Pennsylvania Debates Proposed Natural Gas Impact "Fee"

 
 
January 31, 2012

Pennsylvania's House and Senate are considering competing proposals to assess so-called impact fees on natural gas drillers. All versions would either permit, or mandate, that county governments charge drillers an annual fee for each well. They differ on the rate, whether the decision to impose the charge be left to the counties or not, how much power the state would have to override local zoning ordinances, and how much revenue could be kept by the localities. The table highlights some of the essential differences between the proposal supported by the House and the Governor, and the Senate's proposal:

House

Senate

Tax Rate

1%

3%

Fee Mandated or Permitted?

Permitted

Mandated

Rate is Minimum or Maximum?

Maximum

Minimum

State Can Override Localities?

No

Yes

Proportion of Revenues Going to Counties and Towns

75%

55%

Supporters of the impact fee say its purpose is to recoup the state's costs in drilling, including the upkeep of roads, emergency management, and environmental protection. This suggests that the charge is really a tax, as a fee is distinguished from a tax depending on whether revenues are put into a general fund or only used to fund the provision of services to people who pay the fees. Gov. Corbett, in defense of his proposal, noted that none of the money would go into the Gen­eral Fund.

This issue matters in Pennsylvania, with its large reserves of natural gas. The Marcellus Shale gas industry has grown in recent years, to the point where it has become a large source of tax revenues ($1 billion over the last five years). Large though it is, falling prices have led some drillers to shut down wells. In a shrinking industry, regulatory and tax change is more likely to influence a driller's decision of whether or not to shut down a marginal mine. Chesapeake Energy is currently planning to shut down many wells, for example. So while Pennsylvania is at present alone among gas-producing states in assessing no impact fee, some in the business are concerned that the tax goes too far. David Spigelmyer of Chesapeake Energy, for one, says the fee would add to the already-excessive burden of regulations.

A tax that charges individuals according to the value that they place on publicly provided services better fits the norm of neutrality and decreases the hazards associated with higher taxes. Under this norm, governments should strive to make the revenue that government agencies receive proportional to the expense.  To the extent that the assessments are fees and not taxes, they treat businesses in all industries neutrally: without different subsidies or taxes.

However, it's not obvious whether the revenues distributed to each of the agencies it funds are the "right" amount of compensation for expenditures. The agencies incur expenses, to be sure, but do these expenses go toward providing services that are socially valuable, and more valuable than their cost? And even assuming that the value is greater than the expense, how well do the fees charged approximate the additional cost of providing services to the drillers?For instance, does State Fire Commissioner provide services at least as highly valued as the 10% of revenues that the governor's bill assigns to it?  Such an estimate cannot be made if prices are not voluntary payments.

On that note, it is worth noting that although the services provided by the government may in some cases be public goods valued by the drillers, they need not be financed coercively. A county official has attested that a driller voluntarily pays to fix the roads it uses. He also fears that an impact tax will cause the driller to cut back its contribution.

An unfortunate side note: it appears that the state believes that what it doesn't tax, it should subsidize. A new bill would offer millions in tax breaks to Shell Oil to develop its new plant in-state.

The proposals in Pennsylvania should be questioned on several issues: fiscal and regulatory federalism; redistribution; government provision of services; and tax neutrality.

For more on states' business tax climates click here.

For more on Pennsylvania's tax climate, click here.

Buy this blogger a cup of coffee!

Sizes

Follow Us

About the Tax Policy Blog

Subscribe to Tax Foundation - Tax Foundation's Tax Policy Blog The Tax Policy Blog is the official weblog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.

Monthly Archive

Privacy Policy