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Marcellus Drilling Driving Up Tax Collections, Report Says

Although Pennsylvania does not have severance tax on natural gas production, the state is starting to collect more tax revenues from counties with significant Marcellus Shale development activity than from counties without it, according to a new report from Penn State University.

The report by Timothy Kelsey, a professor of agricultural economics, shows that sales, income and realty transfer tax receipts generally correlate with Marcellus Shale activity in Pennsylvania. "What is pretty clear is that there is an association of some kind between Marcellus Shale activities and state tax collections," Kelsey told NGI's Shale Daily.

The report provides hard data to support anecdotal evidence that Marcellus Shale development is growing local economies, but the implications of the positive economic news are limited because the report only looks at the earliest years of development and does not consider costs.

For the report, Kelsey divided the state into three categories: counties with at least 150 Marcellus wells; counties with less than 150 Marcellus wells; and counties with no Marcellus activity.

Between 2007 and 2010 sales tax collections increased 11.36% in the first category, but they saw a 3.11% decline in the second and a 6.55% decline in the third. Sales tax receipts reveal trends in retail activity but don't perfectly align with actual sales because they don't include food and clothing.

Realty transfer tax collections fell 14.54% in high-activity counties between 2007 and 2010, a considerable decline but less than the 16.38% drop in low-activity counties and the 27.93% drop in no-activity counties. The realty transfer tax is a 1% tax on the sale of real estate in Pennsylvania and can fluctuate based on either the changing value of homes, the number of homes sold, or both.

The data is less precise when it comes to income taxes because 2009 information wasn't available when Kelsey was compiling the report. However, the figures show taxable income is rising with Marcellus Shale activity. From 2007 through 2008 taxable income increased 6.96% in counties with at least 10 wells, 3.08% in counties with fewer than 10 wells and 0.89% in counties with no wells.

The number of tax returns in each group of counties increased by less than 1% during that time period, suggesting a minimal impact in the size of the local workforce in those early years. Kelsey said he is particularly interested to see how that information may have changed in 2009 and 2010.

The increases in taxable income in those early years were largely the result of royalties, as opposed to salaries and wages. For instance, "taxable compensation" (salaries and wages) increased 4.2% in counties with at least 10 wells, but "rights, royalties and patent incomes" increased 325%.

Even in counties without any Marcellus Shale drilling, royalty-related incomes increased 86.6%, which the report attributes at least in part to Marcellus Shale activities, noting that development can occur on second-home or recreational land owned by people who live and pay taxes in other counties.

Kelsey said the report is helpful because it provides hard data when "so much of the debate is based on anecdotes," but he added that the study needs to be expanded as more information becomes available.

A major gap that needs to be filled is the economic cost of development on local communities, Kelsey said. "We're looking to try to find ways to more clearly identify what are the costs on PennDOT [Pennsylvania Department of Transportation] and other state agencies," Kelsey said.

State Sen. Gene Yaw, a Republican whose district includes the area of northeast Marcellus Shale activity, recently introduced legislation that would keep taxing authority and collection on the local level (see Shale Daily, Jan. 31) as a way to offset some of those local costs, such as road maintenance.

Yaw and state Rep. Rick Mirabito plan to address these issues in a panel discussion on Thursday.

Kelsey also wants to look at trends in local communities where development began early, like Bradford, Susquehanna and Washington counties. "Will there still be the large differences between those high-activity counties and those other counties as we look at this long term? I don't know," he said.

Kelsey previously tackled the economic impact of the Marcellus Shale in 2008, using Barnett Shale information to forecast the issues at play in Pennsylvania. He said this new hard data is "fairly consistent" with the information coming out of North Texas in its early years of shale development.

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