United States: Marcellus Shale: Lawmakers Fail To Address Pressing Needs Regarding Natural Gas Industry In 2011-12 Budget

On June 29, 2011, for the first time in eight years, the Pennsylvania General Assembly, confronted with deep budgetary and economic challenges, passed a balanced budget before the June 30 deadline with no broad-based tax increases and a property tax reform measure. Legislators from both parties sought to fill a portion of the 2011–12 budget gap with a new severance tax or impact fee on natural gas producers, but at the risk of having the budget vetoed, lawmakers voted against including either one in the budget. The $27.15 billion General Fund budget, which passed largely along party lines and was signed into law by newly elected governor Tom Corbett, is also the first Pennsylvania budget since 1970 to significantly reduce spending from the previous year, representing a decrease of $1.17 billion, or 4.1 percent, from 2010–11.

According to Governor Corbett, the 2011–12 budget consolidates and streamlines economic development programs to focus on job creation and attracting businesses to Pennsylvania. The budget maintains important tax credit programs at 2010–11 levels, including the Job Creation and Film Production Tax Credits, and increases the cap on the Research and Development Tax Credit from $40 million to $55 million. The budget also reinstates the phase-out of Pennsylvania's corporate Capital Stock and Franchise Tax, which will be eliminated in 2014. Additionally, lawmakers did not seek to amend Pennsylvania's Corporate Net Income Tax or impose combined reporting on business corporations.

In a last-minute legislative measure, Governor Corbett also sought a series of changes to Pennsylvania's property tax reform law, which will give taxpayers greater control over local property tax increases through the referendum process. School districts are now restricted from raising property taxes above an index determined by Pennsylvania's Department of Education, with two exceptions: districts may increase property taxes above the state index without a voter referendum only to fund special education and pension liabilities. The legislature is now out of session until September.

Impact Fee as an Alternative to a Severance Tax

The Marcellus Shale Formation, which principally extends across West Virginia and the Appalachian Basin to northwestern Pennsylvania, represents an important source of energy for the Midwest and the northeastern United States that is projected to last several decades. Geologists estimate that nearly 500 trillion cubic feet of natural gas could be recovered from the formation. Whether to impose a severance tax or an impact fee on natural gas production has been the focus of vigorous debate among lawmakers, economists, producers, local governments, and the general public. Pennsylvania remains the largest natural-gas-producing state without a severance tax.

A study published this week by researchers affiliated with Penn State and funded by the Marcellus Shale Coalition suggests that the economic impact of Marcellus Shale exploration could be even greater than has been previously estimated.1 This study predicts that by 2020, Pennsylvania could supply as much as a quarter of the nation's natural gas, creating $20 billion in value and boosting state and local tax revenues by $2 billion.

Similar industry-backed optimistic reports have generated skepticism from critics who claim that the reports improperly sway the severance tax debate. A recent article published in Ecological Economics persuasively argues that such studies should "(1) includ[e] better assumption of when and where households spend windfall gains, (2) clarify[] the process used to determine where suppliers to the industry and royalty earnings households are located (in state or not), and (3) develop[] a more appropriate econometric model to estimate well drilling as a function of current price and other relevant variables."2 Dr. Kinnaman, Chair of the Department of Economics at Bucknell University, cautions that the credibility of industry or government sponsored research originates not from institutional affiliation, but from the peer review process utilized by all respectable academic journals. This and other studies will likely influence the debate over the economic impact of shale gas extraction.

Shortly after taking office, Governor Corbett created an executive Marcellus Shale Advisory Commission (the "Commission"), principally comprising industry leaders and members of the Corbett administration, to study the impact of natural gas drilling on Pennsylvania. The Commission, headed by Lieutenant Governor James Cawley, is due to submit its final report on July 22. The Commission was charged with the responsibility of developing a comprehensive strategic proposal for the responsible and environmentally sound development of the Marcellus Shale resources.

While the debate over the natural gas industry's contribution to Pennsylvania's economy and infrastructure needs is in its third year, the concept of an impact fee on natural gas producers is relatively new. No state currently imposes an impact fee on natural gas extraction, but impact fees related to other development are common, particularly in the South and West, especially Washington, Oregon, California, Arizona, Colorado, and Florida.3 Unlike the severance tax, the possibility of a natural gas impact fee has not been flatly rejected by Governor Corbett, who has stated that he would consider a fee to support local communities as long as the money was not collected into the General Fund. However, the governor and legislative leaders have insisted that drilling tax revenue will not offset planned budget cuts for public schools, health care, services for the vulnerable, or public universities or fund other core functions of state government. Governor Corbett's agenda over the coming months is to have the Commission conclude its work before lawmakers move to pass any bill or the governor agrees to any fee structure.

