Post by melody on Apr 28, 2014 23:45:13 GMT -5
NATURAL GAS & BUSINESS LEADERS CRITICAL OF SEVERANCE TAX PROPOSALS
By Jeff Cox, PLS
4/22/14
Natural Gas Industry Opposed to Severance Tax
In the wake of recent reports of lawmakers looking at a severance tax on natural gas to ease budgetary pressures, a group representing the state’s natural gas industry and business expressed their opposition to the tax.
During a conference call on Tuesday, various business and industry leaders stated that $631 million has already been paid under the Act 13 impact fee since 2012 and an additional severance tax would be irresponsible.
Leaders from Pennsylvania’s natural gas industry and business community held a statewide telephone conference call to criticize proposals to impose a state severance tax on unconventional natural gas producers and to warn of the potential negative impact on the Commonwealth’s economic climate. With revenue collections falling behind expectations and a potential $500 million budget deficit, news stories have appeared predicting the possibility of an extraction tax being part of the budget discussions. Representatives from the Associated Petroleum Industries of Pennsylvania (API-PA), the Pennsylvania Oil & Gas Association (PIOGA), the Pennsylvania Chamber of Business & Industry, and the Westmoreland County Chamber of Commerce participated in the conference call.
API-PA Executive Director Stephanie Catarino Wissman pointed out that the Department of Environmental Protection reported in February that Marcellus shale and natural gas production in Pennsylvania surpassed three trillion cubic feet in 2013 which was more than double the previous year’s production. She commented, “Simply stated shale development equals more jobs and not just in the energy business. It has created jobs in the construction industry, the chemical industry, the trucking industry, the hospitality industry, the steel industry, and elsewhere.” Wissman noted, “The average Pennsylvania natural gas and oil worker earns over $35,000 per year more than the state’s average income and those opportunities are multiplying.”
According to Wissman, “Already the industry has paid over $2.1 billion in state taxes since 2007.” She continued, “Under Act 13 of 2012, a local impact fee is assessed on all natural gas producers generating additional revenues to the Unconventional Gas Well Fund and so far producers have paid over $630 million in impact fees.” Wissman asserted, “These funds have allowed us to build better roads, develop better housing, and provide better services to families across the state.” She added, “In short, shale energy development made possible by hydraulic fracturing has transformed Pennsylvania’s economic future.”
Wissman argued, “With the right policies moving forward, Pennsylvania energy development will continue to generate good news for many years to come.” She warned, “Unfortunately, a misguided severance tax could strangle production, undermine Pennsylvania’s competitive position and threaten our bright economic bright economic future.” Wissman asserted, “Make no mistake, these short-sighted tax schemes are based on politics not economics. They will destroy job growth and stifle the type of capital investment that is helping our state to grow.”
Louis D’Amico, PIOGA President and Executive Director, compared Pennsylvania’s 9.99 percent corporate net income (CNI) tax rate to other oil and gas producing states. He pointed out that Pennsylvania’s CNI is nearly double the rate in Colorado, North Dakota, and Ohio. D’Amico also pointed out that Texas has no corporate tax. He commented, “From the outset our industry is at a disadvantage here compared to those other states competing for this investment.” Noting there has been a claim that the effective rate of taxation being paid by the oil and natural gas companies is not 9.99 percent because they can deduct intangible drilling costs, D’Amico conceded it is true but explained those costs are also deducted in every other state that has a much lower CNI rate. He disputed claims that West Virginia’s severance tax has not impacted drilling in that state. According to D’Amico, “West Virginia’s most recent severance tax increase has been an anchor on development evidenced by the rig count.” He pointed out that there were 28 working rigs in West Virginia in 2007 and that number has steadily declined to 19 working rigs in 2011 while Pennsylvania has consistently had a higher number of operating rigs. D’Amico also noted that Pennsylvania’s other extraction industries such as coal, timber, aggregate, and slate are not subjected to severance taxes.
Gene Barr, President of the Pennsylvania Chamber of Business & Industry, spoke about the “resurgence in the manufacturing side.” He asserted, “Because of the ability to bring affordable clean natural gas into many of these manufacturing operations many have come back, many have stayed and many have made additional investments because we have this resource here in Pennsylvania.” Barr observed, “The other thing that needs to be kept in perspective is that any business will attempt to pass on any additional costs that are imposed on it from a government regulatory perspective or legislative perspective and that includes a severance tax.” Regarding the argument that corporations “don’t pay taxes” and “Marcellus shale people need to pay their fair share,” Barr noted, “In reality, Pennsylvania gets a higher percentage of its total tax revenues from corporate taxes than the US average.” He warned, “In 1991 this Commonwealth made a disastrous decision about increasing corporate taxes to a level that took us decades to dig out from.” Barr concluded, “I am tremendously concerned as a representative of small and large businesses across Pennsylvania that we will unfortunately make the same mistake here and really begin to reduce or eliminate the advantage Pennsylvania has in terms of homegrown energy.”
