Fact-Checking on Natural Gas Taxes in PA

Pennsylvania Budget and Policy Center’s new report alleging the natural gas industry doesn’t pay taxes goes beyond misleading readers to using inaccurate information in order to jeer support for a severance tax.

The first page of the report says corporations are avoiding corporate tax rates by filing as an LLC because it “allows them to avoid the corporate net income tax altogether.”

This is false. LLC’s are “pass through” companies that transfer profits to the owner—if that is an individual/individuals, they pay the PIT. But if the LLC is owned by a corporation, as is the case for many of the drillers, the taxable income is paid at the 9.9% CNI rate. (NOTE: PBPC plans to correct this error in a future version of the report).

Then the report also misstates facts when it says “80% of the total number of permit holders are now operated by LLCs or LPs.” But the majority of drilling companies in the state are not LLCs or LPs.

Obviously, the union-backed Center thought it would build support for a severance tax if people thought the majority of companies were LLCs avoiding taxes—though neither point is true.

When the report cites the Congressional Research Service (CRS) study on federal tax reductions for the oil and gas industry, it fails to note the 2005 energy bill increased federal taxes for oil and gas, while offering greater deductions for “alternative energy sources”. The CRS calculated that the oil and gas industry received a net tax increase of $1.36 billion in federal taxes, not a reduction.

Pennsylvania Department of Revenue spokesperson Elizabeth Brassell points out several additional errors of the report in the Wilkes-Barre Times Leader:

The report is “a narrow look at old tax data” and used “less than ideal research methodology.” Brassell said the report was based on data the department provided a year ago, and the department has since identified better research methodologies.

Brassell said some of the information in the report is either “blatantly wrong or misrepresented.” For example, the assertion that only $13 million was paid by the industry in personal income taxes must be based on “faulty information,” she said, “because we can’t get that figure anywhere.” …

“In looking at it, state taxes paid by the industry so far in 2011 are already nearly exceeding what the industry has paid in all of 2010 and we’re totaling collections in the hundreds of millions annually rather than the tens of millions,” Brassell said.

Further, the report glosses over how much the gas industry is contributing, including

  • An estimated $100 million in state and local taxes directly from industry and $289 million from indirect activity in 2009. This includes business taxes, individual taxes on wages, and taxes on royalties and lease payments.
  • $64 million in royalties to the state from drilling on state-owned lands this fiscal year.
  • $1.7 billion in royalty and signing bonuses to private landowners in 2009.
  • $11 million to the PA Department of Environment Protection in fees in 2009-10, which entirely pays for DEP costs of inspection.
  • $200 million in local road repairs and improvement in 2010.

Finally, it ignores the economic growth in PA linked to natural gas drilling:

  • Department of Revenue data analyzed by Penn State found Pennsylvania counties with 150 or more Marcellus wells experienced an 11.36 percent increase in state sales tax collections between 2007 and 2010. Counties with no Marcellus wells drilled experienced a 6.55 percent decrease in sales taxes during that same period.
  • Mapping job growth shows a pretty clear pattern that it is being fueled by the gas boom.