Where’s the Fracking Money for PA?

 by Andrew Goutman

What sort of imagery runs through your mind as you gaze across the endless expanse of North Dakota? Bleak, colorless prairies? Miles of snow-covered land punctuated by barbed-wired fences, like in the movie “Fargo?” (Full disclosure: I have never been to North Dakota.)

Blink one time and this is what you might see:  Flocks of job-seekers converging on a state flush with enough cash to pursue job-creating public works programs; and a state poised to make significant cuts in property taxes. That sure beats endless snow and barbed-wired fences.

North Dakota’s budget surplus has ballooned to $1.6 billion, according to Gov. Jack Dalrymple, the result of  tax collections from a prosperous energy economy. More specifically, the state has cashed in on a type of natural gas exploration called hydraulic fracturing, or fracking, by imposing an 11.5 percent severance tax on drillers. North Dakota collected nearly $1.9 billion in severance taxes in 2011. The state’s unemployment rate is 3 percent.

Now, let’s adjust our gaze to Pennsylvania, my home state, and see what’s booming there. After months of vacillation, Gov. Tom Corbett agreed to release $45 million so that Philadelphia schools could rehire 80 counselors who had been laid off in a brutal state budget crisis. Now, every Philadelphia public high school will have the equivalent of one full-time counselor for each of its 169 schools if they share efficiently. Some schools skipped administering the PSATs because there was no counselor available or no money to pay the fees.

Since becoming governor, Tom Corbett has presided over $1 billion in state budget cuts for education. Last summer, the state’s transportation secretary announced that approximately 1,400 of Pennsylvania’s 25,000 bridges could face some kind of travel restriction without funding for repairs. No money has been forthcoming. How do you like those snow-covered prairies now?

There’s Gas in Them There Hills

Pennsylvania is one of many fortunate states (some call Pennsylvania the Saudi Arabia of natural gas) whose land sits on top of a large shale gas formation called the Marcellus Shale. The extraction of natural gas from this shale is done by the same process of hydraulic fracturing as they do in North Dakota. Fracking’s threat to the environment is palpable and battle lines have been drawn. The state of Vermont has totally banned hydraulic fracturing. New York State is now considering lifting its four-year moratorium on fracking. On the other hand, the United States is poised to be the world’s largest energy producer by the year 2020 and a net exporter of natural gas…with big consequences for our national security and state budgets. So where does that leave Pennsylvania’s state budget?

Pennsylvania was the only state with abundant energy resources in 2012 that did not tax natural gas producers…despite the fact that it had issued over 10,000 drilling permits (the state denied a mere 36). The decision not to tax was made in part due to a 2009 Penn State University study that forecasted that drillers would shun the state if drilling taxes were imposed. It was later revealed that the study was funded by the Marcellus Shale Coalition (more about them later), the drilling industry trade group that is dedicated to natural gas deregulation. A separate SUNY-Buffalo study on fracking was canceled in 2012 when it was learned that the leading researcher, Dr. Tim Considine, took nearly $6 million in donations for his department from oil and gas interests the previous year.

With Pennsylvania bogged down by lobbying and research by groups with questionable motives, other energy-producing states moved swiftly to get a fair return of their natural resources. For every Louisiana, which missed out on hundreds of millions of dollars in fracking revenues because of Gov. Bobby Jindal’s rigid tax resistance, there were dozens of other states (28 and counting) with natural gas, oil or coal resources that raced to impose a severance tax…a tax that’s based on the volume or value of the gas production. States such as Iowa, New York and, yes, Pennsylvania, were left out in the cold.

A Tax By Any Other Name…

By 2012 Pennsylvania still had not found the political will to pass a severance tax. (Even conservative Texas got its severance tax: 7.5 percent on natural gas and 4.6 percent on oil, which brought the state $2.7 billion in revenue in 2011.) Gov. Corbett took office in the 2010 Republican wave election that spouted small government, anti-tax verbosity, and he nixed his predecessor’s (Ed Rendell’s) severance tax proposal. But the Great Recession slowed federal dollars…folks were yelling about trucks at drilling sites with out-of-state plates…something had to be done.

