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Slinking Toward A Severance Tax? The Puzzling Case of Garth Everett

natural gas boats - Tom Shepstone ReportsTom Shepstone
Shepstone Management Company, Inc.

 

Pennsylvania State Rep. Garth Everett seems to be slinking toward a severance tax to advance a bill of his own, but it’s all very puzzling, like Garth Everett.

There something very strange going on with Pennsylvania Representative Garth Everett of Muncy (Lycoming County) who has been making noises of late about maybe supporting a severance tax on shale gas production. It’s a strange position for a Lycoming County politician to take, given the importance of the industry to his constituency.

Any severance tax, despite Gov. Wolf’s protestations to the contrary, would have to come out of the pockets of landowners. Natural gas companies are, after all price takers, not price makers, and, therefore, have no choice, if they want to stay in business in the Commonwealth, but to ask landowners to share in those costs. If they can’t do that, they simply won’t produce. It’s that simple. One cannot legislate changes in the laws of economics, a fact Everett surely knows.

But, landowners are Everett’s political base, so why the flirting with a concept nothing short of anathema to them? That’s just the beginning of the puzzlement that is Garth Everett.

Garth Everett

Garth Everett

The Williamsport Sun-Gazette recently reported these comments from Everett:

State Rep. Garth Everett, R-Muncy, feels the time has come for the gas industry to pay a tax on production costs.

“These companies are producing tons of gas in Pennsylvania,” he said. “They are here. They are established. They are in production.”

The gas industry, which already pays an impact fee on gas, has long opposed a severance tax.

But the issue has never been allowed to die by those looking to find additional funding for the state.

And in the past year, when lawmakers were looking for ways to plug a more than $2 billion budget deficit, it once again was raised as a possible revenue source.

Everett said he’s fine with a measure that doesn’t transfer the tax to landowners.

I’d say that’s pretty clear although, in a later conversation with Marcellus Drilling News, Everett tried, in a thoroughly unconvincing fashion, to backtrack:

Rep. Everett told MDN editor Jim Willis that his attempt to communicate his views on a potential severance tax to the Sun-Gazette reporter got lost in the translation. From the beginning of the Marcellus revolution in PA, Everett has been a solid “no” to the severance tax. He did say, however, that “from the beginning” he said that one day a severance tax “may be appropriate.”

In the early days of the Marcellus, Everett felt that an impact fee made sense–and that’s what he voted for. Everett maintains he did NOT tell the Sun-Gazette reporter that he is now “in favor” of a severance tax. What he DID say is that he is willing to discuss it–to consider it–in light of the changing circumstances in the state. The circumstances that are changing? Less new well drilling happens these days, and with because of it, less impact fee revenue. Everett seemed to indicate he would consider replacing the impact fee with a severance tax, under the right conditions. Everett is not a full-throated endorser of the severance tax.

What seems to have turned Everett’s head is House Bill (HB) 1401, introduced by Philadelphia RINOsaur Gene DiGirolamo. That bill merges two issues into a single bill–a severance tax and a 12.5% minimum royalty requirement for landowners, regardless of post-production expenses. Everett has been a long-time champion of minimum royalty legislation, to correct a wrong whereby landowners see very little–or nothing–in their royalty checks (see PA Rep. Garth Everett Reintroduces Minimum Royalty Bill, 3rd Time). Because of that bill, Everett is “a little more willing to consider” a severance tax, if that’s what it takes to propel his minimum royalty legislation along.

It appears Garth Everett is so committed to his minimum royalty bill that he’s willing to impose a tax, on landowners he’s supposedly trying to help, to get a minimum royalty bill. But, he has to know his bill will never survive legal challenges insofar as existing gas leases are concerned because legislation cannot be used to rewrite contracts. Yes, it probably could apply to new leases, but no legislation is necessary in that case given that landowners are now well aware of the protections they need along this line in any lease.

The royalty dispute, of course, is an embarrassing one for the industry and also causes me great consternation as a landowner who became involved with the gas industry in that capacity. What’s important to realize, though, is that this is far from an industry-wide problem. It pertains to the alleged breach of contracts by a couple of players and, interestingly enough, those payers are not active in Garth Everett’s district.

Regardless, there are lawsuits aimed at resolving the disputes and that’s how alleged breaches of contract matters should be handled, not by bringing politicians into the mix. Attempting to fix a contract after the fact is, as our farm neighbor used to tell my father, like trying to put tractor tires on a Volkswagen. It can’t be done easily, it wouldn’t work if it could and the unintended consequences could be dangerous.

Garth Everett

So, why is Garth Everett seemingly willing to sell out landowners in his district to craft a non-solution for landowners in other districts for whom he so mightily claims to speak? He knows a severance tax will help kill the goose that lays the golden eggs of the Williamsport economy and, being trained as a lawyer, he knows his royalty bill is no real answer to what is a very real problem that must addressed in the courts. Why would he entertain such a deal?

Let me say upfront; I do not have an answer but, in trying to find one, I’ve certainly discovered many more questions that need to be asked. They start with the fact Garth Everett hasn’t been exactly transparent on this issue. A political newsletter called The Caucus, in fact, reported this:

“…since 2012, the Lycoming County Republican has leased property in which he holds a financial interest to a gas company, records show. Everett is is listed in public documents as secretary of Lairdsville Partners, which as an agreement with EXCO Resources…

When first asked by The Caucus reporters about the lease, Everett denied its existence.

