A severance tax on Marcellus Shale gas production in Pennsylvania is only fair compensation for extraction of the resource, and the revenue would be a bulwark against recession, according to an analyst's recent paper. However, a gas industry organization blasted the paper as coming from a left-leaning, union-backed source with questionable credibility.

"Based on current prices, Pennsylvania could set a [severance tax] rate between 30 and 35 cents/Mcf and be more than competitive with other gas-producing states," wrote Michael Wood, research director for the Pennsylvania Budget and Policy Center (PBPC). "A higher rate could be justified as Pennsylvania, unlike these other states, does not levy property taxes on oil or natural gas deposits."

Travis Windle, spokesman for the producer-backed Marcellus Shale Coalition (MSC), dismissed Wood's assertions and questioned his impartiality. PBPC is affiliated with the Keystone Research Center, whose board includes several labor union representatives, Windle noted. "This is big labor saying, 'Give us more,'" he said.

Windle also blasted Wood, who until 2007 was budget manager for the city of Harrisburg, PA, for allowing the city's budget to become a "shambles." (Like some other municipalities around the country, the city is facing a budget crisis. In part, Harrisburg is suffering from debt it issued to finance an incinerator project.)

"It sure seems like Mr. Wood's budgetary background leaves a lot to be desired," Windle told NGI.

As Pennsylvania lawmakers hammer out details of a promised severance tax, which was sought by Gov. Ed Rendell, they are not wanting for advice from the energy industry, consumer/taxpayer advocates, environmentalists or others (see Daily GPI, Sept. 1).

The governor has set an Oct. 1 deadline for a tax plan that would take effect in January, but some lobbyists at the state capital say getting a bill through the out-of-control legislature will be a problem. "They couldn't even agree on a budget, and there are a wide range of views on the tax," one lobbyist said. Rendell has said he will not make a deal with the producer community on forced pooling and spacing in exchange for the tax. But "that's just the governor. The legislators are all over the map on this."

Wood's report is titled "How to Structure a Severance Tax That Is Fair to Pennsylvanians." In it he said every state with "mineral wealth" except Pennsylvania has a severance tax. States with a severance tax include Texas, Alaska, Wyoming, Louisiana, Arkansas, Oklahoma and West Virginia, all of which have "booming extraction industries," Wood said.

"During the recent recession, the states with severance taxes fared much better than those without, as relatively high energy prices generated significant tax revenue. The Center on Budget and Policy Priorities notes that North Dakota and Montana were able to avoid budget shortfalls because of revenue from severance and other energy taxes."

If Pennsylvania were to tax natural gas at a rate similar to West Virginia, the state would have raised $71 million in 2010-2011 and could raise $400 million per year by 2014-2015, according to Wood's projections.

On a fixed-rate basis, the tax rate for natural gas in West Virginia ranged from 26 to 35 cents/Mcf in 2010, but rates in some states are much higher, Wood said. At a price of $6/Mcf, Oklahoma's rate is 43 cents/Mcf; the rate in Texas is 45 cents/Mcf, and New Mexico's rate ranges from 52 to 57 cents/Mcf, according to his analysis.

Windle said any tax in Pennsylvania should be structured in a way comparable to what exists in other shale gas-producing states. He said MSC has not published any analysis of what a tax should be but its members are "working closely with leaders in Harrisburg each day." The MSC wants to prevent any tax that would stifle investment in the Marcellus Shale play, he said.

Lawmakers should be careful to draft a severance tax plan that does not allow loopholes for the gas industry, Wood said.

While the industry has lobbied for lower taxes in the first years of a well's production, Wood is opposed. "This sort of tax break is both unnecessary and costly," he said, citing a "tax break" the industry receives from the federal government: the expensing of intangible drilling costs in the year that they are incurred rather than over the life of the well.

"The natural gas industry wants to deduct production, processing, and transportation costs from its tax calculations," Wood said. "In other states, these types of deductions have created loopholes which the production companies have exploited." The tax should be easy to administer and reduce the likelihood of costly litigation."

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