Is Pennsylvania Wasting Its Fracking Wealth?

The state is going its own way in a plan to tax natural gas, but critics say the state is missing out on millions.

In a decade, Pennsylvania has fracked its way from a minor energy player to one of the nation's largest suppliers of natural gas. But as impressive a feat as that is, the state's toughest challenge lies ahead: how to turn its energy boom into lasting wealth and welfare for its citizens.

Most of the nation's largest energy states are trying to make that transition by way of a severance tax — a levy imposed on the value of the resource produced. When the tax is applied to natural-gas production, the more gas that comes out of the ground, the more money goes to the state.

Under the leadership of Republican Gov. Tom Corbett, however, Pennsylvania is one of the few major producers that has passed on a severance tax, opting instead for an alternative revenue collection system.

Corbett says a severance tax would be a mistake, and that his system is facilitating the energy boom while still giving the state a fair cut of its profits. But by pursuing an alternative approach, Corbett has left himself vulnerable to critics who say he's taking too light a touch on the companies developing his state's resources — and costing Pennsylvanians millions in the process.

Determining who is right — the governor or his critics — reveals the difficulty of calculating just how much fracking does to fill a state's coffers and yields a question with no easy answers.

THE CASE FOR THE CRITICS

In 2012, the Keystone State enacted a fee on unconventional wells drilled in the state. Pennsylvania's impact fee is paid out annually over a 15-year time frame at a rate that's adjusted each year based on the price of natural gas and the age of the well. In 2013, the fee meant that wells drilled in the state's Marcellus shale formation came with an additional $50,000 price tag.

Revenue from the fee has helped fund a broad set of priorities ranging from infrastructure construction and repair to implementing environmental safeguards. Sixty percent of the revenue goes directly to counties where drilling is taking place, while the remaining 40 percent is distributed through a variety of statewide projects. It has made a significant impact in communities that have been the most heavily affected by drilling. In some of the counties with the highest well counts the fee has produced an annual check whose value approaches half of the jurisdiction's total operating budget.

But revenue generated by the fee has not kept pace with production. Gas pulled from the ground in Pennsylvania doubled from 2011 to 2012, soaring from a yield of roughly 1 trillion cubic feet the first year to more than 2 trillion the next. Yet the flow of money from the impact fee actually decreased in that same interval. The state brought in roughly $204 million from the fee in 2011. The following year, revenue dropped to $202.5 million.

Between 2012 and 2013, revenue from the fee increased by 11 percent, jumping to a record high of close to $225 million last year. But the leap was significantly smaller than the overall rise in production. Natural-gas output increased by more than 37 percent in the same period, when it rose to 3.1 trillion cubic feet, according to Pennsylvania state estimates.

Skeptics say the math doesn't add up. "We haven't captured the gains we're seeing in production and that means we're essentially giving away money right now that other states are collecting," said Sharon Ward, the executive director of the left-leaning Pennsylvania Budget and Policy Center.

A report released last month by a state data agency has added fuel to the fire. It concluded that Pennsylvania has the lowest effective tax rate on natural-gas production in a survey of 11 of the largest shale-gas-producing states.

The analysis — done by the Pennsylvania Independent Fiscal Office — was an attempt to compare tax rates in the producer states, which range from Louisiana, which ranked as the second-largest natural-gas-producing state in 2012, according to the Energy Information Administration, to Ohio, which came in at No. 19 on the same list of natural-gas heavy hitters. And the results — at least for Pennsylvania — were not pretty.

The agency calculated an effective tax rate on natural-gas production for each state, a metric determined by adding up the value of taxes and fees levied on an unconventional gas well divided by the market value of natural-gas production from the well over a 30-year period. (The report did not, however, include revenue generated by corporate income tax, and Pennsylvania has one of the highest corporate tax rates in the nation at 9.99 percent.)

By this measure, Pennsylvania had the lowest effective tax rate per well out of all the states when state and local taxes were added into the equation. The report calculated the effective tax rate for an unconventional well in the Keystone State at only 0.6 percent under a high-production, high-price scenario. The second-lowest rate came in at 1.4 percent in Ohio, while West Virginia topped the charts with an effective rate of 7.5 percent.

THE CASE FOR CORBETT

But when it comes to the policy, Corbett stands behind his system, and he stands behind it loudly. The Republican incumbent is facing a host of Democratic challengers in what is sure to be a close race for reelection — and talking up the fee every chance he gets.

