Don’t burden state’s natural gas industry with new tax

Originally Published by the Times Leader

By Timothy Kearney

Marcellus Shale has fractured existing societal fissures along the back country roads of Pennsylvania and chambers of government in Harrisburg.

Debates have flared over the proper level (if any) of taxation as well as drilling’s impact on clean water, pollution and disruptions in traditional lifestyles. It is an understandable result of a transformational discovery: the development of what could be one of the world’s largest gas fields.

The management of a natural resource such as the Marcellus Shale requires capital-intensive investment in a market where prices are unpredictable. This built-in business risk means that companies want as much cost certainty as possible, especially in the areas of taxation and regulation. Leaving them with open questions can hinder the development of a valuable natural resource.

There is a difference between taxation for general budget purposes and taxation to cover the inevitable costs of opening the state to natural gas production. As a partner in the development of this new resource, the state will have to underwrite some essential expenses. Roads will need to be built or strengthened to handle larger vehicles and traffic volume, and some basic services will have to be increased. To the extent that boom-towns boom, there could be the need to build schools and provide other public services. Looking both back into the state’s history and ahead into the future, the commonwealth will have to prepare for potential toxic cleanup costs or well reclamation.

The issue of taxation for Marcellus Shale development, though, should not be separated from the question of business taxation reform for the entire Pennsylvanian economy. Governor-elect Tom Corbett correctly has identified the need for the Keystone State to improve its business climate in order to generate growth and employment. Pennsylvania ranks 26th in the nation in terms of business tax climate, according to the Tax Foundation.

The best that can be said is that our state is the beneficiary of even worse policies in neighboring New York, New Jersey, Ohio and Maryland – all of which rank in the bottom 10. Our commonwealth received a “C” letter grade from the Pennsylvania Business Council for the state’s business competitive position. Facing fierce global competition for capital and jobs, being average simply will not do. The core of Corbett’s agenda is to change the business climate without new taxes. With the electorate and a new state Legislature behind him, he has the mandate to move forward in the New Year.

It would be a mistake to put a new tax burden on this fledgling industry, which is in competition with low-tax, gas-producing states such as West Virginia and Texas among others. It’s essential to remember that the market for gas is global and the advantages other states give their industry through the tax code are real. Pennsylvanians should not envision Marcellus Shale as simply a goose laying golden eggs, lest that goose fly away.

The temptation to levy special taxes – whether it’s because other states have severance taxes or simply to tap the industry as a new source of revenue to address state budget woes – should be strongly resisted. Transitioning to a new business tax system does open the door to impose some sort of tax on the new industry to ease that transformation to help balance the budget. But the point of tax reform is to broaden the base to lower tax rates on all business and most important to generate jobs and income.

The way forward is straightforward: Overhaul Pennsylvania’s business tax system to make all businesses in the commonwealth – natural gas and other mining entities, goods and service producers alike – more competitive. Capital moves to where it can be best put to use. Lower tax rates applied across all lines of business activities will increase after-tax returns throughout the commonwealth.

If Marcellus Shale cannot compete without subsidies, then now is the time to reassess the outlook for this sector. But with convincing data, it appears this industry will continue to generate tax revenue and income across the state for years to come — if it is allowed to flourish. The best way for Marcellus Shale to become a cash cow for state coffers is to let it reach its maximum potential.

Timothy Kearney is an assistant professor of business at Misericordia University in Dallas Township, and is a former senior managing director of Bear Stearns & Co.