He responded “no” when asked if Lairdsville Partners had a gas or oil lease…His financial disclosure form shows he as 25 percent ownership of the company.

Days later, when presented with a “Memorandum of Oil and Gas Lease” from the Lycoming County Recorder of Deeds Office, Everett said he ‘forgot’ about the lease he and Lairdsville Partners signed with EXCO resources.”

This is hardly a big deal from a financial disclosure perspective, as the story goes on to indicate the parcel was only a half-acre in size. Yet, it’s also difficult to imagine he wouldn’t recall a lease we can only presume he at least reviewed, given he was a licensed attorney, if he was not involved in negotiating the thing. The fact his wife was President of Lairdsville Partners only lends support to this supposition, as does the fact the lease dates from only 2012. Was the reason he “forgot” the lease more a matter of the language and terms than the money involved? Perhaps.

I say this because there is another very puzzling aspect to this story and it is this; Garth Everett, like many legislators, was a licensed attorney until 2013 when he suddenly sought “inactive status with respect to a law license he had acquired after from graduating Penn State University-Dickinson School of Law in 2000. He apparently attended as a full-time student, which means he gave up at least two years of his life to secure a law degree that would cost $60,000 per year or more today to obtain, not including the time invested. It’s safe to say the investment was worth well over a quarter-million dollars, not to mention the post legislative job security. Yet, he gave it up after only 13 years? Who does that?

Garth Everett

Moreover, the explanation makes no sense (emphasis added):

Because his responsibilities as a state representative have increased with his seniority in the state House, Everett decided his efforts to downsize his law practice weren’t enough. Instead, on April 30, he officially retired from practicing law at McCormick Law Firm on West Fourth Street, Williamsport.

Now, he plans on refocusing his efforts on the issues in Harrisburg: transportation and pension reform.

Pardon me, but six years of “seniority” isn’t seniority and isn’t worth spit if that’s how a representative expects to exercise influence. Additionally, he had (and still has) no committee chairmanship and has been little more than wallpaper with respect to transportation funding or pension reform. He’s done some liquor stuff, but his only major focus has been the Minimum Royalty Act he introduced as HB 1684 in 2013 after he “retired from law.” It was no real burden to maintain his active status but return to practice after three years of inactive status requires a petition for re-instatement.

What possible reason would make Garth Everett want to retire from law and focus with singularity on a royalty issue that should be resolved in court and not the legislature. Is he simply posturing for the sake of bringing pressure to settle? Perhaps, but then why make loose lips comments that can only be interpreted as implicit support for a severance tax deal that hurt the landowners in his own district?

The phony idea that landowners wouldn’t pay it is patently silly for anyone who took Econ 101. They’ll either pay or never get drilled. Gas companies don’t set prices and they can only ensure profits necessary to survive by cutting costs somewhere, which means new leases will somehow account for severance taxes or simply not be entered into. Existing leases are contracts and won’t be successfully altered by legislation. Garth certainly understands all this, which makes his positioning all the more puzzling.

Garth Everett

This makes me wonder, again, if this isn’t all about the leases Garth Everett may have reviewed for others when he was practicing law. He should appreciate a good lease because he served as solicitor to Penn Township, Lycoming County. It leased its land to Chief Exploration & Development in 2009 and included this excellent provision as an addendum (“Lessor” is landowner Penn Township and “Lessee” is Chief):

19. It is agreed between the Lessor and Lessee that, notwithstanding anything herein contained to the contrary, all oil, gas or other proceeds accruing to the Lessor wider this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas, and other products produced herewider to transfonn the product into marketable form; however. any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor’s share of production so long as they are based Lessee’s actual cost of such enhancements. However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.

That’s a good provision and almost identical to one I easily got put in my own lease addenda with Chesapeake Energy in 2008. There was no intimidation or serious resistance from the company. Garth Everett had every reason to be clearly aware, as I was, of the need for this critically important language. Did he ensure his clients got the benefit of such language (assuming he was involved in gas lease reviews)?

Everett apparently represented numerous municipalities prior to going “inactive” with his law license. Was he reviewing their lease agreements? Did some clients not benefit by this language, which eliminates any need for sure to be contested minimum royalty legislation? Have some of them complained or threatened legal action? Is this what Garth Everett’s obsession with putting tractor tires on a Volkswagen all about—atoning for or whitewashing sins of omission?

Garth Everett

Fun to play with but impractical, no solution and dangerous

I don’t know, but, if so, it’s a damned poor strategy for getting the justice some landowners appear to dearly need. Penalizing your own constituents, not to mention others, with a severance tax makes no sense when the aim is to get reasonable royalties for landowners. The solution is to be found in court and good lease negotiating, not with wacky deals that propel us all into never never land. Garth Everett may be a good man with good intentions, but he’s gone way off-track with this loose severance tax talk. It’s all so puzzling.

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One thought on “Slinking Toward A Severance Tax? The Puzzling Case of Garth Everett

  1. (1) So for this sentence “Everett said he’s fine with a measure that doesn’t transfer the tax to landowners.” …he’s got the Wizard of Oz on speed-dial?

    (1) For this item “He responded “no” when asked if Lairdsville Partners had a gas or oil lease…His financial disclosure form shows he as 25 percent ownership of the company.” and he forgot. Personally – I always forget about companies I only own 25% of.

    So (1) + (1) = 6? I’m skeptical. It’s possible he took a wrong turn with common core math…but I doubt it.

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