The Republican majority in the Pennsylvania legislature came up with a solution: an “impact fee” on natural gas drillers. It’s not really a tax, you see…it’s a fee. Corbett was delighted: “Well, instead of a tax, we enacted an impact fee. I reminded many people that companies were already paying taxes…corporate and sales taxes…Their employees pay their income tax.” The Pennsylvania Budget and Public Policy Center tried to explain the fee part: “The impact fee generates revenue based on the number of wells drilled, the number of years since the well was drilled, and the price of natural gas…rather than the value of gas production.” And what distinguishes a fee from a tax? Frack it; don’t ask.

So here is where the rubber hits the road. The impact fee has generated for Pennsylvania’s coffers an estimated $202 million in 2011 and $204 million in 2012. The Public Policy Center reported that had the Corbett Administration simply adopted the severance tax formula of neighboring West Virginia, Pennsylvania would be reaping an estimated $532 on shale gas production in 2013-14. Such revenues, according to the Center’s Research Director Michael Woods, would provide the state “with an important source of funding for investments in education, colleges, transportation and other infrastructure that help build a strong economy.”

But let’s go even further. “The gap grows wider, and Pennsylvanians will get shortchanged,” remarked Sharon Ward, another director of the Public Policy Center. She said a modest 4 percent natural gas severance tax would bring in $1.2 billion annually by 2019-20, three times as much as the $382 million that would be generated by the impact fee. That’s a lot of school books and bridge repairs.

Stubborn As a Mule

The burning question here is: Why won’t Gov. Corbett budge on something with so much upside and, at best, a questionable downside. It’s true he signed the “Taxpayer Protection Pledge” that undoubtedly made Grover Norquist very happy. But so did Republican Governor John Kasich, and he’s been pushing to increase Ohio’s severance tax, said to be the lowest (2.5 percent) in the nation.

Maybe this will give us a better clue: Perhaps its the massive amount of money that oil and gas interests have given to Corbett over the years. Corbett received $1,042,116 from the industry for his campaign for governor, and $361,207 while running for attorney general, according to Center for American Progress. Corbett’s 2014 reelection team has set its sights on $30 million for the 2014 campaign, and you can bet that wads of it will come from deep drilling, pun totally intended.

To this day, Gov. Corbett remains combatively opposed to a severance tax on fracking. And he’s got a natural partner in the form of the Marcellus Shale Coalition (MSC), which just recently went on the offensive against Democratic gubernatorial hopefuls who want what other states seem to enjoy. While all Democratic candidates have generally endorsed a severance tax, US Rep. Allyson Schwartz, of Philadelphia, has specifically called for a 5 percent tax on natural gas production. “Pennsylvanians deserve a fair deal and a lasting positive legacy for the commonwealth,” Schwartz told Philly.com.

A Battle to the Finish

In an news release from mid-October, the MSC argued that “new energy taxes will reduce development in Pennsylvania, and more capital–not less–will be directed to other states.” This line of reasoning seems to mimic the conclusions of those two tainted studies, and it seems to be a losing argument in the war of public opinion. Jon Geeting of Keystone Politics put it succinctly: “If it’s profitable to drill, gas companies will drill. If it’s not, they won’t. Severance taxes don’t appear to be reducing investment in every other state.” [Emphasis mine.]

But no matter who wins the war of opinion, there is the tricky question of whether a severance tax or any tax increase on natural gas production can get through the Republican-controlled state legislature. Remember that former Gov. Ed Rendell couldn’t get a 5 percent severance tax through the General Assembly, and that was when it had far more Democrats.

Pennsylvania’s fortunes in getting sufficient funding for education, infrastructure and other priorities through a fair tax on natural gas drilling may have been sealed last week by a report on the prospects of the 2014 Pennsylvania governor’s race. The highly-influential Rothenberg Report, which handicaps every political race in the country, has changed its appraisal of the race from “toss-up” to “leans Democrat.” As our vice president would say, that’s a big fracking deal.

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