Just The Facts on Higher Energy Tax Schemes

Gov. Wolf doubled-down on his proposal for job-crushing higher energy taxes last week, ignoring the real-world market reality of this energy downturn that’s spurred thousands of layoffs as well as dozens of bankruptcies. And despite the governor stating that the energy industry is “showing no signs of slowing down,” there couldn’t be a worse time for additional energy taxes that will jeopardize even more good-paying Pa. jobs as well as the clear environmental and economic benefits tied to expanded natural gas production and use.

In fact, Williamsport Sun-Gazette editors sharply criticized the governor’s massive energy tax increase, calling it “unwise” and “out of touch with economic reality” in a recent editorial. Given this “growing disconnect between political agendas and the facts,” as MSC’s David Spigelmyer made clear in a Tribune-Review column, “Pennsylvanians deserve the facts.”

Higher energy tax advocates in Harrisburg frequently rely on two provably false arguments: 1) Pa.’s energy companies “pay very little in taxes” and 2) Other states have a severance tax, so Pa. should as well. Putting highly-charged political rhetoric aside for a moment, consider these actual facts:

  • Pa. does tax natural gas we just call it an impact fee. And Pa. is the only state in the country to levy such a tax. By April of this year, that unique natural gas tax will generate more than $1 billion for the Commonwealth and all 67 counties, providing critical revenue boosts local community and environmental programs.
  • And Pa. energy companies are subject to the same high taxes and challenging business climate as all other companies operating in the Commonwealth. Since 2008, natural gas development has generated more than $2.3 billion in tax revenue for the Commonwealth and Pa. has received more than $1 billion in bonus payments and royalties from shale development on state-owned lands.
  • As in any industry, different companies may be structured to operate in a variety of different ways. Those companies that are required to pay the Corporate Net Income Tax (CNIT), abide by the letter of the law. If they have income, they remit the appropriate tax. Most companies, however, have invested more than they have earned in their Pa. operations and would carry losses on their Pa. tax returns. In short, if they have no income in their Pa. operations, they have no tax liability because they are not profitable.

Further, since higher energy tax advocates often compare Pa. to other major oil and gas producing states, isn’t it logical if not absolutely necessary to look at those states’ tax policies as a case study? Consider these facts:

  • States that rely on severance tax revenues are facing severe budget shortfalls and deficits, according to the U.S. Energy Information Administration, as energy companies continue to weather this prolonged market downturn.
  • These fiscal and budgetary woes were spotlighted in a recent Politico article under the headline “Price Crash Teaches Oil-Patch States Danger of Budget Built on Commodity Taxes.”
  • Given these painful economic facts, why do some Pa. policymakers continue to push for policies that will hurt – not help – the Commonwealth’s economy and not generate anywhere near the promised revenues?

Here’s what they’re saying about misguided policies to increase Pennsylvania’s energy taxes:

STATES REJECT SEVERANCE TAX HIKES

  • Top Ohio Democratic, Republican Legislative Leaders Shoot Down Energy Tax Hike: Ohio’s legislative leaders said they won’t increase taxes on oil and gas produced via horizontal hydraulic fracturing while oil prices remain low. “Until market conditions improve, it’s something that we should stay away from,” said House Speaker Cliff Rosenberger, R-Clarksville. “I’ll just be pointed: N.D. and Okla. are two great states to point out. I’ve talked to the legislative leaders in both states. D.’s decreasing their severance tax. … And Okla. is having huge issues with the fact that they’ve tied their severance tax to [the state general revenue fund], and now [they’re] facing a structural imbalance.” … Rosenberger and Senate President Keith Faber, R-Celina, said now is not the time to raise rates, with Ohio’s fracking industry facing a downturn due to declining oil and natural-gas prices. Minority leaders in the general assembly agreed with the majority position. (AP, 2/12/16)
  • “W.Va. Senate Passes Bill to Eliminate Some NatGas Taxes”: The W.Va. state Senate has unanimously passed a bill to eliminate volumetric fees that natural gas producers pay in addition to the state’s severance tax. Introduced Jan. 28, the chamber wasted no time in providing a $110 million tax cut to gas and coal producers. … The bill would eliminate taxes passed in 2005 to generate revenue to pay the state’s workers compensation debts. It imposes a 4.7 cent/Mcf fee on natural gas production and a 56 cent/ton fee on coal producers. (NGI, 2/12/16)
  • “Price Crash Teaches Oil-Patch States Danger of Budget Built on Commodity Taxes”: The oil price crash is teaching some old lessons to new states. As governors and state lawmakers throughout the country get to work on their budgets for next year, a stark divide is emerging between states that already learned the pitfalls of relying too heavily on a single, volatile source of funding and those that learned from previous crashes to diversify their economies. States with relatively new entrances to the oil boom, such as N.D., are struggling to fill massive holes that have opened as oil lost nearly two-thirds of its value during the last year. Even longtime-producer Alaska is mulling previously unthinkable options, such as imposing an income tax. … , W.Va. and Wyo. also all saw revenue shortfalls during the last two years, and officials there are pursuing a variety of options to close the gap. (Politico, 2/10/16)

