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Time to Tax Natural Gas

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By Sharon Ward

 

A few years ago, Pennsylvania ran an ad campaign encouraging urban dwellers and suburbanites to explore Route 6, which cuts a path through the forests, waterfalls, and mountains of the Commonwealth's northernmost tier of counties. Today, travelers on Route 6 will find something new: giant drill rigs from Oklahoma and Texas rumbling along the roads and bald spots in the pristine forests, evidence of the state's natural gas gold rush.

We have been here before.  As William Ecenbarger points out in his series this week on Metropolis, Pennsylvania has known both the tremendous benefits − and long-term costs − of natural resource booms.

For two centuries, coal, timber, and oil production created tens of thousands of jobs and sustained thriving communities, but that's not the whole story.  Over time, mines were shuttered, forests were clear cut, and the wells ran dry, leaving once vibrant communities in tatters.  Today, taxpayers are still paying for contaminated rivers and wells left behind by these long-gone companies.

Pennsylvania can learn from past mistakes. It can take steps now to protect the environment and to ensure the public costs that come with industry growth are paid by the industry, not by taxpayers.

That can be achieved by enacting a levy on natural gas production, known as a severance tax.

The natural gas industry has marshaled its resources to fight plans to enact a severance tax, at the same time that thousands of drillers are pouring into the state to tap into the rich gas reserves in a subterranean layer of rock known as the Marcellus Shale.

 

Wastewater problems

All this may seem remote to many Philadelphians. But there is a lot at stake for the city and its residents.

Philadelphia water officials have expressed concern that forest clearing and soil damage resulting from drilling activities could degrade water quality for Philadelphians over the long term. That's a big worry for the city, which derives half of its water supply from Marcellus Shale regions of the state.

The drilling process produces large quantities of wastewater - infused with sand, salt and chemicals -- which must be contained and treated. There are few facilities in Pennsylvania capable of treating this water, and contamination of private wells and public waterways have been reported in other parts of the state.

A severance tax will provide the state - and local governments - with the resources they need to monitor the industry, enforce environmental protection laws, and clean up the damage - and there will be damage.

A severance tax comparable to one currently in effect in West Virginia would bring in $30 million to $50 million to Pennsylvania in 2009-10. The long-term potential for revenue for Pennsylvania is significant.  Within five years, if gas development continues to expand, a severance tax could generate $500 million annually to protect our environment and local communities impacted by drilling --in addition to helping fund vital services like education and health care.

Severance tax opponents argue that the Marcellus Shale development is in its infancy in Pennsylvania and that the state already taxes the natural gas industry adequately. The evidence tells a different story.

 

Low taxes

Many drillers in Pennsylvania are well-established oil and gas giants that have made billions in other states. In fact, ExxonMobil spent $41 billion this week to acquire one of the most active drillers in Pennsylvania. But, more than two-thirds of drillers are also established under tax laws as LLCs, so that they pay the much lower personal income tax and no corporate income taxes at all.

The oil and gas industry will try to scare consumers by saying gas bills will go up. In fact, since transportation costs make up half of the final price tag to consumers, natural gas from Pennsylvania - even with the tax - should be cheaper than the gas we currently import. Besides, Pennsylvania consumers already pay severance taxes - to states like Wyoming, Texas, and Louisiana who supply our gas today.  

Taxpayers shouldn't be asked to foot the bill for industry.  A severance tax, collected by the state and shared with local governments, will help pay for cleanup, environmental damage, infrastructure repair, emergency services, and other social costs from gas drilling.

Severance taxes won't cost jobs.  They have not deterred natural gas producers from developing deposits in Texas, Wyoming, Arkansas, and West Virginia, which already impose the tax. Producers fully expect to pay severance taxes, since they do so in most states where they operate.

We've been down this road before with other resource booms, but this time policymakers have a golden opportunity to ensure that development of the Marcellus Shale goldmine is done responsibly. Pennsylvanians should enjoy the benefits of industry growth and not simply get saddled with the costs.

 

Sharon Ward is director of the Pennsylvania Budget and Policy Center.

 

 The Center has conducted extensive research into state severance tax policies, the impact of mineral resource production across the country, and what lessons Pennsylvania can learn from other states' experiences. Learn more at www.pennbpc.org/severance-tax.

 

States with Severance Taxes States_With_Severance_Taxes.jpg

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