Taxing Drillers at Issue in Pa. Governor's Race

Tuesday, October 07, 2014

PITTSBURGH -- Natural gas and oil companies are not likely to close down western Pennsylvania drilling operations and make a mad rush west to Ohio or south to West Virginia to set up shop if Tom Wolf is elected as the next governor, speculate political experts watching the race for the state’s top office.

Wolf, a Democrat, is leading Gov. Tom Corbett by a wide margin in nearly all the polls. He wants to impose a 5% severance tax on the natural gas and oil industry with drilling operations in the state. It is estimated that the severance tax would generate $1 billion in revenue. Wolfe has said he wants the monies to go toward funding education.

A severance tax is a tariff imposed on the removal of non-renewable resources such as crude oil, natural gas, coal bed methane and carbon dioxide. It is separate from an income tax. Pennsylvania is the only major natural gas and oil producing state that does not have a severance tax.

In a story published Monday by the Pittsburgh Tribune-Review, the CEO of Range Resources, Jeffrey Ventura, said imposing a severance tax would put drillers at a disadvantage compared to companies exploring other plays, such as Ohio’s Utica shale.

“I think you'll see companies like Range or some of the smaller people stay pretty active, but at the end of the day, it clearly will impact the play overall,” Ventura said (READ STORY).

Companies are still liable for federal and state income taxes on oil and gas profits in addition to the severance tax, should one become law. Corbett signed an impact fee into law three years ago, which has raised more than $630 million for state coffers.

Companies pay $50,000 for each horizontal well drilled, and $10,000 for smaller, vertical wells in the commonwealth.

Corbett said recently at a shale conference in Pittsburgh that 10- to 15 years down the road, when the natural gas and oil industry is further established in Pennsylvania, companies would be better able to sustain a severance tax.

Right now more than 245,000 workers in Pennsylvania are tied to the shale industry, plus the oil and gas industry works with 1,347 different businesses across the state, according to the Marcellus Shale Coalition, an industry trade association in Pittsburgh.

“This is a tenuous time,” Corbett said. “I need to see the industry get a foothold.”

According to a Lancaster-based Franklin & Marshall College poll, released Sept. 25, Wolf leads Corbett, 49% to 31% among the state’s registered voters.

Chris Borick, a professor of political science and sirector of the Muhlenberg College Institute of Public Opinion in Allentown, said if Pennsylvania enacts a severance tax, it will be in line with neighboring state tax rates.

Ohio, for example, has a 2.5% tax, passed in May, on horizontal wells.

Ohio Gov. John Kasich, a Republican, who is running for re-election, has said he wants to raise the tax to 4% or 4.5%. West Virginia, meanwhile, has a 5% severance tax on extracted gas.

“The imposition of a severance tax in Pennsylvania will of course be weighed in the decisions of the shale gas companies to drill in the state, but I don’t see it as a defining factor in their choice,” Borick wrote in an email.

“And if firms were looking west to Ohio for a more attractive tax environment, they may be limited by efforts by Governor Kasich to adopt increased taxes on shale drilling in the Buckeye State,” he wrote. “By the way, our polls show the majority of Pennsylvanians do not think that a severance tax will cause drillers to leave the state.”

Should Wolf become governor, Borick believes there is enough support in the legislature to pass a severance tax.

Wolf appears to be in line with public opinion, he adds. But, the Democrat would be more aggressive in terms of taxes and safety and environmental regulations on the industry.

Joe Sabino Mistick, a Duquesne University law professor and political commentator, agreed with Borick’s assessment. If Wolf is elected, drillers won’t leave the state, he said.

“The bigger companies don’t seem as alarmed by a restructuring of the tax as the smaller companies do,” Mistick said. “The contracts are here and the infrastructure is here.”

Still, Dave Spigelmyer, president of the Marcellus Shale Coalition, said more taxes would be harmful and detrimental to small and medium-size businesses working in shale development in Pennsylvania.

“Our elected leaders must avoid a race to the bottom and focus on common sense policies that encourage more job creation and investment into the commonwealth rather than new energy taxes that will make Pennsylvania less competitive and hurt our economy,” Spigelmyer said.

Copyright 2014 The Business Journal, Youngstown, Ohio.
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