Taking Stock of Drilling Tax Plans

As The Delaware County Daily Times reports this morning, state lawmakers believe a Marcellus Shale gas drilling tax will happen one way or another. The big question is just what it will look like.

Right now, there are four prominent plans being kicked around Harrisburg to assess a drilling tax or fee on shale gas. The plans, introduced by Rep. Greg Vitali, Sens. John Yudichak and Ted Erickson, Rep. Kate Harper, and Senate President Pro Tempore Joe Scarnati, have bipartisan backing.

We took up the task of wading through each plan to make sense of them and to see how they stack up against each other. Here's what we found.

  • The Vitali bill raises the most revenue over the next five years. After the first year, the Scarnati plan collects the least total revenue of the plans.
  • The Scarnati plan, unlike the other three, imposes a fee on all production in 2010 and 2011, generating more revenue in 2011. The other proposals count only six months of production for 2011.
  • At 5.9%, the effective tax rate of the Vitali plan is nearly twice as high as the other plans, which range between 2.4% and 3.1%.
  • Total collections grow substantially, from $50 million to $167 million in 2011 to between $172 million and $552 million by 2015, depending on the plan.
  • All plans provide funding for local governments but take very different approaches to funding for the environment and state services.

The General Assembly should adopt a drilling tax or fee during the upcoming budget process that is part of an overall strategy to properly regulate and monitor this growing industry. Our report makes a few recommendations for lawmakers as they move toward that goal.

First, most of the legislative plans use a base tax rate of about 5%, which seems reasonable. It is consistent with West Virginia and is lower than many gas-producing states.

Lawmakers should be cautious about any front-end rate cuts they include in the structure of the tax. These tax breaks can reduce revenue significantly without doing much to induce drillers to produce more natural gas.

Lawmakers should also be careful about how they define low-producing wells, which would be exempted from the tax under each plan. If a low-producing well is defined as one that produces 90 thousand cubic feet (MCF) or less per day, all gas produced in the last 17 years of the life of the well would be fully exempt from taxation; if set at 60 MCF per day, the exemption would be limited to the final seven years of the well’s lifespan.

Finally, lawmakers should ensure that some drilling tax revenue goes to the General Fund to pay for core services like schools, universities, hospitals, cultural institutions and public supports — in addition to supporting local and environmental needs. To limit drilling tax revenue to only those communities where drilling occurs is a complete break with existing state policy. As with other states, drilling tax revenue should support core state services that benefit all Pennsylvanians.

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