Westmoreland County Chamber of Commerce President Chad Amond commented, “The continued success of the natural gas industry is an important issue for Westmoreland County, our business community, and our workforce.” He said the Westmoreland County Chamber “supports a variety of efforts to increase production, conservation, delivery, and new energy technology.” Amond added, “We also support a tax climate that allows the industry to continue to grow and prosper here for the betterment of residents and businesses here in Westmoreland County and across Pennsylvania.” He provided an overview of the industry’s impact, directly and indirectly, on Westmoreland County. Amond observed, “I can tell you firsthand that our business community is stronger today as a result of the success of the gas industry.” Amond told reporters, “We are concerned about discussions coming out of Harrisburg and talks about major overhauls to the stability of the industry’s tax situation.” He added, “We know all too well that sometimes when the butterflies flutter their wings in Harrisburg it causes tidal waves in other parts of the Commonwealth.”
The participants then responded to questions from the news media.
The Democratic gubernatorial candidates have been talking about a severance tax for several weeks and in the last few days we have been hearing from Republican legislative leaders talking about this. How serious is this with a Republican-controlled legislature enacting this in the next few months?
Wissman: Obviously, anytime where the state budget is challenged they are going to be looking at various outlets to possibly close the budget hole. I think that, unfortunately, our industry is part of that discussion at this point in time. It seems to be nonpartisan. I cannot sit here and tell you, looking at a crystal ball, ultimately what can happen here. There is definitely sentiment on both sides of the aisle about talking about this issue.
D’Amico: It’s true that there are budget challenges and it also true that bipartisan votes on both sides of the aisle are open to looking at ways to cure that. My comment is, quite frankly, should you be taking and singling out a single industry, one that has contributed the most economic growth and the most increase in jobs throughout the state over the past few years for taxation. I believe the people of Pennsylvania will pay for that severance tax in two ways. As investment decreases you will see fewer wells drilled and fewer wells drilled in Pennsylvania doesn’t just impact Pennsylvania. We are anticipating by next year that 25 percent of the United States’ natural gas supplies will be coming out of this Commonwealth. Anything that decreases the ability to supply that amount of gas is going to have direct impact not only in Pennsylvania but in the rest of the US. The other place where we are going to pay for this in Pennsylvania is in the job growth and in addition of new industries. The frustrating part of this is that just discussion of a severance tax is scaring some investors right now. It is giving pause to folks on other parts of the country and other parts of world about relocating to Pennsylvania.
Barr: A lot of this is related to the fact we have not been able to solve our issues and our problems relative to the pension issue that is swallowing almost every new dollar coming into Pennsylvania. That is absolutely imperative to do. Much of that is due to a retroactive benefit increase as well as the fact that over the years we did not put in the dollars that we were required to do. But as Lou points out, if you increase those taxes assuming you will get more in many cases you will end up getting less. There is an erroneous assumption from many in Pennsylvania who say the gas is here and they have to stay and they have to get it. The reality is it can stay in the ground if it is not economical to get it out. That is just a simple truth.
Wissman: A severance tax will have a ripple effect not only directly on the oil and natural gas industry but all sectors of Pennsylvania’s economy.
Have there been any discussions about repealing the impact fee if a severance tax is imposed or will there be both?
Wissman: Under Act 13 of 2012, language does state that if a severance tax is enacted the local impact fee would cease. However, there have been multiple proposals that have been talked about that would call for the severance tax in addition to the local impact fee and that can be changed very simply…So it is not out of the realm of possibility that you could ultimately end up with both.
Barr: In that scenario, there is only two ways to look at this. Either the municipalities and the county governments that have gotten the relief looked for in terms of the impact fees will be gone or you are going to make these efforts more punitive by layering this on top of the CNI, on top of the impact fees, etc., if you talk about a severance tax.
Wissman: I would add if that were to happen Pennsylvania would be the only state in the nation that would have two fees such as that.
In the past there have been several calls for a severance tax that have not gotten anywhere. Is there anything this time that it is making it any more serious?