"Thanks to Tom Corbett ... Pennsylvania has ... become America's second-largest producer of natural gas, and the benefits to Pennsylvanians have been remarkable," a narrator intones in a Corbett campaign commercial before going on to say that the Marcellus shale gas industry has "resulted in over 400 million dollars returned to local communities for local projects."

The governor, in a bid to get more bang for his political buck, prefers to look at the numbers in absolute terms and takes issue with efforts to compare the impact fee to tax policy in other states. Corbett's deputy chief of staff and energy executive, Patrick Henderson, called the IFO report an "abysmal failure."

His reasoning and that of the industry is that the impact fee is fundamentally different than a severance tax. "From the beginning the effort to try to shoehorn these two different metrics together to bring about a comparison was fatally flawed," Henderson said.

The Marcellus Shale Coalition, a natural gas industry trade association, and the governor's office also say the report fails to draw an apt comparison by leaving out the impact of the Keystone state's corporate income tax, which is one of the highest in the nation, along with a slew of other state-specific provisions like the fact that Pennsylvania makes the industry bear the cost to repair roads when they become damaged due to natural-gas production activity.

Another defense offered up by the administration is that the governor believes a severance tax would send the wrong signal to the industry — and could even drive drillers out of town.

"There's always been the mentality in Pennsylvania that if you have a good thing you tax it to death. We don't want to do that this time around. We have an opportunity to get this right so that capital continue to flow into the state and we can create economic opportunity rather than crush it," Henderson said.

WHO'S RIGHT?

There's no easy answer. It's extremely difficult — if not impossible — to fairly compare revenue and taxation from natural-gas production across state lines, as each state has different levels of production and its own idiosyncratic tax code.

Calvin Kent, a professor at West Virginia's Marshall University and a tax-policy specialist, says Corbett's argument that higher taxes dampen business prospects has some validity, but it's not as compelling a case as the governor may think.

"The main determinant of drilling activity is the price of natural gas, and the gas is going to be where it's going to be no matter what," Kent said. "So if the goal here is to raise revenue for the state then clearly Pennsylvania is forgoing an opportunity."

Corbett's Democratic challengers see the debate as an opportunity and they've been quick to weigh in. Each one of the four major contenders say they would enact a severance tax if elected to office, and pledge to use the tax to fund education and infrastructure as well as other state priorities.

Yet while many claim Corbett could be doing more, it's equally clear his policy has yielded some benefits for Pennsylvania. And without the governor, the current fee would be but a fantasy. He helped shepherd the natural-gas revenue-collection mechanism through the state Legislature — a feat his Democratic predecessor, former Gov. Ed Rendell, was unable to achieve.

"Some people think taxes should be higher. but the bottom line is that the dollars generated by the fee aren't being talked about at a press conference or on paper," Henderson said. "You have to actually be able to get what you're proposing across the finish line or else it's just empty air."

THE CASE FOR THE CRITICS

In 2012, the Keystone State enacted a fee on unconventional wells drilled in the state. Pennsylvania's impact fee is paid out annually over a 15-year time frame at a rate that's adjusted each year based on the price of natural gas and the age of the well. In 2013, the fee meant that wells drilled in the state's Marcellus shale formation came with an additional $50,000 price tag.

Revenue from the fee has helped fund a broad set of priorities ranging from infrastructure construction and repair to implementing environmental safeguards. Sixty percent of the revenue goes directly to counties where drilling is taking place, while the remaining 40 percent is distributed through a variety of statewide projects. It has made a significant impact in communities that have been the most heavily affected by drilling. In some of the counties with the highest well counts the fee has produced an annual check whose value approaches half of the jurisdiction's total operating budget.

But revenue generated by the fee has not kept pace with production. Gas pulled from the ground in Pennsylvania doubled from 2011 to 2012, soaring from a yield of roughly 1 trillion cubic feet the first year to more than 2 trillion the next. Yet the flow of money from the impact fee actually decreased in that same interval. The state brought in roughly $204 million from the fee in 2011. The following year, revenue dropped to $202.5 million.

Between 2012 and 2013, revenue from the fee increased by 11 percent, jumping to a record high of close to $225 million last year. But the leap was significantly smaller than the overall rise in production. Natural-gas output increased by more than 37 percent in the same period, when it rose to 3.1 trillion cubic feet, according to Pennsylvania state estimates.

Skeptics say the math doesn't add up. "We haven't captured the gains we're seeing in production and that means we're essentially giving away money right now that other states are collecting," said Sharon Ward, the executive director of the left-leaning Pennsylvania Budget and Policy Center.