State enabling legislation governs the kind of impact fees that local governments may enact. Impact fees have historically been imposed by local governments on developers to fund infrastructure improvements and public services associated with specific projects. In most states, local governments have the authority to impose fees for water and wastewater facilities. Similar fees have also been used to compensate municipalities for negative social or environmental risks. In Pennsylvania, traffic-related impact fees are authorized by statute. In 1990, Pennsylvania enacted legislation under its Municipalities Planning Code that allowed local governments to levy impact fees on developers to cover the costs of new roads, water lines, and sewer systems in the vicinity of a new development. A municipality that chooses to adopt a transportation impact-fee ordinance must complete a series of independent studies and receive public comment. Often the cost of, and timeline for, justfying a transportation fee is affordable only for the most affluent municipalities. The various Marcellus Shale impact-fee proposals authored by Pennsylvania lawmakers seek to eliminate the requirement for municipalities to demonstrate the need for an impact fee, bypassing the hiring of independent consultants and preparing studies. The Pennsylvania Builders Association has long opposed impact fees and successfully lobbied against their enactment.

The leading impact-fee proposal currently in the Pennsylvania General Assembly is Senate Bill 1100 (the "Bill"), originally authored by Senator Joseph Scarnati. As originally drafted, the Bill proposed a base fee of $10,000 per year for any well that produces an average of at least 60,000 cubic feet of gas per day. The fee would increase with increased gas production or an increase in the price of natural gas, up to a possible maximum of $100,000 or more per well per year if the price of gas increased substantially.

On May 16, 2011, the Bill was sent to the Pennsylvania Senate Environmental Resources and Energy Committee, chaired by Senator Mary Jo White. Senator White offered an amendment that significantly changed the way the fee was calculated. Senator White argued that since the local impact on the community from any single well would not increase with an increase in the price of gas, a fee with such an increase was more like a tax than an impact fee. As an alternative, she proposed a flat fee of $40,000 per well for the first year, followed by a $10,000 reduction per year for Years 2 through 4, with a continuing fee of $10,000 for Years 5 through 10.

Because of the production curve of a typical horizontal natural gas well, Senator White's amendment produces roughly the same fee as Senator Scarnati's original proposal for a typical well at the current price of natural gas at least during the first 10 years of production. However, because Senator White's amendment does not adjust the fee in accordance with the price of gas, her amended fee would remain the same despite potential future increases in gas prices. Also, the amended Bill would no longer charge a fee after 10 years of production, while the original Bill imposed the fee for the life of the well as long as it produced an average of at least 60,000 cubic feet of gas per day. Additionally, under Senator White's amendment, natural gas producers could obtain a credit of up to 30 percent of the fee for donations to approved county affordable-housing projects.

Senator White's amendment also made changes to the distribution of the collected fees, although the general structure of the outlays, unlike the fee itself, remained intact. Under the amended Bill, none of the collected fees would be deposited in the General Fund; instead, a separate Shale Impact Account would be established. From this fund, an initial amount ranging from $2.5 million to $7.5 million per year would be distributed to county conservation districts. Beginning in 2012, an additional $1 million would be distributed off the top to the state fire commissioner for the training of first responders to Marcellus Shale emergencies. After these two amounts are paid, 60 percent of the remaining fund would be distributed to counties and municipalities where Marcellus Shale drilling is ongoing. The final 40 percent of the fund would be distributed for environmental grants, the Motor License Fund, and the Hazardous Sites Cleanup Fund.

On June 14, 2011, the Environmental Resources and Energy Committee approved the Bill as amended by Senator White with a unanimous vote, including an affirmative vote by Senator Scarnati. It is not clear when the Bill may receive a vote from the entire Senate. Given Senator Scarnati's position as the Senate's President Pro Tempore, it seems likely that he will be able to push for a vote on his Bill in the fall.

The Pennsylvania Budget and Policy Center opposes the governor's position that a substantial portion of any drilling impact-fee revenues should go only to the local counties where drilling is conducted.4 While sales, income, and corporate taxes are collected from across the state, then pooled in the state's General Fund and largely redistributed across the state to local governments, impact fees are structured to fund the foreseen and unforeseen needs of areas directly affected by a particular activity. However, Pennsylvania lawmakers point to the governor's "no tax" pledge as the driving force behind the adoption of an impact fee rather than a severance tax. An impact fee allows the governor and his constituents to depart from standard practice for the distribution of tax revenues while assuring Pennsylvanians that responsible and environmentally safe drilling will be conducted in the state. Arguably, Pennsylvania would be one of the first gas-producing states to deviate from the severance tax norm. By comparison, former governor Ed Rendell used gaming tax revenues to support statewide property tax reductions. Approximately 88 percent of the revenues from table games goes directly into the state's General Fund. The Pennsylvania Budget and Policy Center fails to recognize a distinction between statewide sanctioned gaming activities designed to increase the state's lottery revenues specifically supporting senior citizens and the capital improvements needed to support the extraction of natural resources in specific counties promoting economic growth.

