New York State should enact a natural gas depletion tax

Date: 27 Jul 2008 | posted in: Energy, From the Desk of David Morris, Media Coverage, The Public Good | 0 Facebooktwitterredditmail

Buffalo News, July 27, 2008

The newly discovered natural gas reserves in the deep layer of rock of the Marcellus Shale, which lies under the Southern Tier, are potentially worth more than $70 billion. On Wednesday, Gov. David Paterson signed a bill making it easier for companies to drill for natural gas. Unfortunately, he didn’t sign a bill to make it easier for the public to benefit from this drilling.

Unlike the majority of states, New York lacks a natural resource depletion or severance tax. Thus, soaring gas prices and dramatically expanded recoverable reserves will do little to replenish shrinking public budgets. If New York were to impose a tax similar to that of other top natural gas producing states, public services could receive nearly $500 million in additional annual revenue. This revenue could prove critical in maintaining a high level of public services in a time of rising unemployment, soaring food and energy prices and a massive housing crisis.

Many states distribute depletion tax revenue directly to local governments experiencing the associated environmental and economic costs of drilling. As more wells are drilled, increases in reports of incidents involving gas wells will follow. Last year, an accident at a nearby natural gas drilling site left dozens of homeowners in Brookfield without drinking water for days, some for months. Many houses had to be fitted with water purification systems that are costly to maintain.

New York could emulate states such as Alaska, New Mexico and Wyoming and set aside a portion of those revenues in trust funds whose benefit will continue long after the natural gas disappears. New Mexico and Wyoming each draw more than $150 million in annual budget revenue from the interest earned on their funds, while Alaska pays dividends directly to its citizens.

If New York does decide to embrace this principle, it should learn from the mistakes of others and design an effective policy. Consider the case of Ohio, also home to part of the Marcellus Shale region. Ohio has a depletion tax, but one so poorly designed that the state will see only minimal gains in its revenue despite soaring gas prices. The reason?

Ohio’s depletion tax is on the volume of natural gas the state produces, rather than its market value. Thus Ohio’s tax will generate only $10 million in annual revenue. This is minuscule compared to the half a billion dollars of annual revenue Ohio would receive if its tax were similar to other states such as Montana or Oklahoma that tax a percentage of the market value.

Industry will oppose any minerals extraction tax, and may threaten not to drill in New York. But experience shows these are empty threats.

Drilling will still be immensely profitable. And developers can be very flexible when confronted. Landowners have shown the way.

In March, gas companies were offering landowners in Broome County $50 per acre to drill on their land. Fortunately, the recent natural gas rush has taught landowners to collectively bargain with such companies. The companies are now offering landowners in Broome County up to $2,500 per acre and a near 20 percent share in profits. That rate, by the way, is much higher than any depletion or severance tax imposed by any state.

The Legislature needs to act immediately. At this very moment, millions of dollars are streaming out of town, city and state lands. The state must follow the lead of its natural gas producing peers, and enact a market-based depletion tax.