Political Climates Change But Arguments Against Shale Tax Remain the Same

The House came one vote short Tuesday night of reviving an on-again, off-again debate over whether to slap the natural gas drilling industry with an additional tax on energy production. Then, after a short morning session on Wednesday, lawmakers left Harrisburg for Christmas break. Business leaders expect the shale tax debate, or even the prospect of one, to carry over when lawmakers return to Harrisburg on January 22, for the start of session in the New Year.

If nothing else, Governor Tom Wolf, running for re-election, is almost sure in his February 6 budget address to again ask the General Assembly to approve higher energy taxes. Having been requested in three-out-of-three budgets thus far, an additional tax on energy is one of the many tax increase proposals he’s kept a mission-like zeal for; even as it and the others have been repeatedly rejected by the General Assembly.  

“From his first budget proposal, additional broad-based taxes on energy have been a part of the governor’s agenda and we expect it to be as long as he’s in office,” said David N. Taylor, PMA President & CEO. “But we also expect the core of House and Senate members to remain opposed as we already have taxes on energy production and use while we are currently able to offer abundant and affordable energy to our industrial sector.”

“In reality, energy prices are one of the only economic advantages we have to offer to new and expanding industries in Pennsylvania,” said Carl A. Marrara, PMA’s Vice President of Government Affairs. “Why the governor and certain members of the legislature would want to compromise that shows just how out of touch they are with basic economic realities.”

Other re-election politics are keeping the debate simmering as well. A small group of Republican members from the southeast (whose constituents enjoy the same lower energy prices from shale gas as all Pennsylvanians, but no matter) insist they need political cover and are the drivers of the additional tax on Pennsylvania energy.

The most recent version of the tax from Bucks County’s Rep. Gene DiGirolamo is 1.5 percent, with no reduction in the impact fees that drillers currently pay, or the Corporate Net Income tax, or the other host of business taxes assessed in Pennsylvania. Unlike other states with a traditional severance tax in lieu of an impact tax as it exists in Pennsylvania, the proposal includes no abatement period to recuperate the massive investment drilling companies pay to operate a new well.

The political scramble before Thanksgiving over the tax bill, HB 1401, led to hundreds of amendments filed to it. The bill was later attached to the tax code and 300 of the amendments dropped off for no longer being germane. Some that remain offer some measure of regulatory relief and expedition – things that should be accomplished on their own merit, not as a mere consolation.

It’s an unpersuasive political ploy, industry leaders say. “We’re not going to trade some improvement in a bad regulatory climate for a tax,” one leading industry official said and recent history shows why.

Act 13 of 2012 was designed to clear an uncluttered regulatory path for drillers. In return, the industry agreed to pay the impact fee, which principally benefits communities where the drillings sites are located. But after months of complicated court battles over Act 13, the industry is stuck with the fee and no regulatory relief.

Business also rightly fears that once a shale tax is on the books it will be the go-to tax for lawmakers in a fiscal bind, and any more, because of a bankrupt pension system and over spending, they are almost always in a fiscal bind. The Independent Fiscal Office recently released its five-year economic and budget outlook; the report does not anticipate a deficit for this budget year, FY 2017-18, but they do expect one for next year.

Other arguments for the tax are just as bankrupt, but they’ve been repeated so often they are taken as fact. One of the default arguments is that Pennsylvania is the only gas producing state without a severance tax.

But, Pennsylvania is the ONLY gas producing state with an impact fee. As the Pennsylvania Independent Oil and Gas Association points out on its website, “picking one aspect of another state’s tax structure while ignoring the whole structure is the ultimate false comparison and is not fair, reasonable or commonsense.”

Texas and Wyoming, other big drilling states, have no personal income taxes and many gas producing states have no corporate income tax and some have no property taxes. But here in Pennsylvania, we have it all: the existing gas well impact fee, and property taxes, and the highest flat Corporate Net Income Tax without 100% net operating loss carryforward provisions, and personal income taxes, and hosts of local taxes.

“Competitiveness is about the overall cost of creating and maintaining jobs,” said PMA’s Taylor. “In Pennsylvania, we are having the wrong conversation. We should be focusing on how we can help this industry expand and grow – not exchanging recipes on how to cook the golden egg.”

Adding another tax undermines an industry that has already added billions to the revenue stream not only through taxes the drillers already pay but what the hundreds of thousands of industry workers pay in local, state and federal taxes. Just a few months ago, API Pennsylvania released a study showing that the U.S. natural gas and oil industry supported 322,600 jobs in the state and contributed $44.46 billion to the state’s economy in 2015.

As good as this news is the industry is just getting started, for now.

“We are nearly a decade into America’s shale energy revolution, however, we’re just in the early stages of realizing the downstream manufacturing opportunities tied to natural gas,” Dave J. Spigelmyer, President of the Marcellus Shale Coalition, wrote in a commentary published in October.

“Earlier this month, Chevron and Peoples Natural Gas launched the ‘Forge the Future’ initiative with an economic analysis from McKinsey & Company that examines these downstream opportunities. The report projects Pennsylvania could see a $60 billion increase in gross domestic product over the next decade and over 100,000 more jobs, the majority of which would fall in the manufacturing sector if the Commonwealth fully embraces its energy opportunity.”

Piling on more taxes as a way out of future budget jams, or to further some other mission, rejects the opportunity instead of embracing it. Now is not the time for new, additional, burdensome taxes. A tax on natural gas extraction is a broad-based tax increase and should be treated as such.

 

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