A report released last month by a state data agency has added fuel to the fire. It concluded that Pennsylvania has the lowest effective tax rate on natural-gas production in a survey of 11 of the largest shale-gas-producing states.

The analysis — done by the Pennsylvania Independent Fiscal Office — was an attempt to compare tax rates in the producer states, which range from Louisiana, which ranked as the second-largest natural-gas-producing state in 2012, according to the Energy Information Administration, to Ohio, which came in at No. 19 on the same list of natural-gas heavy hitters. And the results — at least for Pennsylvania — were not pretty.

The agency calculated an effective tax rate on natural-gas production for each state, a metric determined by adding up the value of taxes and fees levied on an unconventional gas well divided by the market value of natural-gas production from the well over a 30-year period. (The report did not, however, include revenue generated by corporate income tax, and Pennsylvania has one of the highest corporate tax rates in the nation at 9.99 percent.)

By this measure, Pennsylvania had the lowest effective tax rate per well out of all the states when state and local taxes were added into the equation. The report calculated the effective tax rate for an unconventional well in the Keystone State at only 0.6 percent under a high-production, high-price scenario. The second-lowest rate came in at 1.4 percent in Ohio, while West Virginia topped the charts with an effective rate of 7.5 percent.

THE CASE FOR CORBETT

But when it comes to the policy, Corbett stands behind his system, and he stands behind it loudly. The Republican incumbent is facing a host of Democratic challengers in what is sure to be a close race for reelection — and talking up the fee every chance he gets.

"Thanks to Tom Corbett ... Pennsylvania has ... become America's second-largest producer of natural gas, and the benefits to Pennsylvanians have been remarkable," a narrator intones in a Corbett campaign commercial before going on to say that the Marcellus shale gas industry has "resulted in over 400 million dollars returned to local communities for local projects."

The governor, in a bid to get more bang for his political buck, prefers to look at the numbers in absolute terms and takes issue with efforts to compare the impact fee to tax policy in other states. Corbett's deputy chief of staff and energy executive, Patrick Henderson, called the IFO report an "abysmal failure."

His reasoning and that of the industry is that the impact fee is fundamentally different than a severance tax. "From the beginning the effort to try to shoehorn these two different metrics together to bring about a comparison was fatally flawed," Henderson said.

The Marcellus Shale Coalition, a natural gas industry trade association, and the governor's office also say the report fails to draw an apt comparison by leaving out the impact of the Keystone state's corporate income tax, which is one of the highest in the nation, along with a slew of other state-specific provisions like the fact that Pennsylvania makes the industry bear the cost to repair roads when they become damaged due to natural-gas production activity.

Another defense offered up by the administration is that the governor believes a severance tax would send the wrong signal to the industry — and could even drive drillers out of town.

"There's always been the mentality in Pennsylvania that if you have a good thing you tax it to death. We don't want to do that this time around. We have an opportunity to get this right so that capital continue to flow into the state and we can create economic opportunity rather than crush it," Henderson said.

WHO'S RIGHT?

There's no easy answer. It's extremely difficult — if not impossible — to fairly compare revenue and taxation from natural-gas production across state lines, as each state has different levels of production and its own idiosyncratic tax code.

Calvin Kent, a professor at West Virginia's Marshall University and a tax-policy specialist, says Corbett's argument that higher taxes dampen business prospects has some validity, but it's not as compelling a case as the governor may think.

"The main determinant of drilling activity is the price of natural gas, and the gas is going to be where it's going to be no matter what," Kent said. "So if the goal here is to raise revenue for the state then clearly Pennsylvania is forgoing an opportunity."

Corbett's Democratic challengers see the debate as an opportunity and they've been quick to weigh in. Each one of the four major contenders say they would enact a severance tax if elected to office, and pledge to use the tax to fund education and infrastructure as well as other state priorities.

Yet while many claim Corbett could be doing more, it's equally clear his policy has yielded some benefits for Pennsylvania. And without the governor, the current fee would be but a fantasy. He helped shepherd the natural-gas revenue-collection mechanism through the state Legislature — a feat his Democratic predecessor, former Gov. Ed Rendell, was unable to achieve.

"Some people think taxes should be higher. but the bottom line is that the dollars generated by the fee aren't being talked about at a press conference or on paper," Henderson said. "You have to actually be able to get what you're proposing across the finish line or else it's just empty air."