Money is Fleeing
Pennsylvania should get a cut of the state’s increasingly valuable natural gas resources
By Justin Dahlheimer, originally published in the Pittsburgh Post-Gazette, July 2, 2008
One resource that could help improve Pennsylvania’s fiscal future during an economic recession can be found under its feet, or, more precisely, under its soil. While the state’s untapped mineral wealth has soared in value fourfold over the past 10 years, the state has failed to follow the example of dozens of other states by demanding that the public share in this newfound wealth.
Recently discovered natural gas reserves in the deep layer of rock of the Marcellus shale are potentially worth $350 billion or more. Those reserves keep rising in value with the prices of oil and natural gas, and companies are scrambling to buy up drilling rights across the state.
Regrettably, unlike most U.S. states, Pennsylvania lacks a natural resource depletion or severance tax. If Pennsylvania imposed a tax similar to that of other top natural-gas-producing states, it could reap nearly $1 billion in additional annual revenue. Such additional revenue could prove critical in maintaining a high level of public services at a time of rising unemployment, soaring food and energy prices and a massive housing crisis.
Many states distribute depletion tax revenue directly to the local governments that feel the environmental and economic costs of drilling. Pennsylvanians need no better reminder than Centralia, where a devastating coal mine fire started in 1962 still roars. Frequent attempts to put it out were stalled by a lack of money. In 1983 the federal government finally decided it was cheaper to relocate 1,000-plus residents than extinguish the fire.
A depletion tax would generate enough revenue that Pennsylvania could emulate states like Alaska, New Mexico and Wyoming by putting some in trust funds so the state could benefit long after the mineral resources disappear. New Mexico and Wyoming each draw more than $150 million in annual revenue from the interest earned on their funds, while Alaska pays dividends directly to its citizens.
If Pennsylvania were to embrace this kind of tax, it should learn from the mistakes of others and design an effective policy.
Consider Ohio, home to part of the Marcellus shale. Ohio has a depletion tax, but it is so poorly designed that the state will see only minimal gains in revenue from soaring gas prices. Ohio taxes the volume of natural gas produced in the state, rather than its market value. Thus Ohio’s tax will generate only $10 million a year, which is minuscule compared to the half billion dollars Ohio would receive if its tax was similar to states such as Montana or Oklahoma.
The mining industry will oppose any minerals extraction tax, of course, but experience shows that companies can be very flexible when confronted. In Arlington, Texas, recently, a group of landowners collectively negotiated with companies that wanted to drill on their land. The company’s initial offer was $5,000 per acre. Its final offer was $22,000 per acre and a 25 percent share in profits. That percentage of profits, by the way, is much higher than any tax imposed by any state.
The Pennsylvania Legislature needs to act immediately. At this very moment millions of dollars are streaming out of the state, money that could be helping to finance essential services for towns, cities and the state government. Pennsylvania should follow the lead of its natural-gas-producing peers and enact a market-based depletion tax.
Justin Dahlheimer is a researcher with the Institute for Local Self-Reliance and the author of the recent report, “Balancing Budgets by Raising Depletion Taxes“.
About ILSR: The Institute for Local Self-Reliance is a nonprofit organization founded in 1974 to advance sustainable, equitable, and community-centered economic development through research and educational activities and technical assistance. More at http://www.ilsr.org