Tax on gas drillers boils in Harrisburg

Governor resolute in his opposition

As new taxes go, a levy on natural gas drilling in Pennsylvania would seem like a pretty easy political sell.

Two-thirds of the state's voters support the idea, several polls show.

Politicians are desperate for money to plug a $4 billion budget gap and prevent deep cuts in the state college system and other programs.

Every other major natural-gas producing state has some sort of tax, and some of the biggest drillers have said they won't oppose one here, so long as it's reasonable.

"The Marcellus industry has been clear and outspoken on this for a year or so," said Ray Walker, vice president of Texas-based Range Resources and chairman of the Marcellus Shale Coalition, an industry group. "We are willing to discuss a severance tax."

But the new governor isn't.

In fact, Gov. Tom Corbett, who signed a no-tax pledge during his campaign last year, is far more resolute in his opposition to a tax than many in the industry.

"The governor absolutely does not subscribe to the notion that because everybody else collects a severance tax, we should as well," Patrick Henderson, Mr. Corbett's energy executive, said last week in an interview.

Mr. Corbett said Sunday that a tax might encourage drillers to invest elsewhere.

"The gas isn't going to move. What does move is the capital and the equipment," he said, appearing on a local Philadelphia news show. "It's going to move where gas is cheapest to produce."

Although Mr. Corbett said last week he might consider an "impact fee," Mr. Henderson said it would be a mistake to read that as a retreat.

The governor wants any such fee to go directly to drilling communities -- and only to cover real costs, such as road repair and extra police, Mr. Henderson said. The governor wants his new Marcellus Shale Advisory Commission to help calculate those costs. The panel's first meeting was Friday.

"The severance tax is off the table," said Lt. Gov. Jim Cawley, chairman of 30-member commission, which includes Mr. Walker and 12 others with industry ties.

Even so, the tax question is sure to keep boiling in Harrisburg this year, as Pennsylvania continues to wrestle with the consequences of a booming energy industry entering a recession-ravaged state.

After their demoralizing losses last fall, Democrats are rallying around a single theme: Republicans are willing to hurt the middle class and students while letting their drilling-industry friends off the hook, Democrats argue. They point to the industry's campaign donations, including $800,000 to Mr. Corbett. Environmentalists and unions have gotten in on the action, holding news conferences and rallies.

Meanwhile, the drillers and their allies are emphasizing the thousands of jobs and millions in revenues the industry already brings to the state.

The issue could drive a wedge between legislators in drilling country and Republicans in southeastern Pennsylvania, which presumably wouldn't share in impact fees.

"No one down here can even see why this is controversial," said Daylin Leach, D-Montgomery. He said local polls found 8-to-1 support for a natural-gas tax, putting his GOP counterparts "in an awkward position."

One thing's not in dispute: A tax on Marcellus Shale gas could raise a lot of money.

Drilling in the shale has ramped up dramatically since 2004, when Pennsylvania got its first well using the new hydraulic fracturing process that frees gas from the rock.

From July 2009 to December 2010, drillers reported, 1,247 Marcellus shale wells produced 466 billion cubic feet of gas. At today's prices, a 5-percent tax -- akin to West Virginia's -- would have collected $93 million in that period.

On top of that, nearly 1,500 additional wells are not yet in production, and tens of thousands more are projected.

At West Virginia's tax rate, the wells would yield nearly $400 million in revenue by 2015, estimates the Pennsylvania Budget and Policy Center, which favors a tax.

But Mr. Corbett said Sunday that, even at $200 million a year, a severance tax would not come close to plugging the hole in this year's budget.

A 2007 survey by the National Conference of State Legislatures said 28 of 32 natural-gas production states have some kind of tax on drilled gas. Pennsylvania is the only one with significant drilling and no tax.

States spend it in different ways, using it for environmental funds and giving some to local governments. Some states bank part of the revenues in trust funds, setting aside money for when the gas runs out.

The same tug-of-war between politicians and a powerful industry has played out across the nation. In 2000, the Wyoming legislature hired economist Shelby Gerking to study how tax rates affected drilling activity -- in effect, to test industry's claim that taxes discouraged drilling. He found taxes made a dent -- but only a dent. Far more important were factors such as the price of natural gas.

Mr. Gerking said it wasn't a popular study: one industry official tried to get him fired from the University of Wyoming, but the college president backed him.

"There was a lot of flak," said Mr. Gerking, a professor at the University of Central Florida. "There was a lot of money at stake, that's why."

"Where are they going to go to escape a tax?" he said. "These taxes are not going to change production."

But his argument, repeated by environmentalists and others, hasn't always gotten through. Indeed, many legislators have cited a Penn State study -- financed in part by the shale coalition -- that found a severance tax would hamstring the industry.

With Mr. Corbett's hard line, the shale coalition is hammering home the message that they are willing to pay a reasonable fee or tax, though they will push for other measures, such as a law restricting local governments from using zoning rules and the like to limit drilling.

The industry is not in lockstep on taxes. The Pennsylvania Independent Oil and Gas Association, which represents traditional drillers, remains steadfastly anti-tax.

While Mr. Corbett is willing to consider an impact fee, it's not yet clear how a fee would work.

Industry executives and legislators have begun to talk about putting a levy on each well, akin to impact fees for housing developments. Another idea would be to create a local option tax, where counties could decide the fees within a set framework.

But local fees would go disproportionately to a few Pennsylvanians. So far, most Marcellus gas production is in Bradford, Susquehanna, Washington, Tioga and Greene counties -- which, all told, comprise about 3 percent of the state's population.

Meanwhile, polls show consistent, growing support for a tax: 70 percent of voters in a Susquehanna Polling Research survey statewide said they support it, including 62 percent of Republicans.

"The governor does not govern based on polls," Mr. Henderson said last week. "He received a clear mandate and it was clear to the voters that he does not support tax increases, period."

Supporters of an impact fee would have to devise something Mr. Corbett could sign -- and that suits Republicans in the state House, who have been less enthusiastic.

They would also need such key Senate figures as Majority Leader Dominic Pileggi, R-Delaware, who as of Friday, sounded more open than ever to a severance tax. "The industry has clearly said this wouldn't in any way interfere with their capital investment or job creation in the state," Mr. Pileggi said.

Former Gov. Tom Ridge -- whose lobbying firm has been earned $900,000 in fees from the shale coalition -- points out that the industry has operated profitably in states with severance taxes.

"It's got to be part of the discussion," Mr. Ridge said.

He says his role is largely "pounding on" companies in the coalition to make them realize that they risk everything if Pennsylvanians turn against them because of environmental concerns, taxes or anything else. "Nobody wants to pay more taxes," he said, but drillers need to be seen as good corporate citizens.

First published on March 28, 2011 at 12:00 am