Transcript Penn BPC Jan 2010 taxation of natural gas v2.ppt

State Taxation of Natural Gas
Production
Joint Meeting of the Conservation and Natural
Resources Advisory Council and Citizens Advisory
Council on Severance Taxes
January 19, 2010
Michael Wood
Research Director
Pennsylvania Budget and Policy Center
www.pennbpc.org
Who we are

The Pennsylvania Budget and Policy
Center is a statewide, nonpartisan policy
research project focused on state budget
and fiscal analysis and public education.
◦ Launched as project of Keystone Research
Center in 2006.
◦ We focus our work on policies that improve
the economic and social well-being of lowand middle-income Pennsylvanians.

Visit us online at www.pennbpc.org
Why do states use severance taxes?


Extraction of natural resources
produces “externalities” – pollution,
habitat loss, infrastructure damage, etc.
– that are not accounted for in sales
price of the product
Natural resources, particularly nonrenewable ones, are seen as belonging to
everyone in the state – the “common
wealth”
Why do states use severance taxes?
- continued
•
Due to federal energy production incentives, few
pay corporate income taxes
Source. BusinessWeek
Severance taxes are common
States in red have at least one
severance tax – 35 in total
35 states collected $16.7 billion in
severance taxes in 2007-08
Source. U.S. Census
Severance and Business Taxes in Leading Natural Gas
Producing States
Rank
State
2007 Natural Gas
Production
Current Severance Tax Rate
Corporate Taxes
1
Texas
6,091,724
7.5% of market value of gas produced (reduced
tax rate for "high cost wells“ ~ approx. 3.7%)
Franchise Tax*
2
Wyoming
1,923,224
6% of taxable value (gross sales minus certain
processing and transportation costs)
3
Oklahoma
1,744,393
7% of average monthly price of gas plus 0.095%
excise tax
Income Tax
4
New Mexico
1,544,830
8.67-9.5%, depending on county and school
district
Income Tax
5
Louisiana
1,363,538
$0.331 per MCF (7/1/09 to 6/30/10 – reset each
year)
Income Tax
6
Colorado
1,242,571
2% to 5% based on gross income
Income Tax*
7
Alaska
433,485
25% to 50% of net income
Income Tax*
8
Utah
376,409
5% when gas over $1.50 MCF
Income Tax*
9
Kansas
365,877
4.33% (8% rate – 3.67% property tax credit)
Income Tax*
10
California
307,160
Conservation fee of $0.00880312 per MCF
Income Tax*
11
Alabama
270,407
8% production tax and 4-8% privilege tax
Income Tax
12
Arkansas
269,886
5% (Effective 1/1/09)
Income Tax
13
Michigan
264,907
5.25% (5% severance tax and 0.25% oil/gas fee)
Income Tax*
14
West Virginia
231,184
5% + $0.047 per MCF
Income Tax*
15
Pennsylvania
182,277
None
Income Tax
No
* - State uses combined reporting for corporate taxes
What do states do with severance
tax collections?
Fund general operating expenses – 35
states
 Share a portion with local governments 15 states
 Finance environmental cleanup or
conservation programs – 10 states
 Support public education – 8 states
 Invest in “permanent funds” – 4 states

Lessons from other states:
Set reasonable rates to provide adequate
revenues
 Keep the tax simple - limit deductions,
exemptions, and exclusions
“The most backward systems allow low
rates or exemptions for stripper wells,
and perhaps for low volume or high cost
wells.” – Dr. Mason Gaffney, University of
California, Riverside

Changing severance tax rates has had
little impact on production or drilling
300,000,000
60,000
250,000,000
50,000
200,000,000
40,000
150,000,000
30,000
Last Rate Change
100,000,000
20,000
50,000,000
10,000
-
Number of Active Gas Wells
MCF of Gas Production
West Virginia Natural Gas Industry Growth, 1979-2008
Natural Gas Production
Gas Wells
Data Source. West Virginia Geological and Economic Survey
West Virginia added the $0.047 per MCF component of their tax on
December 1, 2005. Both drilling and production appear unaffected by
the change.
A massive increase of the severance tax in
Arkansas hasn’t changed producer plans, either
“During the 2009 second quarter, Chesapeake’s average
daily net production of 220 mmcfe in the Fayetteville
increased approximately 15% over the 2009 first
quarter and approximately 60% over the 2008 second
quarter. Chesapeake is currently producing
approximately 240 mmcfe net per day (325 mmcfe gross
operated) from the Fayetteville and anticipates reaching
approximately 300 mmcfe net per day (400 mmcfe gross
operated) by year-end 2009 and approximately 375
mmcfe net per day (500 mmcfe gross operated) by yearend 2010.”
Chesapeake Energy Corporation Provides Operational
Update 7/30/2009 4:04 PM
Local Taxes
Property taxes on oil and gas interests
are an important source of local revenue
– helping counties, municipalities and
school districts deal with costs imposed
by resource extraction (not an option in
Pennsylvania since 2002 court case – coal,
gravel, and other extraction industries still pay
property taxes in Pennsylvania)
 Less common are locally assessed
severance taxes

Pennsylvania has a mixed legacy
with natural resource development
Pennsylvania Lumber Museum
Art Rose
Penn State Agricultural Extension Service
Pennsylvania Historical and Museum Commission
A well-structured severance tax can:
Help repay governments for increased
costs due to natural resource
development
 Provide funding for cleanup – today and in
the future
 Help communities transition once the
“boom” is over

Severance tax could be used to augment
declining environmental funding
$450
$400
$350
$ Millions (nominal)
$300
$250
DCNR
$200
DEP
$150
$100
$50
$-
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Major State Fund Expenditures by Fiscal Year
2007-08
2008-09
2009-10*
Thanks!
Michael Wood
Research Director
Pennsylvania Budget and Policy Center
[email protected]
(717) 255-7156
View our severance tax-related publications at:
http://www.pennbpc.org/severance-tax