By: Randy L. Varner
From the time Governor Ed Rendell proposed a natural gas severance tax in his 2009-2010 budget address in February 2009 to the very end of the 101-day budget impasse in October, the idea of taxing Pennsylvania's Marcellus Shale "gold rush" created grand political theater. With the dire budget situation looming in the background, the Governor's estimation that the proposed severance tax could raise $107 million in its first year instantly became one of the hot buttons of the budget process.
The mobilized forces involved in the debate were well-funded, well-informed and made compelling arguments for their sides. Studies were produced and subsequently attacked. Position papers were released, opinion editorials were written, press conferences were held, websites were created, and venerable groups, such as the Pennsylvania Chamber of Business and Industry, the Sierra Club, Citizens for Pennsylvania's Future, and the Pennsylvania Oil and Gas Association all became engaged in the debate. At its core, the debate focused on what impact the proposed severance tax would have on the development of the natural gas drilling industry in the Commonwealth. The intense attention to this core issue, however, caused other important issues to receive less attention than they warranted.
For instance, while the debate centered on the impact the severance tax would have on the gas companies that are extracting the gas from the ground, little attention was given to the impact the tax would have on the landowner receiving royalties from drilling rights. Specifically, the royalty provision in many gas leases provides that the 1/8 (or higher, depending on the negotiated percentage) royalty payment is made after all taxes, assessments and adjustments on production from the leasehold are removed from revenue realized. In the case of such leases, a portion of the tax burden would be borne by the landowner.
Along those same lines, any legislation imposing a severance tax should be clear about whom the tax is imposed upon. Both the House and Senate versions of the severance tax bills introduced in 2009 would impose the tax upon every "producer" in the Commonwealth. "Producer" is defined in pertinent part as "[a] person who engages or continues within this Commonwealth in the business of severing natural gas for sale, profit or commercial use." It is not difficult to imagine the Department of Revenue taking an overly expansive view of the breadth of that definition. The General Assembly should not delegate to the Department of Revenue the power to determine whether a landowner-lessor is a "producer"; rather, it should make that determination on its own and make that determination clear in the legislation.
Also, the issue of oil and gas interests becoming subject to property taxes also took a back seat in the debate. On March 10, HB 10, which would subject oil and gas interests to real estate property taxation, was introduced in the House. Currently, oil and gas interests are not subject to property taxation under the Pennsylvania Supreme Court's holding in Independent Oil & Gas Association v. Board of Assessment of Fayette County, 572 Pa. 240, 814 A.2d 180 (2002) ("IOGA"). Prior to the Supreme Court's decision in IOGA, many counties assessed such interests as part of the property tax base. In IOGA, however, the Court determined that the assessment statutes do not provide for the taxation of oil and gas interests because they are not "lands" or any physical improvement "permanently affixed" to the ground. Id. HB 10 specifically would include "rights held pursuant to a lease or other agreement" regarding natural gas and oil as being subject to taxation as real estate.
These are just a few examples of other issues surrounding the Marcellus Shale tax debate that go beyond the normal talking points and media headlines, but nevertheless are of great importance in the overall picture. Policymakers will once again be challenged with these issues as part of the upcoming 2010-2011 budget debate.
Originally published in the January 2010 edition of Capital Watch.