Guest Column By Clifford Rieders
The debate rages as to whether Marcellus Shale drillers should pay a severance tax to the government.
The taxers say that the drillers are depleting the land and therefore ought to pay money representing a percentage of what they sever from the land because the asset will one day be gone.
The no-taxers say we need to incubate the industry to maximize the number of jobs and economic growth the drillers and their compatriots will bring. No-taxers point out that even though 38 other states have a severance tax, virtually every state that has gas in the ground, some of those states have a lower total tax when you count levies such as income and sales taxes.
Who is right? We can argue about the long-term cost of drilling as opposed to the long-term value and economic development. We can argue as to whether a severance tax would be lost in the general coffers of a money-hungry commonwealth or whether it would be used wisely to remediate damage caused by gas drilling and its associated fracking.
If there is no severance tax, would the economic activity be so much more as to make up for the cost of drilling? No analysis available to the public proves that argument. Do the states that tax oil and gas taken from the land wisely use that money? It depends on the state and who is in power.
Landowners who have gas removed from their property and benefit by royalties may or may not invest locally. However, from a tax point of view, the land depreciates as the gas is removed. This "depletion allowance" is a tax benefit to landowners by virtue of the theory that their land becomes less valuable as the mineral or other substance is removed. Therefore landowners can reduce the taxes they pay on the royalties by the extent to which the gas goes bye-bye.
That would not be so bad if the gas drillers paid taxes on all the money they make. Gas drillers also benefit by our corporate-cozy tax code. From their income, the gas drillers can deduct the cost of searching for the gas, drilling, research and development, tools, parts, equipment, employees, and royalty payments to landowners. The tax advantages to drillers and landowners are second to none in the tax code.
Considering that both landowner and driller make money from the activity and are afforded considerable tax savings, the question is properly asked as to who should pay the bill from any problems caused by the drilling. It seems as though those who are making money off the activity should be putting a little something aside for our grandchildren, who will have to deal with any problems caused by gas removal.
One good idea that has been floated is local taxation, but the Pennsylvania Supreme Court has suggested that the quirky doctrine of pre-emption prevents local municipalities from protecting themselves.
What about local excess user fees charged by school districts, social service agencies and municipalities for use of their facilities by drillers and owners? This can be based upon amortization or depreciation of the particular facility.
For example, a road would ordinarily be built so it would have to be resurfaced once every 10 years. But now because of the use of heavy-duty drilling rigs, the road must be replaced after five years and the projected cost of that activity could be levied against the users. The same thing could be done for other services provided by local government as demands of the burgeoning industry increase.
User fees have been a commonly accepted way of financing everything from museums to court systems.
The problem is that we spend more time arguing over philosophy and dogma than trying to wrap our arms around solutions to imminently solvable problems.
We need to put aside the Republican-Democratic schism and focus upon the cost to our local agencies by virtue of the gas-drilling cornucopia. Once we get a good handle on those costs, we must be willing to examine what is driving those costs and how best to address them without throwing out the baby with the bath water. Problems are solvable, even if attitudes are not.
Clifford Rieders is past president of the Pennsylvania Trial Lawyers Association.
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