvania shale gas producers aren’t paying their

fair share in taxes ought to take a look at where the drilling rigs

are working. Their Pinocchios, 4 out of 5,

could wind up sending more rigs to states like Texas and Oklahoma.

That’s all for now, but more Pinocchios will be awarded to

Pennsylvania politicians in the months ahead.

For the Clear Energy Alliance, I’m Mark Mathis.

Power On.