COULDN’T BE A WORSE TIME

  • With the “Economic Downturn of the Industry,” Gov. Wolf’s “Severance Tax Looks Really Unwise”: The industry remains a viable part of Pa.’s economy, probably one of its better long-term job generators. But like most of the rest of the energy industry, it is prone to highs and lows. Which makes Gov. Tom Wolf’s push for a severance tax in addition to impact fees all the more out of touch with economic reality. To begin with, we are not thrilled with double-taxation of an industry that has never taken a dime of government funding in Pa. and has suitors in neighboring states. Throw in the economic downtown of the industry, and the governor’s reach for a severance tax looks really unwise, to be charitable. The impact fees have been a godsend distributed, for the most part, in the local and county coffers where the industry has had the most impact. … [Local governments need] to hope Gov. Wolf has not pushed decision makers of the gas industry into pulling up stakes in Pa. (Williamsport Sun-Gazette editorial, 2/12/16)
  • “Slowdown in the Gas Fields Hits Main Street”: The slowdown in the gas fields has hit Main Street in Marcellus Shale country. … “Nearly every company that’s active in the shale play has reduced jobs, has reduced capital allocation by as significant margin,” said MSC’s David Spigelmyer. In 2013, there were 120 rigs drilling in the region. This year, there are only 30. Layoffs are hitting major companies in waves. … And that has sent shock waves through the Washington and Greene Co. economies. “The real gut punch is the supply chain jobs and there are thousands and thousands of those across this region and they’re feeling the pressure as well,” said Spigelmyer. John Bruno, of Mickey’s Men’s Store on High street, says oil and gas workers saved his business with their steady purchases of work boots and flame-retardants clothes. But he’s now a victim of global economic forces. An oversupply of both oil and natural gas and a lack of demand has resulted in historically low prices. (KDKA-TV, 2/10/16)
  • Wolf “Continues to Ignore Market Realities in Pushing for Additional Energy Taxes”: Returning to the political scene in Harrisburg again in 2016 is Gov. Wolf’s proposal for a tax on natural gas extraction. … “The governor continues to ignore market realities in pushing for additional energy taxes that will cost even more good-paying Pa. jobs in this depressed global commodity environment,” MSC’s David Spigelmyer said. “This couldn’t be a worse time for additional energy taxes, which will be shouldered, in large part, by Pa. families, small businesses and virtually all consumers of energy, according to the IFO.” (Pittsburgh Business Times, 2/9/16)
  • Even Higher Energy Taxes Will Cost Local Jobs: ’s leading oil and gas trade groups on Wednesday renewed their commitment to fighting Democratic Gov. Wolf’s latest proposal to enact a severance tax on production, saying operators can’t absorb more costs during the downturn and repeating that there can’t be a compromise. … Wolf’s refusal to leave higher energy taxes off the table, the trade groups said, would damage the state economy, its economic recovery and competitive edge with other producing states. Prices for gas in Pa. are already well below the U.S. benchmark, the rig count has dropped to its lowest point since the industry started developing the Marcellus Shale, and workforce reductions and spending cuts have curbed development in the state, they said. “We reported on the deteriorating market conditions and capital reductions that were occurring across Pa.,” [MSC’s Dave Spigelmyer said]. “Over the course of the last year, and certainly into 2016, market conditions have continued to erode.” … “Everyone knows the numbers that have been put out for this are unachievable. I believe we’re having a debate over doing a severance tax for the sake of doing a severance tax,” Spigelmyer said. “Why in the world are we even talking about it? It seems so silly. We have an approach that works and has worked since 2012. Altering the debate to do a tax for the sake of doing a tax does nothing but send more chilling indecision upon this industry in the Commonwealth.” (NGI, 2/10/16)
  • Timing for Even Higher Energy Taxes “Couldn’t Be Worse”: Wolf still wants a severance tax. And the timing couldn’t be worse, industry advocates say, as sinking oil and gas prices have Pa. drillers slashing jobs and expenses just to stay in business. … Pa. already has a tax in the impact fee. … Drillers are actually already leaving for other shale regions, even during the worst market downturn in decades, according to [MSC’s] Spigelmyer. “Things are far worse now than they were a year ago,” he said. A number of the shale coalition’s members are already moving capital investments to other places, Spigelmyer said. One of the companies, which he said didn’t want to be named, is moving business to N.D. because of the cost of doing business in Pa. (PennLive, 2/11/16)