The effective tax rate for a new natural-gas well in Pennsylvania is the lowest compared to other states, according to a report by the Independent Fiscal Office.
The nonpartisan state agency put together “Natural Gas Extraction: An Interstate Tax Comparison” at the request of state Sen. David Argall, R-Mahanoy City.
The report compares taxes or fees levied by 11 states producing natural gas from shale, including the Marcellus and Utica formations in Pennsylvania.
Pennsylvania levies an impact fee on each well drilled. As time goes on, the fee decreases and is not based on the amount of gas that the well produces. Other states levy a severance tax on the amount of gas produced.
The IFO figured out the effective tax rate to ensure all the comparisons were “apples to apples,” according to a news release. That looks at state severance taxes on the extraction of natural gas. Pennsylvania’s impact fee is treated like a severance tax in the study. It also calculates local taxes on natural-gas reserves or the market value of natural-gas sales.
However, the analysis does not include corporate net income tax, personal income tax, sales and use taxes and tangible personal property taxes because of the lack of publicly available data, the IFO said.
Argall said in an email statement that the report misses the mark.
“The goal of my request to the Independent Fiscal Office was to make an interstate comparison of all taxes and fees generated by the natural gas industry, including income, sales and property taxes,” he wrote. “Unfortunately, some taxes were not available for the study. Pennsylvania still maintains the highest Corporate Net Income tax compared to other states.”
The study looks at a hypothetical well and the gas it would extract over its lifetime under four production and price scenarios, according to the IFO. The projection assumes the well under each scenario begins production in 2014.
The production is calculated four ways: A well with low production and high production over a 30-year period. Under each scenario, a low price and high price for natural gas is calculated, based on methods used by the U.S. Energy Information Administration.
Pennsylvania’s effective tax rate under low production with a low price is 1.6 percent. Under a high price, it’s 1.3 percent. By comparison, the effective tax rate on a similar well in West Virginia would be 7.2 for low and high price.
Under high production, Pennsylvania’s effective tax rate is 0.8 percent for the low price and 0.6 percent for the high price. By comparison, West Virginia’s effective tax rate in a similar scenario would be 7.5 percent for low and high price.
The next lowest on the list is Ohio, with an effective tax rate of 1.8 percent for high and 1.4 percent for low price in both low and high production. The other states surveyed include Arkansas, Colorado, Louisiana, Michigan, North Dakota, Oklahoma, Texas and Virginia.