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The Marcellus Shale should benefit everyone

The Marcellus Shale should benefit everyone

The only way Pennsylvania can benefit from natural gas is to tax its extraction

Among the many issues raised for states by the rapid development of fossil fuels, like the burgeoning Marcellus Shale gas boom in Pennsylvania, are two pressing fiscal issues: first, how to raise funds fairly from industry activities; and second, how to distribute these funds to mitigate local impacts while investing in economic growth.

Today, Pennsylvania is the only major natural gas state that lacks a severance tax. A loophole in state law also excuses natural gas development from local property taxes. The absence of these two critical revenue streams denies Pennsylvania the opportunity to apply the lessons of recent energy booms in the American West.

Headwaters Economics, an independent research group based in Montana, has studied energy and fiscal policy at the county and state level. Our research provides several clear guideposts for how Pennsylvania can avoid the mistakes of others and create benefits from its natural gas supplies.

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Without a mechanism in place to capture energy revenue, little to none of the wealth created by this industry remains locally. The majority of new jobs and businesses in gas field services will leave when the build-up phase ends, while the bulk of profits will accrue to multinational corporations and their shareholders.

The only way to ensure that local governments and the citizens they represent benefit over the lifetime of natural gas extraction is to require that a small portion of the wealth created by the energy development is returned to local and state governments.

Pennsylvanians should focus not just on severance taxes but also property taxes. Our research indicates that the most important form of energy revenue to county governments -- the entities that often face the biggest burdens in terms of road and other infrastructure impacts -- is property tax.

For example, in Wyoming's Sublette County during the heart of the 2008 natural gas boom, for every $1 the county received in state severance tax distributions, the county collected $21 in local property taxes, of which more than 85 percent was derived from natural gas production.

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It is important to recognize that taxes do not deter fossil fuel development and are only one among many factors affecting the bottom line in decisions about where energy companies focus development activity.

While Wyoming taxes natural gas production more aggressively than Colorado, during the recent recession oil and gas exploration and development companies withdrew from Colorado's Piceance Basin more quickly and returned more slowly than in Wyoming's Green River Basin. Furthermore, production and severance taxes are necessary for energy production to pay its way.

Energy development has significant impacts on municipal and regional infrastructure, for instance. Drilling-related heavy truck traffic brought the small town of Parachute, Colo., with an annual budget of less than $1 million at the start of the energy boom, to its knees. Only with an $8 million grant of severance tax revenue was the town able to tackle the problem by building a new highway interchange to handle the increased traffic.

Energy revenue also can be invested locally or statewide to promote growth. Garfield County, Colo., boasted a $90 million budget surplus at the end of 2010, even while the state of Colorado was suffering a major budget deficit. Rifle, a small town in Garfield County, has invested distributions of the state severance tax to diversify its economy and make it an attractive place to live and do business long after the drilling rigs have left.

In the coming years, Pennsylvania will face many challenges created by the natural gas boom. Until the state determines how to raise revenues from this resource, however, it will lack the resources to offset the impacts caused by energy production and will miss the opportunity to diversify its economy and become more resilient in the future.

First Published: February 8, 2011, 5:00 a.m.

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