A pair of recent reports shows how difficult it is to measure the tax benefits of Marcellus Shale development in Pennsylvania.

The Pennsylvania Department of Revenue (DOR) released figures last Monday showing that since 2006 natural gas companies — producers, as well as service providers — paid more than $1.1 billion in state taxes on top of investments, royalties and fees.

In the first quarter of 2011, 857 companies paid $238.4 million in various taxes, the DOR said, $20 million more than was paid in all of 2010. Those taxes included capital stock and foreign franchise taxes, corporate net income taxes, sales tax and employer withholding.

The DOR also attributed $214.2 million in personal income taxes since 2006 to Marcellus development through payments to individuals, royalties and asset sales, but it said a “comprehensive analysis” of Marcellus-related personal income taxes “is not feasible” because the DOR can’t determine what profits were “passed through” to individuals as opposed to corporations.

In limited liability corporations and limited partnerships income is passed through to owners — be they individuals or corporations — which then pay taxes. Shares owned by individuals are taxed at 3.07% while shares owned by corporations are taxed at 9.99%.

However, the DOR said the 857 companies included 1,096 pass-through businesses that reported $675.4 million in 2008 income.

The DOR figures follow a report from the Pennsylvania Budget and Policy Center (BPC), a nonpartisan but left-leaning research group, claiming that natural gas drillers “pay very little in state and local taxes, despite industry claims to the contrary.” Specifically, the report found that the oil and gas industry paid $38.8 million in Pennsylvania state business taxes in 2008.

The BPC found that of the 783 companies to file corporate net income taxes in 2008, only 15% owed any tax. By structuring their businesses as limited liability companies or limited partnerships, nine of the top 10 permit holders in the Marcellus were able to attract investment from individuals who “avoid the corporate net income tax altogether and pay the much lower personal income tax.”

Although they reach different conclusions, the two reports don’t contradict because they cover different time frames and include different information, DOR spokeswoman Elizabeth Brassell told NGI. While the BPC report covers only the 2008 tax year, the DOR figures cover nearly five years. Brassell also said that in the time since it gave the BPC the public tax information to crunch, it found a more “comprehensive” way to analyze the industry classification codes used to categorize taxpayers by sector.

Both the BPC and DOR agree that the current reporting structure makes it difficult to precisely measure Marcellus taxes. Gov. Tom Corbett has noted that there isn’t a box on tax forms that reads “I’m a Marcellus Shale company.” The BPC believes disclosure is the solution.

“There is one way for gas drillers to put this to rest once and for all,” Sharon Ward, executive director of BPC, wrote in a blog post after releasing the report. “Each company could release verifiable details on the state and local taxes it pays in Pennsylvania.”

The question of how much the oil and gas sector pays in taxes is a major point in the debate over whether to tax natural gas production in Pennsylvania. Corbett opposes such a tax and has repeatedly pointed to the existing tax base as one reason why.

At a recent speech in Pittsburgh Corbett cited a 2010 study by Penn State University and the University of Wyoming that said Marcellus producers paid $389 million in state and local taxes in Pennsylvania in 2009 (see NGI, May 2a). He also cited a March report that noted correlations between drilling activity and increased local tax collections (see NGI, March 7).

“So the critics ask me: Why not a severance tax? I guess I respond: Why? They’re paying their taxes. They’re creating wealth. They’re creating income,” Corbett said, noting the additional indirect and induced benefits of increased employment and wealth.

Increasingly, though, the public supports a tax of some kind and several lawmakers have introduced proposals.

• State Rep. Greg Vitali, a Philadelphia-area Democrat, is currently fighting a procedural battle to get his House Bill 33 out of a committee where it has been since he introduced the legislation in February. HB 33 would tax 5% of the value plus 4.6 cents of each Mcf produced in Pennsylvania, designed to compete with the fiscal regime of neighboring West Virginia.

• State Rep. Camille Bud George, a Democrat from central Pennsylvania, introduced House Bill 833 in early March. The bill would impose a 30-cent tax on each Mcf at the wellhead, adjusted based on commodity prices. The majority of the revenue from the tax would go toward local governments, upgrades at wastewater plants, bridge and road repairs and environmental programs.

• State Rep. Kate Harper, a Philadelphia-area Republican, recently introduced House Bill 1406. The bill would impose a 1.5% tax on the gross value of each Mcf at the wellhead for the first 60 months of production and would then jump to 5% for wells producing more than 90 Mcf/d. The revenue would go to education, local governments and environmental programs (see NGI, April 25).

Because Corbett has pledged to veto any tax proposal that added money to the state general fund, interest is particularly high in an “impact fee” proposed by state Senate President Pro Tempore Joe Scarnati, a Republican from north central Pennsylvania (see NGI, May 2b). The bill would enact a base fee of $10,000 per well plus additional payments based on the price of natural gas.

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.