Fracking for State Dollars


By Pamela M. Prah, Staff Writer

Could Ohio, New York or Pennsylvania be the next North Dakota and “frack” its way to budget surpluses?

The United States is on track by 2020 to become the world’s largest oil producer and a net exporter of natural gas, a reversal of fortunes with huge consequences for many state budgets. But it depends on what kinds of taxes the states want to impose.  States as varied as Pennsylvania and Louisiana have already lost out on hundreds of millions of dollars from the energy boom because of their tax policies, while Texas and North Dakota continue to cash in.

The boom in oil and natural gas production is due to the common but highly controversial practice of hydraulic fracturing, commonly known as fracking, and horizontal drilling, both of which have allowed companies to reach oil and gas deposits that previously were trapped in shale and other “tight” rock formations. Energy companies insist the process is no threat to nearby groundwater; environmentalists generally disagree.

These deep-drilling techniques helped North Dakota bypass Alaska last year to become the second largest oil-producing state (Texas is first) through development of the Bakken oil shale field. Meanwhile Pennsylvania has been called the “Saudi Arabia of natural gas” as production there more than quadrupled between 2009 and 2011 due to expanded horizontal drilling combined with hydraulic fracturing of the Marcellus Shale field.

At Issue: Severance Taxes

But states collect vastly different amounts of severance tax revenue on oil and gas. North Dakota, for example, imposes an 11.5 percent severance on oil, subject to certain exemptions, and collected nearly $1.9 billion in all severance taxes in 2011, up from just $83,000 in the pre-fracking days of the 1990s.

Pennsylvania has no severance tax at all. Instead it has an impact fee that helps localities fix roads and other drilling damage. The impact fee brought in $204 million in 2011, but that was only about half of what the state could have collected had it used a tax comparable to that of neighboring West Virginia, by one estimate.

“There should be a tax like other states have,” says Pennsylvania state Representative Gene DiGirolamo, a Republican who last session pushed a 4.9 percent tax on companies drilling for natural gas in the Marcellus shale field, the largest such gas deposit in North America, and one that also covers parts of Ohio, West Virginia and New York, among other states. “We’re not chasing the gas industry out of the commonwealth,” says Republican state Representative Tom Murt, who is cosponsoring the legislation. “We just want the industry to pay their fair share.”

Pennsylvania is the only state with substantial oil and gas reserves that does not have a severance tax. Even tax-averse Texas has one: It levies 7.5 percent on natural gas and 4.6 percent on oil, which helped to bring in $2.7 billion in combined severance taxes for the state in 2011.

Severance taxes vary not only in their rates but in how the tax is calculated. In some, the rate is based on the taxpayer’s gross oil and gas income, according to this state-by-state review of shale gas regulation and tax structures from Resources for the Future. Other states calculate the tax on the amount of oil and gas extracted. Nationwide, severance taxes on all natural resources in 2011 went up $3.5 billion from 2010 to 2011, a 31.2 percent increase, data from U.S. Census show, due in large part to fracking. “Shale energy development has transformed the U.S. energy sector,” says Kyle Isakower, vice president of the American Petroleum Institute (API).

A state-by-state study sponsored by API predicts that between 2012 and 2035, fracking will deliver $130 billion in taxes and payments to North Dakota and its local governments. Pennsylvania will collect $60 billion, and Texas $397 billion.  

Higher, Lower Taxes Proposed

Supporters of creating a severance tax in Pennsylvania face an uphill battle. Republican Governor Tom Corbett is a vocal foe of the idea. He has signed the Taxpayer Protection Pledge, under which he promises not to raise any taxes as governor.

Contrast that with the situation in neighboring Ohio, where Republican Governor John Kasich has been pushing to increase the severance tax, currently among the lowest in the nation (10 cents per barrel of oil and 2.5 cents per thousand cubic feet of natural gas). Kasich wants to use the money raised from the higher severance taxes to pay for a cut in the personal income tax. His proposal failed in the Legislature last year , but it could be included again in the fiscal 2014 budget that he releases next month. 

One industry-backed study estimated that the surge in developing the Utica Shale field in Ohio will yield $433 million in state and local taxes in 2014, up from $16.5 million in 2011. By raising the severance tax to 5 percent, the state could see revenues increase by $538 million over four years.

In Louisiana, however, Governor Bobby Jindal may call for something entirely different: the outright elimination of state taxes on oil and gas extraction, estimated at $774 million in revenue each year, as part of his plan to overhaul the tax code, The Times-Picayune reported.

Louisiana has already lost hundreds of millions in potential revenue from fracking because of a tax break the state gave the industry in the 1990s on horizontal oil and gas drilling. Initially the exemption cost the state only a few hundred thousand dollars a year, but after the Haynesville Shale field was discovered in 2008, the money foregone increased to more than $200 million a year, according to a report last year on state tax incentives from the Pew Center on the States (Stateline is part of the Pew Center on the States).

Meanwhile, in Michigan, the governor wants to ramp up fracking, but his focus isn’t on severance taxes. Instead, Republican Governor Rick Snyder has called on private industry to help create a “Strategic Natural Gas Reserve” that would allow the state to keep some of the gas developed on state land and use it to hold winter heating prices down. Currently, when a private company drills on state land, the state can either take its share in money or in natural gas. Until now, the state has chosen to take the money. “It could make sense for us to store that gas and sell it later, when we could get a better price,” the governor said in a message devoted to energy issues last fall.

Then there is Vermont, which doesn’t allow fracking at all. As Stateline has reported, Vermont last year became the first state to ban hydraulic fracturing over concerns that blasting millions of gallons of water mixed with sand and chemicals to free the gas also contaminates drinking water. Energy companies insist the process is safe.

Potential in New York, California

Nowhere are the stakes higher than in New York, where fracking for gas has been temporarily banned, and California, where fracking of Monterey Shale oil holds huge potential. Environmentalists and the industry are closely watching both states.

In New York, Governor Andrew Cuomo is considering lifting a four-year moratorium on fracking gas. “New York is ground zero for the anti-fracking movement,” says environmentalist Emily Wurth, the director of the water program at Food & Water Watch in Washington, D.C., which tracks the numerous local resolutions against fracking. “Pennsylvania is a case study of what will happen if we allow rapid expansion,” Wurth says. “The accidents, leaks and explosions … it’s been a complete disaster.”

But industry and free-market groups say the benefits outweigh any environmental damage. A study by the Manhattan Institute concluded that a typical Marcellus Shale gas well generates $4 million in economic benefits for every $14,000 in damage from environmental impact.  The group estimated that ending the drilling moratorium in New York could mean $1.4 billion in tax revenues for the state and localities from 2011 to 2020.

In California, claims Mark Mills of the Manhattan Institute, developing the Monterey Shale, with an estimated 15 billion barrels of oil, could allow California to “enjoy a gusher of oil revenues.” Mills figures the overall economic benefit of opening up the full extent of the Monterey shale could reach $1 trillion. Last December, California’s Department of Conservation released a “discussion draft” of fracking regulations for the enormous field. The state described the draft as “a starting point for discussion” before formal rulemaking.

Meanwhile, fracking proceeds on numerous sites apart from the Monterey shale. California Environmentalists argue that existing laws in California already apply to this fracking, but are not properly enforced. “At present, industry fracks whenever and however it deems fit, and that practice has to stop,” Vera Pardee of the Center for Biological Diversity said last week. The group has filed a lawsuit to stop what it calls unregulated fracking.