Alternative to state-level severance tax

A new approach to taxing the natural gas industry in Pennsylvania aims to mitigate the local impacts of gas drilling without a statewide tax or fee structure.

In the coming weeks, state Sen. Gene Yaw (R-Lycoming) will unveil a series of legislative proposals dealing with the natural gas industry. Among the measures is a provision to allow counties to include the value of active natural gas wells in property tax assessments.

Mr. Yaw said his intention is to provide a stream of revenue for county and municipal governments to deal with the impact of the growing industry. Last week, representatives of local governments told the Senate Majority Policy Committee the industry is creating increased costs for infrastructure, law enforcement and health services.

Natural gas wells are currently exempt from property taxes after the state Supreme Court ruled in 2002 a “clear statutory requirement” did not exist for their assessment. Other natural resources such as coal and oil are included in property tax assessments.

Mr. Yaw’s bill would overturn the 2002 decision and allow counties to assess property taxes on natural gas wells once again.

The property tax assessment plan would be an alternative to the creation of a state severance tax on the natural gas industry. Since property taxes are assessed, collected and distributed at a local level, the state would see no financial benefit, but Mr. Yaw said he prefers that to a state tax.

“When the money comes down to Harrisburg, you never know where it’s going to end up,” said Mr. Yaw.

In various severance tax proposals last year the state would have retained between 50 percent and 83 percent of the severance tax revenues – for either the General Fund or various state-level environmental funds – leaving a relatively small amount for the local governments.

Property tax in Pennsylvania is assessed by calculating three figures: the value of the sale of the property, the cost of replacing structures on the property and the income generated by the property.

Under Mr. Yaw’s plan, property owners would be subject to an assessment equal to the percentage of the royalty they were receiving from a single well. For example, if a property owner was earning 10 percent of the royalties on a certain well, they would be responsible for 10 percent of the added assessment.

Only actively producing wells would be assessed because the value of a well is dependent on the amount of gas it produces. As wells age and produce less gas, the assessment would drop accordingly.

State Sen. Gene Yaw (R-Lycoming)

Douglas Hill, executive director of the County Commissioners Association of Pennsylvania (CCAP) said his organization supports the implementation of either a property tax assessment or a severance tax.

“The bottom line is that there are local impacts from drilling which the industry is not paying and we support a method of compensation for local governments,” said Mr. Hill.

The CCAP has not taken a specific position on Mr. Yaw’s legislation because the association would prefer to see the drilling company assessed for the tax rather than the property owners.

Mr. Hill said it is impossible to calculate how much annual local tax revenue has been lost since the 2002 Supreme Court ruling, but as the industry expands into Pennsylvania there is more revenue at stake than ever before.

Gov. Tom Corbett opposes the creation of a severance tax and has pledged to veto any tax increase. The governor’s office did not respond to requests for comment on whether Mr. Yaw’s proposal would count as a tax increase.

Kathryn Klaber, president of the Marcellus Shale Coalition, an industry group, said the legislation was a starting point for discussion.

“To ensure that Pennsylvania’s economy and workforce remain ahead of the curve in an increasingly competitive global economy requires common sense solutions that encourage capital investment and job creation,” said Ms. Klaber.

Mr. Yaw also intends to introduce a bill allowing gas companies to pool their leases within geographically linked areas. The bill would not allow for “forced pooling” or allow gas companies to extract gas from properties without lease agreements, he said.