Impact Fee on Natural Gas―Unique in the United States

If Senate Bill 1100 is passed, Pennsylvania would be the first state to impose an impact fee on natural gas production, although under similar circumstances, several other states, including Montana, Washington, and Wisconsin, have permitted impact fees for wind energy production. In other areas, impact fees are common across the United States. In most cases, these fees are directed to new development and purport to offset the cost to the community associated with the development by providing funds for such activities as building new schools, maintaining roadways, and supplementing emergency and other municipal services.

The only impact fee on natural gas drilling that has been passed to date was a fee imposed by the County of Rio Blanco, Colorado. Rio Blanco is a rural county where unconventional natural-gas-drilling techniques have led to a recent drilling boom. Using a state statute permitting local governments to impose impact fees on "construction and building materials," the Board of County Commissioners of Rio Blanco imposed an impact fee on various equipment and materials used for natural gas drilling. When Rio Blanco issued a notice of deficiency to ExxonMobil for $748,400, ExxonMobil countered that it did not owe the fee since its materials were not "construction and building materials" as required by the statute. The case eventually made its way to the Colorado court of appeals, which held in favor of ExxonMobil and barred the county from imposing the impact fee on natural-gas-drilling companies.5 To date, this overturned county impact fee is the only effort to exact an impact fee from natural gas operations in the United States that has been enacted or tested in the courts.

Analysis of a Potential Natural Gas Impact Fee

While a complete economic analysis of the amended Bill has not yet been published, Dr. Rose Baker and Dr. David Passmore of Penn State's Institute for Research in Training and Development did review the potential economic impact of Senator Scarnati's original impact-fee proposal, along with several more traditional severance tax bills.6 According to Drs. Baker and Passmore, Senate Bill 1100 would generate fees of between $103 million and $172 million per year between 2011 and 2015. These fees alone are too small to have a significant impact on the Pennsylvania economy or the natural gas industry. Drs. Baker and Passmore estimate that the fee would reduce employment by 290 jobs compared to the estimated 7.1 million Pennsylvania jobs in 2011 and that the fee could reduce Pennsylvania's 2011 estimated gross state product of $519 billion by roughly $24 million. The Pennsylvania Budget and Policy Center has also stated that Senator White's amendment drastically reduces the effective tax rate of the Bill to 1 percent from the 3.1 percent proposed by Senator Scarnati.7 Since the above numbers are based on the original text of the Bill, the current amended version should be even less significant.

A June 2011 Quinnipiac University poll8 showed that 69 percent of Pennsylvanians and 59 percent of Pennsylvania Republicans support some type of severance tax on natural gas. Senate Bill 1100 is poised to balance the support of a severance tax against the anti-tax national sentiment that helped Governor Corbett and the Republicans win election in 2010. On July 15, the governor's Marcellus Shale Advisory Commission voted to include the adoption of a local impact fee on drillers in its final recommendations to the Legislature and executive branch set for release on July 22. Commission members stressed that their recommendations are only "the end of the beginning." Lt. Governor Cawley has warned that the Commission's recommendations will likely undergo significant modification during the legislative process. Publication of the Commission's formal report will serve as a platform for lawmakers to resume debate in September when the General Assembly returns to Harrisburg.

Footnotes

1. Andrew Maykuth, "Penn State Report Even More Bullish on Marcellus Shale," The Philadelphia Inquirer, July 20, 2011.

2.Thomas C. Kinnaman, "The Economic Impact of Shale Gas Extraction: A Review of Existing Studies," 70 Ecological Econ. 1243, 1249 (2011).

3.National Impact Fee Survey: 2009; Clancy Mullen, Duncan Associates, Austin, Texas; December 20, 2009.

4."Summary of Representative Reed's Marcellus Fee Plan" (June 28, 2011) (web sites herein last visited July 19, 2011).

5.Bd. of County Comm'rs of Rio Blanco v. ExxonMobil Oil Corp., 192 P.3d 582, 590–91 (Colo. Ct. App. 2008).

6.Dr. Rose M. Baker and Dr. David L. Passmore, "Potential Pennsylvania Economic Impact of Four Natural Gas Severance Tax/Fee Proposals," Presented at Regional Economic Models, Inc., Seminar: Evaluating Fiscal Impacts: The Example of an Oil and Gas Severance Tax (May 18, 2011).

7."A Turn for the Worse: Sen. Scarnati's Amended Marcellus Shale Fee Plan" (June 20, 2011).

8."Big Gender Gap Keeps Pennsylvania Gov's Approval Low, Quinnipiac University Poll Finds; Voters Support Natural Gas Drilling 2-1" (June 14, 2011).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.