Why I Oppose a Severance Tax, 2014 Election Edition

In anticipation the 2014 election, I’ve laid out my argument against a severance tax. Even though the PA Democratic Party has adopted an official position in support of a moratorium on drilling, many of the party’s candidates are ignoring what their party faithful are telling them. Instead, the gubernatorial candidates are thinking of a severance tax as a panacea for our state’s budget woes and they’re hanging onto the hyped-up (and discredited) jobs numbers the industry boasts. More on job numbers in an upcoming post. For now, here are the arguments against the severance tax:

• What is happening in Pennsylvania is a crime against nature. You don’t punish criminals by charging them taxes or fees. You penalize them. I want the natural gas industry to pay for what they’re doing here until it hurts. Moreover, I want the drilling to stop.

• The fundamental problem with taxes and fees is that they become the price of admission — pay up and you can do whatever you want to the state.

• A severance tax would quickly institutionalize drilling. The severance tax would funnel money into the general fund. There’s no question that deserving, yet cash-strapped programs could use the money, but selling off our environment, health and safety is not the way to get it.

• The drillers are already dodging most taxes imposed on them. They take advantage of the Delaware Loophole that allows them to shift profits out of state. When they do file in state, they structure themselves as LLCs and LPs so they can pay at the personal tax rate of 3% instead of the corporate tax rate of 9.9%. Oil and gas reserves are not subject to property taxes, as are other mineral deposits. Drillers are exempt from local business privilege taxes. State and local hotel taxes are waived on all those rooms rented long-term by the imported workers from Texas, Oklahoma, and elsewhere. Many drillers are exempt from local earned income taxes. A host of federal tax incentives significantly reduce the federal income taxes, and in turn, the state income taxes the companies pay regardless of how they file. Range Resources, the second largest driller in the state, had a federal tax rate from 2005 – 2008 of 0.4%. Why aren’t our elected officials working to enforce existing tax laws rather than create new ones?

• What makes anyone think that the industry that is so good at dodging taxes isn’t going to dodge the severance tax? In fact, when the severance tax was on the table before Corbett took office, the natural gas companies were already telegraphing how they planned to work around it. They said, “We’re too poor to pay the cost of setting up operations AND a severance tax, so please give us time to get established, say 3 years, and then, we’ll start paying the tax.” Drilling is like wringing a sponge. You get the most out of the sponge the first few times you wring it. You’ll still get liquid out of the sponge after many wrings, but it’ll be nothing like the amount you get the first few times. Had the severance tax been voted into law then with the grace period for the richest companies in the history of companies, the amount of tax they would have paid after three years would have been negligible. In fact, many who have analyzed production rates, like Deborah Rogers, founder of the Energy Policy Forum and others, have noted that wells don’t appear to be producing as much gas as anticipated.

• There is no amount of money that can pay for the destruction we’re doing to our natural resources, health, safety, and infrastructure. The drilling needs to stop.