Barr: It goes back to … the fact that the pension problem is increasing tremendously in significance and our inability to come to grips with that is creating more discussion about that. So I think that is clearly one of the ones that are driving that.
When discussing West Virginia, you made a correlation with the rig count and Pennsylvania’s count decreasing from 111 in 2011 to 56 currently. It is my understanding that decrease had a lot more to do with the economics of dry gas versus wet gas as opposed to the impact fee. Is a correlation between a rig count and a fee a fallacy?
D’Amico: You are absolutely right about the reduction in Pennsylvania which is still far outreaching West Virginia which is the point I was making. There are great reasons why rigs have moved to Ohio. One is the anticipation of higher liquids content and the potential in some areas of actual oil production. The other aspect is Ohio has, cost-wise, a better tax structure and a better economic structure than Pennsylvania. It is making a lot of sense for people to move into Ohio… I think it is going to continue for a period of time until we actually catch up with our infrastructure build out and get more of the dry gas out of Pennsylvania. One of the points we haven’t hit on here is if you look at Marcellus shale development in Pennsylvania we essentially have a barbell. The bulk of the activity is in the north central part of the state, the northeast part of the state and the southwest. The southwest is clearly a result of the liquids production. What we are seeing in areas such as Lycoming and Susquehanna Counties is huge reserves. What you are seeing in between is very little activity. With the low cost of natural gas it is very challenging for a company to make money with Marcellus outside of those two particular areas.
Given the factors of the increased profit for liquids and oil as opposed to the move favorable tax structure in Ohio, which is driving the move west?
D’Amico: I think liquids.
Regarding any increased taxes being passed onto consumers, what is your response to Democratic candidate Tom Wolf’s explanation that a severance tax would be one of the few taxes in Pennsylvania that would be an “exportable tax” and a majority of the gas produced in Pennsylvania is actually going to the New England/New York market where the consumers there would actually be paying the tax as opposed to the residents of Pennsylvania?
Barr: Even if you adopt that, what it still means it is still not much comfort to a manufacturer in Pennsylvania who has had their costs increased. I get Tom’s point and I understand it. But the reality is many businesses and companies in Pennsylvania because of their proximity have had the ability to significantly reduce their energy costs which for many of them is the overwhelming part of their costs. That is small comfort to somebody who is going to be paying more and may have lost their competitive advantage they have by being close to the outlet here.
By Jeff Cox, PLS
4/22/14
Natural Gas Industry Opposed to Severance Tax
In the wake of recent reports of lawmakers looking at a severance tax on natural gas to ease budgetary pressures, a group representing the state’s natural gas industry and business expressed their opposition to the tax.
During a conference call on Tuesday, various business and industry leaders stated that $631 million has already been paid under the Act 13 impact fee since 2012 and an additional severance tax would be irresponsible.
Leaders from Pennsylvania’s natural gas industry and business community held a statewide telephone conference call to criticize proposals to impose a state severance tax on unconventional natural gas producers and to warn of the potential negative impact on the Commonwealth’s economic climate. With revenue collections falling behind expectations and a potential $500 million budget deficit, news stories have appeared predicting the possibility of an extraction tax being part of the budget discussions. Representatives from the Associated Petroleum Industries of Pennsylvania (API-PA), the Pennsylvania Oil & Gas Association (PIOGA), the Pennsylvania Chamber of Business & Industry, and the Westmoreland County Chamber of Commerce participated in the conference call.
API-PA Executive Director Stephanie Catarino Wissman pointed out that the Department of Environmental Protection reported in February that Marcellus shale and natural gas production in Pennsylvania surpassed three trillion cubic feet in 2013 which was more than double the previous year’s production. She commented, “Simply stated shale development equals more jobs and not just in the energy business. It has created jobs in the construction industry, the chemical industry, the trucking industry, the hospitality industry, the steel industry, and elsewhere.” Wissman noted, “The average Pennsylvania natural gas and oil worker earns over $35,000 per year more than the state’s average income and those opportunities are multiplying.”
According to Wissman, “Already the industry has paid over $2.1 billion in state taxes since 2007.” She continued, “Under Act 13 of 2012, a local impact fee is assessed on all natural gas producers generating additional revenues to the Unconventional Gas Well Fund and so far producers have paid over $630 million in impact fees.” Wissman asserted, “These funds have allowed us to build better roads, develop better housing, and provide better services to families across the state.” She added, “In short, shale energy development made possible by hydraulic fracturing has transformed Pennsylvania’s economic future.”
