Fairness test applied to shale tax

HARRISBURG - The subject of fairness - always a question in tax policy - will inevitably surface as part of the debate when the state Legislature tries once again this fall to impose some type of levy on Pennsylvania's booming natural gas industry.

Natural gas producers don't pay a tax on production in Pennsylvania, although in every other major gas producing state they pay one or more. And the coal industry in Pennsylvania pays a property tax based on production value to counties, municipalities and school districts - as well as a federal severance tax.

For now, Pennsylvania has one of the lowest tax burdens in the nation for the industry, which is spending billions of dollars to tap thousands of wells into the Marcellus Shale formation, considered the nation's largest-known natural gas reservoir.

Two major gas states with the heaviest tax burdens, Colorado and Texas, impose a property tax on the value of oil and natural gas - to the tune of about $2 billion a year in Texas - as a way to address the local impact of drilling. In Texas, there's a separate state severance tax on gas and oil that raised almost as much in the 2010 fiscal year. And in Colorado, there's a conservation tax and a severance tax.

James LeBas, a tax policy analyst for the Texas Oil and Gas Association and that state's former chief revenue estimator, said a severance tax makes more sense if a state has a monopoly, as Texas essentially once did. But there's a good argument to be made against it if a state has to compete for the business, LeBas said.

"Texas will be happy as soon as Pennsylvania starts taxing oil and gas," LeBas said. "We'd like to get our rigs back, please."

However, Pennsylvania state Rep. Rick Mirabito (D., Lycoming) said it is fair for Pennsylvania's natural gas industry to pay a local impact fee as an obligation to the community, and it is fair to pay a severance tax as well, since so many other states impose one.

For years, Pennsylvania has imported natural gas from outside its borders to heat homes, and for all those years Pennsylvanians have paid the built-in cost of other states' severance taxes on the gas, Mirabito said.

So now that Pennsylvania is exporting gas thanks to more than 3,000 Marcellus Shale wells, it should impose one as well, he said.

"A severance tax is about tax equity," he said.

Former Gov. Ed Rendell first proposed a severance tax on the industry in 2009, soon after it began drilling in to the Marcellus Shale in earnest. He proposed a tax identical to West Virginia's, but opposition from the Senate's GOP majority - not to mention the industry - helped doom that effort.

This year, opinion in the Senate GOP has swung behind the effort to impose some type of tax or fee. But the debate likely will be dominated by Gov. Corbett, who succeeded Rendell in January after campaigning against a tax on the industry.

Corbett opposes a severance tax because he says he fears it would drive the industry away and cost the state jobs and the investment while Pennsylvania is trying to recover from the recession. He also points to the growing exploration of other natural gas deposits around the country, including the Utica Shale in Ohio, where Gov. John Kasich is putting out the welcome mat.

Corbett said Thursday that his office is drafting legislation to impose an "impact fee" on the industry, although he hasn't revealed details, such as what type of impacts the fee would cover or how much the industry would pay.