House Finance Committee Hears From RDA

[RDA - Responsible Drilling Alliance]

House Finance Committee Hears From RDA

 

On Tuesday, July 19th, RDA President Ralph Kisberg testified before the House Finance Committee at their legislative review Marcellus shale informational meeting held in Waterville. This is a slightly abbreviated copy of his remarks.

 

Thank you for this opportunity. Welcome to the beautiful Pine Creek Valley. My name is Ralph Kisberg, I am a co-founder and a director of the Responsible Drilling Alliance, a Lycoming County based grass roots education and advocacy coalition with over 850 members.

 

At the final meeting of the Governor’s Advisory Commission, Lt. Cawley, reminded members that “The Governor wants recommendations based on science, not emotion or desire for profit.”

I am here to give some testimony on what is known as the dismal science.  We are here to talk about 2 forms of taxation. The need for impact fees is self evident; there are direct costs of gas development that fall on the local residents and will be borne by taxpayers at all levels of government.

 

It is necessary to hammer out an impact fee bill based on a thoughtful analysis of the true costs of assignable impacts. We believe the impacts should be charged to those who cause them, those whose direct decisions lead to consequences. Such fees should not be charged to Pennsylvanians who are allowing access to their property and intrusion in their lives, but are not the ones calling the shots.

 

There is a model ordinance provision in HB 1715 that effectively takes away local control. We believe it should not be included in any final bill. A carefully designed model ordinance that is based on protecting Pennsylvania citizens property rights could be very helpful in the many areas where there are presently no zoning protections. But only if the legislation provides a baseline ordinance that communities could choose to add to and enhance, within the constraints the courts have determined are permissible. The “poison pill” ordinance in 1715 leads to an unacceptable choice, funds to help mitigate impacts being offered in lieu of the community's right to determine its own character.

 

Just to give you an idea of what we hear from people in our area, in an informal poll of 2,000 random voters taken by a candidate for countywide office and canvassed in over 20 municipalities in the past month, nearly everyone voiced agreement that gas development needs to be done more responsibly and expressed concerns about the long term affects on our future. Why is there this level of concern?
The answer is, impacts from the oil and gas industry that are already being felt, even in the beginning years of this development. We can do something about a number of these impacts, others we cannot. Besides the obvious heavy infrastructure costs, there are also many impacts that are not evident until you live with such a widespread dispersed industrial development. Many affluent retired or outdoor oriented earners and job creators are already planning to move out of state and take their wealth accumulated here with them. There are also decreased profits being experienced by existing or fledgling businesses due to a sharp rise in space and personnel costs, worker availability, and material price increases, all due to competition with gas related work.

 

We hear a lot about the winners, but there are also many financial net losers. This group includes many low income and fixed income renters who have seen steep increases in rent and in evictions with rental housing now going at a premium.

 

These impacts are made more critical when they happen in small towns and rural villages. The general nuisance of new sources of traffic, noise, dust, and lights, all greatly affect the quality of life.  Depreciation to quality of life has direct economic consequences that perhaps cannot be quantified until property values begin to fall. Perhaps these can best be addressed now as part of the severance tax concept.

 

Of the gas producing states, 27 of the 32 impose some kind of extraction fee, tax, or charge, including the big producers: Alaska, Texas, Louisiana, Wyoming, Oklahoma, and Louisiana. What are the primary reasons so many states choose to use this policy? It is because in their economies, production of oil or gas (or both) has been the dominating force long enough for their politicians have figured out the necessity of such a fee.

 

Gas extraction requires very large capital expenditures and very little staffing. One PhD economist has estimated gas industry staffing to capital expenditure ratio at only 10% of an average industry’s.

 

Industry funded economic studies greatly inflate predictions of both jobs and taxes by using standard business parameters and off the shelf software that doesn't consider this industry's unique labor and tax situation. The PA Department of Labor listed only 18,000 employees working in the core drilling and pipeline industries in 2010, not the previously published and much touted estimates of 44,000, or 88,000, or 107,000. The Pennsylvania Budget and Policy Center could find only 44.4 million in taxes in 2009 instead of the often quoted estimate of 389 million.

These inflated figures have been used to help fend off imposition of a severance tax. Polling data says 70% of Pennsylvanians favor a severance tax. Everybody has to pay a fair share of taxes, why not the gas industry? Severance tax opponents tells us to leave the money in industry hands so they’ll drill more and we will then receive the ancillary benefits. But this is already done for them via the federal tax code.

 

For almost 100 years, oil and gas producers have benefited from a tax deduction on intangible drilling and development costs, (IDC’s). There are a few other aids in the tax code too.

 

What does it all add up to? According to Bloomberg Businessweek, Range Resources, a key player here in PA, paid an average federal income tax rate of 0.4% from 2005 to 2008.

 

So you say, “That’s the feds. We have such awful taxes here in PA, surely we stick it to them.” But these federal incentives also reduce the state taxes operators pay, whether they are structured as a corporation that pays the corporate net income tax on profits or as an LLC/Limited Partnership that pays the same 3.07 PIT rate we do.

 

It is fair to say that Pennsylvania has an antiquated corporate tax system that includes:

• Delaware Holding Companies
• management fees
• non-market based transfer prices to shift profits out of state (such as when an operator sells gas to a related pipeline company for a below market price, cutting the operator's profits)
  
  

What does this really matter, you may wonder, as they are mostly all LLC’s anyway? As of March, 9 of the top 10 in the state in number of MS permits are LLC’s including Royal Dutch Shell, Chevron’s Atlas Energy and Anadarko. It doesn’t matter if a company is an LLC/LP or a corporation, well operators are probably subject to our capital stock and franchise tax. A tax on the net worth of a business and it’s average net income over the past 5 years. Okay, we got them now.  However, this is being phased out and is to be completely eliminated in 2014, just when the MS infrastructure is getting rolling.

 

The gas here is a one time thing and eventually it will be gone. With an equitable extraction fee, we can focus on building a future for those who follow us, in this way providing partial compensation for the intrusions into the lives of all Pennsylvanians – intrusions we never thought we would have to incur when most of us chose to make our home here.

 

Initially abstaining from a severance tax was a strategy that has so far cost us about $200M in lost revenue. That figure will start to grow rapidly soon enough. Those monies, if not used for the general fund, could be leveraged with imagination. These tax funds offer only slight compensation for the loss of something no one can deny has been a tremendous asset to all Pennsylvanians: our Endless Mountains, our Pennsylvania Wilds, Our Lumber Heritage Region, which at best will have their tranquility and the value they offer to us all imposed upon for many decades. And too, for the very real risks some of our loved ones and loved properties may be facing.

 

At this point in the gas development, it is vital all legislators get a better understanding of the industry and attempt to steward the development to Pennsylvania’s advantage, as much as these powerful outside forces and now owners of the preeminent subsurface rights of over so much of our land will allow. To do that must include a tax policy that starts letting those forces and the financial markets know we aren’t the chumps they believe us to be in the corporate suites in Oklahoma City, Dallas, Houston, and across the entire nation of Norway, who’s state owned oil company bought a 32.5% stake in the leases of the largest lease holder in Pennsylvania, “America’s natural gas champion: Chesapeake Energy”

 

No reasonable fee on the coming gas extraction?  Ask yourselves how it will play out in your district when the profits from 18 trillion cubic feet of gas are going to help provide cradle to grave services for Norwegians, while Pennsylvanians see the land they assumed was going to be a part of their future put at risk.

 

Thank you for listening.