President & Founder, Elk Advisors Group
The Commonwealth of Pennsylvania is the midst of a political debate about a severance tax but voters ought to think long and hard about it before abandoning the very workable Marcellus Shale Impact Fee.
Yesterday, I had the pleasure of making a presentation to the Wyoming County (Pennsylvania) Chamber of Commerce on the subject of Pennsylvania’s Marcellus Shale Impact Fee and why it is far superior to the severance tax we keep hearing some politicians say they need. The reality is that they don’t need it as much as they want it. They want it so they can solve problems they created at the least possible cost to their own reputations and with the most credit for passing out other peoples’ money.
While these politicians are fond of saying Pennsylvania is the only oil and gas state without a severance tax, the conveniently neglect our super high state corporate income tax and act as if the Marcellus Shale Impact Fee didn’t exist. But, it is does exist and no other state has anything like it–anything so fair and so well tailored to address the needs of communities. It allows communities to decide how to spend the money rather than the state politicians, so, perhaps that’s what they don’t like.
Anyway, Act 13 Impact Fees are collected based on the price of natural gas. That price averaged $3.652 in 2013, which put the impact fee assessment in the third column of this guide for determining the fee:
The beauty of the Act 13 Marcellus Shale Impact Fee is in its distribution, which is targeted toward communities and away from politicians. Here are the formulas:
And, here’s how the money actually got spent:
And, who paid it:
This is how the funding formula worked for Wyoming County:
What can these impacts fees be used for? Well, it’s a long list of things designed to mitigate the impacts of natural gas development and enhance communities where it takes place.
Here’s where the impact fees went by county and you’ll notice they largely went to communities most impacted by natural gas development which is precisely how one would hope it would work (unless you’re a freeloader county).
This is just one aspect of the natural gas industry, of course, and the other much more important part of the formula is simply this; energy = jobs. Here are a few statistics and a chart illustrating what I mean:
Consider also where those job opportunities are; they’re concentrated in industries impacted by natural gas development.
Advocates of a severance tax, of course, want us to suppose Pennsylvania is letting oil and gas companies skate free but that simply isn’t the gas, as the following illustrates:
And, oil and gas companies do have alternatives, as the following chart illustrates. Pennsylvania offers some incentives to companies, to be sure, but it’s far from the best place to do business, which means business will go elsewhere with a severance tax.
Companies are, in fact, already investing in other plays and have numerous options:
Those greedy for a severance tax need to consider how very fortunate Pennsylvania has the industry, given its high corporate taxes. The revenue multiplier effect is simply huge and already produces increased taxes across the board because we’ve managed to avoid killing the golden goose with a severance tax:
Do we really want to tamper with something that works?
Does this make any sense?
No, it doesn’t and Margaret Thatcher captured the severance tax problem in a nutshell:
And, here’s the bottom line:
Think about it, please, and choose wisely. A severance tax is bad for Pennsylvania.