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The Case Against the Pennsylvania Marcellus Shale Severance Tax

By Richard Druby, Esquire
Nestico Druby, P.C.


On September 29, 2010, the Pennsylvania House of Representatives passed a bill that will impose a "severance tax" on all gas taken out of the Pennsylvania Marcellus Shale. The new tax is considered the largest tax on natural gas extraction in the country. The tax will be next considered by the Senate, and if the Senate passes it, it will be sent to Governor Ed Rendell, who has favored such a tax for a long time. This latest tax burden must be rejected because it will seriously jeopardize one of the few job-producing industries left in Pennsylvania, and will not protect the environment, as those who favor the tax now claim.

The severance tax has been proposed as a method of ensuring that funds are available for cleanup of environmental damage and the repair of infrastructure harmed by drilling and hydraulic fracturing operations. Hydraulic fracturing, also called "fracing" or as some in the media have referred to it, "fracking," is a process in which fractures in the shale are created and expanded by intense hydraulic pressure, allowing more natural gas to escape and be recovered by the drilling operation. The claim that the tax will provide a fund from which to clean up or repair environmental damaged caused by drilling and fracing is misleading. The tax passed by the House of Representatives provides that only about 6% of the funds generated by the tax will go to local communities where drilling is occurring. The great majority of the tax, about 81%, goes into the coffers of the General Fund to be spent as Ed Rendell and those who control the state Legislature decide.

By some estimates, Marcellus Shale drilling operations will produce 100,000 jobs in the Commonwealth, with some of those jobs located in Sun Country as the Marcellus Shale formation extends to some parts of the local area. Likewise, the Marcellus Shale operations will infuse millions of dollars into the local economies by workers using local services, patronizing local restaurants and occupying local housing. As such, the tax revenue generated from income taxes on the new jobs and the sales tax on the increased business will certainly help fill the Commonwealth's treasury. However, the proposed tax is so high that its passage will inflict tremendous damage to businesses involved in Marcellus Shale drilling, and thereby further harm a struggling economy. The people pushing for this tax are ignoring the tax revenues generated by a growing economy and the infusion of 100,000 jobs into our state brought about by Marcellus Shale drilling.

The proposed tax will reduce the gas companies' incentives to extract natural gas in Pennsylvania, which will decrease the number of jobs created and will decrease the amount of money invested into the local economies in many parts of the Commonwelath. Companies that are in the business of extracting gas from the Marcellus Shale will be encouraged to locate their operations in states with lower tax costs. Pennsylvania, meanwhile, will have practically the highest such tax, and our legislature will surely drive these companies and the jobs they bring out of our state.

As a native of Northeastern Pennsylvania, I know the beauty of the natural resources of the area and have a strong desire to protect them. As a lawyer who represents landowners in negotiating oil and gas leases, I understand that a well-crafted lease that requires a gas company to agree to certain environmental responsibilities can go further to protect the integrity of a landowner's property than the imposition of a job-killing tax. For example, a well-crafted lease should provide that the gas company be responsible for testing of water quality before and after drilling operations. The company must be responsible for the cleanup of any environmental damage, and protect the landowner against any environmental damage claims. The gas company must also be responsible for providing adequate amounts of insurance to cover any such claims, and to clean up the site completely when the drilling operation is complete.

The legislature's time and effort would be better spent passing legislation requiring gas companies to provide certain levels of insurance coverage for environmental hazards, amending the Oil and Gas Conservation Act to apply to Marcellus Shale formations, and insisting on the strict enforcement of the provisions of the Oil and Gas Act already on the books in order to hold gas companies to proper drilling and extraction methods and to reduce the number of environmental accidents like the water contamination that occurred in the town of Dimock in Susquehanna County.

By pushing legislation for high severance tax rates, the state government hurts landowners who will likely bear a portion of the severance tax under their lease, the local communities who stand to see increased revenues from Marcellus Shale activity, and the general public who may bear increased rates as a result of the tax proposed. Ultimately, Pennsylvania's natural resources may suffer most by the legislature's desire to increase general revenues under the guise of environmental protection.
Nestico Druby, P.C.
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