Drillers Likely Morphing Into Pass-Through Entities to Cut Taxes, Revenue Secretary Says

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Interesting tidbit from a Tuesday Pittsburgh Post-Gazette interview with Revenue Secretary Dan Meuser.

The article highlighted an analysis from the Department of Revenue on the state taxes being paid by oil and gas drillers and related companies. Toward the end of the story, Post-Gazette reporter Laura Olson writes:

The department's figures show 275 companies paying corporate taxes in 2006, a number that dropped to 178 last year and to 97 so far this year. [Secretary Meuser] attributed the general decline to fluctuation as mergers occur, noting that this year's number is expected to rise slightly.

But the secretary also said some companies, in light of the state's 9.99 percent corporate tax rate, were probably morphing from corporations to become pass-through entities taxed at the lower 3.07 percent [personal income tax] rate. He said that was speculation and that the department didn't have definitive data on those transitions.

"Consolidation clearly is the primary reason" for fewer drilling companies paying corporate taxes, he said. "But the other is also occurring. That's exactly why the governor wants to lower the corporate rate."

This is a point we've been making all along. At last count, more than 80% of permitted wells in the Marcellus Shale are owned by companies that are operating as limited liability companies (LLCs) or limited partnerships (LPs). Individuals who own a share in these entities pay the personal income tax rate on profits, avoiding the corporate net income tax. This lowers the company's effective tax rate.

A corporation owning shares of an LLC or LP is supposed to pay the corporate net income tax on its share of profits. The problem is, and the data confirms, that the vast majority of drilling corporations in Pennsylvania (85% in 2008, according to data we received from the Department of Revenue in 2010) pay nothing in corporate taxes.

The Department of Revenue's new analysis of industry tax data, which has its own problems as we have explained, left out information that could be used to determine what share of filers actually owed any corporate income tax. But when asked by a reporter, the Department indicated that only 178 out of 900 drilling companies (that’s 20%) paid any corporate net income taxes in 2010.

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