Madeleine Smith: Taxation on Fracking Companies

Taxation imposed on fracking companies has been the main form of compensation to the state for land use and environmental damage from fracking, and many states have taken advantage of the potential for an increased income. For example, 12,000 acres of public land near Mesa Verde in Colorado were set to be auctioned off to oil companies last November, a decision made by the state in an attempt to generate money and boost the economy (Goud, 2013).  In this case, the state would benefit both from the money earned directly from the lease, as well as from the taxes imposed on the natural gas the company finds. 

Colorado, and nearly every other state besides Pennsylvania, has imposed a severance tax on natural gas.  A severance tax has historically been placed on many nonrenewable natural resources such as coal and oil and now has been introduced to the natural gas industry as an additional fee paid to the state by the drilling company on top of income taxes.  Different states use different criteria, such as location and production to decide tax rates so there is little uniformity in this type of regulation, a common theme in natural gas drilling.  For example, Colorado, whose wells produced over 1.2 million cubic feet of natural gas in 2007, imposes a 2 to 5% tax rate depending on the company’s gross income, but other states may have a much more complicated system (Taxing Natural Gas Production).  The state ideally uses the money from the severance tax to repair and renew land after the fracking companies move out, but sometimes the state uses most of the money for other causes it deems important, such as roadwork or schools.

In place of a severance tax, Pennsylvania passed Act 13 in 2012, adopting a unique policy called an impact fee which brings a portion of the income from wells back to the state. Some money collected will then be allotted to various towns and counties to offset side effects of fracking or to improve other aspects of the area as seen fit by local officials and citizens (PUC, 2013).  This system may seem more ideal than a severance tax in writing, but may fall short if wells in these areas fail to produce a lot of oil.  With a severance tax, taxation is usually imposed regardless of net income, but with the impact fee, areas with the highest production may not necessarily see the most money come back.  For instance, an area may also have been expected to produce a lot of gas, so many drilling rigs were installed, but the wells failed to produce.  In this case, the land was still wrecked but those wells did not generate a great deal of natural gas, so only a minimal amount of money will be given back to that community because of the lack of production (Pennsylvania Impact Fee Summary). 

The impact fee is determined by the average selling price of natural gas for the year, but as the value of natural gas production in the Marcellus Shale increases, it is predicted that an annual severance tax of only 4% could generate roughly three times as much income as the current impact fee, which brought in only $202 million in 2012 (Pennsylvania Budget and Policy Center, 2013).  Pennsylvania’s impact fee is the only system of this kind right now, but citizens of profiting towns and cities have generally been pleased with their monetary allotments.  For instance, Dr. Alice Davis, administrative director at Susquehanna County Career and Technology Center, and Art Donato, 911 Coordinator and Forest Lake Township Supervisor, of Susquehanna County, Pennsylvania, both described the new roads and increased prosperity brought to their tiny town, Dimock, which had previously struggled economically.  They claim that the town is more prosperous than it has ever been and that many locals are now able to earn a living through a combination of the new jobs created and the income from leases.  Because the wells of Dimock have produced so much gas, people said the town has benefitted greatly from the impact fee since it pays the town in terms of how much gas was drilled.