Pa. Can Energize Its Energy Sector by Cutting Red Tape—Not with Industry Subsidies
This week the state legislature passed House Bill 732. The bill—designed to exempt volunteer service providers from a 1 percent realty transfer tax— now offers tax credits to the natural gas industry. The language for the tax credits was pulled from HB 1100, which attempts to boost the natural gas industry through government incentives. Combined, this unlikely pairing turns a somewhat harmless tax change into a mixed bag of government favoritism and corporate welfare.
The Marcellus Shale is the largest gas field in the U.S., covering 60 percent of Pennsylvania. The state’s natural gas industry doesn’t need government subsidies for long-term success: it needs fairness and consistency from government regulators.
The House Republicans’ Energize PA proposal—which contains HB 1100—includes legislation to streamline the burdensome regulations and extended permitting timelines that hamper the gas industry without protecting the environment. It also creates a registry of so-called brownfield sites—abandoned manufacturing locations—to encourage their reuse by new businesses. Such sites usually already have the proper zoning, utility and transportation infrastructure in place, making new development more feasible.
However, Energize PA also includes targeted tax breaks through HB 732—a form of corporate welfare that would add to Pennsylvania’s already long list of politically–selected tax credits, loans, and subsidies that amount to nearly $800 million.
The Shell Cracker Plant located in Beaver County is just one example of the energy industry benefiting from corporate welfare. The plant received partial tax exemption under the Keystone Opportunity Zone program and is estimated to be saving $1.65 billion over 25 years through the Pennsylvania Manufacturing Tax Credit. While proponents claim that these privileges are responsible for attracting the $6 billion dollar construction project to the state, even Tony Amadio—a current county commissioner for Beaver County who was in office during negotiations with Shell—admits that more important than special favors was the local infrastructure and of course the topography, which conveniently includes the Marcellus Shale.
Bill proponents say the objective of this new natural gas processing tax credit is to attract similar investment to the state. While this is an attractive argument for anybody in the gas industry or who lives in northeastern PA, the credit gives preferential treatment to a particular industry while thousands of other state businesses are left continuing to pay high taxes. This is unfair, and unlikely to work.
The Upjohn Institute for Employment Research found that economic development incentives like tax credits only influence a firm’s location decisions about 2-25 percent of the time. This means that 75–98 percent of the time states are simply giving away taxpayer’s money to big businesses, with no return on investment.
A fair alternative is Energize PA’s proposal to increase a cap on how much companies can claim for net operating losses for the purpose of calculating tax deductions. This provision applies to all businesses rather than just a few.
Another option is to eliminate Pennsylvania’s $800 million in corporate welfare, and use the money to reduce all business taxes. Eliminating $800 million in handouts could lower the corporate tax rate to 7.6 percent1.
Either action would make the overall business climate more attractive to manufacturers considering Pennsylvania as a location as well as to those already here. There are many ways to encourage new jobs without playing favorites.
1. Author’s calculation based on spending on corporate welfare and the estimated revenue from the CNIT from the Independent Fiscal Office’s June 2019 estimates. Pre-COVID-19 numbers were used as to not distort the likely impact of this policy.