Wissman argued, “With the right policies moving forward, Pennsylvania energy development will continue to generate good news for many years to come.” She warned, “Unfortunately, a misguided severance tax could strangle production, undermine Pennsylvania’s competitive position and threaten our bright economic bright economic future.” Wissman asserted, “Make no mistake, these short-sighted tax schemes are based on politics not economics. They will destroy job growth and stifle the type of capital investment that is helping our state to grow.”
Louis D’Amico, PIOGA President and Executive Director, compared Pennsylvania’s 9.99 percent corporate net income (CNI) tax rate to other oil and gas producing states. He pointed out that Pennsylvania’s CNI is nearly double the rate in Colorado, North Dakota, and Ohio. D’Amico also pointed out that Texas has no corporate tax. He commented, “From the outset our industry is at a disadvantage here compared to those other states competing for this investment.” Noting there has been a claim that the effective rate of taxation being paid by the oil and natural gas companies is not 9.99 percent because they can deduct intangible drilling costs, D’Amico conceded it is true but explained those costs are also deducted in every other state that has a much lower CNI rate. He disputed claims that West Virginia’s severance tax has not impacted drilling in that state. According to D’Amico, “West Virginia’s most recent severance tax increase has been an anchor on development evidenced by the rig count.” He pointed out that there were 28 working rigs in West Virginia in 2007 and that number has steadily declined to 19 working rigs in 2011 while Pennsylvania has consistently had a higher number of operating rigs. D’Amico also noted that Pennsylvania’s other extraction industries such as coal, timber, aggregate, and slate are not subjected to severance taxes.
Gene Barr, President of the Pennsylvania Chamber of Business & Industry, spoke about the “resurgence in the manufacturing side.” He asserted, “Because of the ability to bring affordable clean natural gas into many of these manufacturing operations many have come back, many have stayed and many have made additional investments because we have this resource here in Pennsylvania.” Barr observed, “The other thing that needs to be kept in perspective is that any business will attempt to pass on any additional costs that are imposed on it from a government regulatory perspective or legislative perspective and that includes a severance tax.” Regarding the argument that corporations “don’t pay taxes” and “Marcellus shale people need to pay their fair share,” Barr noted, “In reality, Pennsylvania gets a higher percentage of its total tax revenues from corporate taxes than the US average.” He warned, “In 1991 this Commonwealth made a disastrous decision about increasing corporate taxes to a level that took us decades to dig out from.” Barr concluded, “I am tremendously concerned as a representative of small and large businesses across Pennsylvania that we will unfortunately make the same mistake here and really begin to reduce or eliminate the advantage Pennsylvania has in terms of homegrown energy.”
Westmoreland County Chamber of Commerce President Chad Amond commented, “The continued success of the natural gas industry is an important issue for Westmoreland County, our business community, and our workforce.” He said the Westmoreland County Chamber “supports a variety of efforts to increase production, conservation, delivery, and new energy technology.” Amond added, “We also support a tax climate that allows the industry to continue to grow and prosper here for the betterment of residents and businesses here in Westmoreland County and across Pennsylvania.” He provided an overview of the industry’s impact, directly and indirectly, on Westmoreland County. Amond observed, “I can tell you firsthand that our business community is stronger today as a result of the success of the gas industry.” Amond told reporters, “We are concerned about discussions coming out of Harrisburg and talks about major overhauls to the stability of the industry’s tax situation.” He added, “We know all too well that sometimes when the butterflies flutter their wings in Harrisburg it causes tidal waves in other parts of the Commonwealth.”
The participants then responded to questions from the news media.
The Democratic gubernatorial candidates have been talking about a severance tax for several weeks and in the last few days we have been hearing from Republican legislative leaders talking about this. How serious is this with a Republican-controlled legislature enacting this in the next few months?
Wissman: Obviously, anytime where the state budget is challenged they are going to be looking at various outlets to possibly close the budget hole. I think that, unfortunately, our industry is part of that discussion at this point in time. It seems to be nonpartisan. I cannot sit here and tell you, looking at a crystal ball, ultimately what can happen here. There is definitely sentiment on both sides of the aisle about talking about this issue.
D’Amico: It’s true that there are budget challenges and it also true that bipartisan votes on both sides of the aisle are open to looking at ways to cure that. My comment is, quite frankly, should you be taking and singling out a single industry, one that has contributed the most economic growth and the most increase in jobs throughout the state over the past few years for taxation. I believe the people of Pennsylvania will pay for that severance tax in two ways. As investment decreases you will see fewer wells drilled and fewer wells drilled in Pennsylvania doesn’t just impact Pennsylvania. We are anticipating by next year that 25 percent of the United States’ natural gas supplies will be coming out of this Commonwealth. Anything that decreases the ability to supply that amount of gas is going to have direct impact not only in Pennsylvania but in the rest of the US. The other place where we are going to pay for this in Pennsylvania is in the job growth and in addition of new industries. The frustrating part of this is that just discussion of a severance tax is scaring some investors right now. It is giving pause to folks on other parts of the country and other parts of world about relocating to Pennsylvania.
Barr: A lot of this is related to the fact we have not been able to solve our issues and our problems relative to the pension issue that is swallowing almost every new dollar coming into Pennsylvania. That is absolutely imperative to do. Much of that is due to a retroactive benefit increase as well as the fact that over the years we did not put in the dollars that we were required to do. But as Lou points out, if you increase those taxes assuming you will get more in many cases you will end up getting less. There is an erroneous assumption from many in Pennsylvania who say the gas is here and they have to stay and they have to get it. The reality is it can stay in the ground if it is not economical to get it out. That is just a simple truth.
Wissman: A severance tax will have a ripple effect not only directly on the oil and natural gas industry but all sectors of Pennsylvania’s economy.
Have there been any discussions about repealing the impact fee if a severance tax is imposed or will there be both?
Wissman: Under Act 13 of 2012, language does state that if a severance tax is enacted the local impact fee would cease. However, there have been multiple proposals that have been talked about that would call for the severance tax in addition to the local impact fee and that can be changed very simply…So it is not out of the realm of possibility that you could ultimately end up with both.
Barr: In that scenario, there is only two ways to look at this. Either the municipalities and the county governments that have gotten the relief looked for in terms of the impact fees will be gone or you are going to make these efforts more punitive by layering this on top of the CNI, on top of the impact fees, etc., if you talk about a severance tax.
Wissman: I would add if that were to happen Pennsylvania would be the only state in the nation that would have two fees such as that.
In the past there have been several calls for a severance tax that have not gotten anywhere. Is there anything this time that it is making it any more serious?
Barr: It goes back to … the fact that the pension problem is increasing tremendously in significance and our inability to come to grips with that is creating more discussion about that. So I think that is clearly one of the ones that are driving that.
When discussing West Virginia, you made a correlation with the rig count and Pennsylvania’s count decreasing from 111 in 2011 to 56 currently. It is my understanding that decrease had a lot more to do with the economics of dry gas versus wet gas as opposed to the impact fee. Is a correlation between a rig count and a fee a fallacy?
D’Amico: You are absolutely right about the reduction in Pennsylvania which is still far outreaching West Virginia which is the point I was making. There are great reasons why rigs have moved to Ohio. One is the anticipation of higher liquids content and the potential in some areas of actual oil production. The other aspect is Ohio has, cost-wise, a better tax structure and a better economic structure than Pennsylvania. It is making a lot of sense for people to move into Ohio… I think it is going to continue for a period of time until we actually catch up with our infrastructure build out and get more of the dry gas out of Pennsylvania. One of the points we haven’t hit on here is if you look at Marcellus shale development in Pennsylvania we essentially have a barbell. The bulk of the activity is in the north central part of the state, the northeast part of the state and the southwest. The southwest is clearly a result of the liquids production. What we are seeing in areas such as Lycoming and Susquehanna Counties is huge reserves. What you are seeing in between is very little activity. With the low cost of natural gas it is very challenging for a company to make money with Marcellus outside of those two particular areas.
Given the factors of the increased profit for liquids and oil as opposed to the move favorable tax structure in Ohio, which is driving the move west?
D’Amico: I think liquids.
Regarding any increased taxes being passed onto consumers, what is your response to Democratic candidate Tom Wolf’s explanation that a severance tax would be one of the few taxes in Pennsylvania that would be an “exportable tax” and a majority of the gas produced in Pennsylvania is actually going to the New England/New York market where the consumers there would actually be paying the tax as opposed to the residents of Pennsylvania?
Barr: Even if you adopt that, what it still means it is still not much comfort to a manufacturer in Pennsylvania who has had their costs increased. I get Tom’s point and I understand it. But the reality is many businesses and companies in Pennsylvania because of their proximity have had the ability to significantly reduce their energy costs which for many of them is the overwhelming part of their costs. That is small comfort to somebody who is going to be paying more and may have lost their competitive advantage they have by being close to the outlet here.
