A FAIR DEAL FOR PENNSYLVANIA FAMILIES

By Robert M. McCord

The Keystone State sits atop one of the largest natural gas fields in the world, and yet Pennsylvania receives less than any other state in the country from natural gas drillers that profit from this abundant resource. Rob McCord believes the natural gas industry should pay its fair share and embrace best practices that protect Pennsylvania's health, safety, and natural resources.

The Keystone State sits atop one of the largest natural gas fields in the world, and yet Pennsylvania receives less than any other state in the country in exchange for allowing natural gas drillers to profit from this abundant resource. That has to change.

The Marcellus Shale has hundreds of trillions of cubic feet of gas locked away in what many industry analysts believe is the lowest-cost formation for development.

The job of the next governor is to:

1. Develop a framework for ensuring that this enormous resource is developed safely and responsibly, and
2. Produce a formula for appropriately compensating the public in a way that generates the greatest economic impact for the Commonwealth.

Rob McCord believes the natural gas industry should not only pay its fair share, but that it should also embrace best practices that protect Pennsylvania's natural resources while ensuring that there are no negative health or safety impacts for Pennsylvania communities and families.

Unfortunately, the exact opposite has taken place. Significant portions of the natural gas bill signed into law in 2012 (Act 13), which were, at the time, touted as "historic," have been ruled unconstitutional by the state Supreme Court due to weak environmental enforcement provisions and its intrusion on the authority of local municipalities to regulate drilling.

Furthermore, the law's industry-friendly impact fee shortchanges Pennsylvania residents by generating far less than would a reasonable drillers' tax, effectively subsidizing natural gas companies for the impact their operations have on Pennsylvania's infrastructure, air quality, water quality, and the cost of oversight activities.

McCord's natural gas plan includes a drillers' tax that justly compensates Pennsylvanians for allowing drillers to generate billions in profits from Pennsylvania's natural resources, a significant increase in enforcement activities, the adoption of industry best practices to guide development, and a forward looking proposal to utilize the revenues for investment in the environment and education.

Developing a Fair Drillers' Tax

Since the first Marcellus well was drilled in Pennsylvania in 2005, the state's annual production of natural gas has increased more than 1,200%. As a result, Pennsylvania has gone from ranking 15th in the nation for natural gas production to 3rd in 2012 - virtually all due to the Marcellus Shale.

Pennsylvanians are not benefiting nearly enough from this growth, however, because the commonwealth remains the only major natural gas producing state that does not require drillers to provide fair and just compensation for the benefit of being allowed to extract natural gas resources. As a result, Pennsylvania residents and communities are being shortchanged while gas companies generate enormous profits.

It is time for drilling companies to pay their fair share.

Rob McCord believes Pennsylvania should impose a drillers' tax of 10% of the net value of natural gas after allowing for certainproduction-related expenses. This rate is lower than many other states, including Alaska, Montana, and North Dakota.

At 10%, the drillers' tax would generate about $1.6 billion in the first year alone (or about $1.4 billion more than the current impact fee), rising to approximately $3.25 billion by 2020.

The McCord plan will generate more revenue for Pennsylvania than any other plan currently under consideration.

Debunking the Opposition Myths

Supporters of the drilling industry have used a variety of arguments to defend the special tax treatment companies receive. The reality is, every other major natural gas producing state is fairly compensated for allowing drillers to profit from its natural resources and it has not deterred development in any of those states.

In fact, with the exception of Pennsylvania, each of the top five natural gas producing states in 2012 received some form of compensation from drillers at a rate far more meaningful than Pennsylvania's industry-friendly impact fee.

For example, although Pennsylvania produced 10% more natural gas than Oklahoma in 2012, Pennsylvania collected only about $200 million from the impact fee - less than a quarter of the nearly $850 million Oklahoma generated in revenue.

Supporters of the natural gas industry also claim Pennsylvania's tax climate is less favorable to businesses than many other states, including neighboring West Virginia and Ohio. What they neglect to mention is that Pennsylvania's personal income tax rates are significantly better. This is important because many natural gas drillers structure their business in a way that allows investors to pay the much lower personal income tax rate on their share of profits, lowering the driller's effective tax rate.

The Pennsylvania Budget and Policy Center reported in 2011 that nine of the top 10 drilling permit holders in Pennsylvania's Marcellus Shale were incorporated as LLCs or LPs, thus enabling them "to attract investment capital from individuals who avoid the corporate net income tax altogether and pay the much lower personal income tax."

Ultimately, the argument that a drillers' tax deters natural gas development doesn't hold water.

What's more, the lack of a drillers' tax in Pennsylvania actually diminishes the state's ability to respond to and protect against drilling-related emergencies or grow its economy. As Headwaters Economics wrote in a 2012 report, "States that maintain higher effective tax rates have more resources to mitigate the impacts of industrial development and population growth, and can invest revenue in permanent funds for long-term economic development."

In addition, taxes seem to have little or no impact on natural gas development. The sheer presence of large natural gas reserves - and its proximity to market - is enough to attract development by companies seeking to profit. According to the 2012 Headwaters report, "Experience suggests that the state competition for industry activity through low tax rates and tax incentives is largely ineffective, meaning states can set fiscal policy to meet community needs and state priorities without deterring industry investments."

Finally, Pennsylvania's proximity to major population centers gives the state a competitive advantage that makes it attractive and lucrative for drillers. Of the top five states for natural gas production, Pennsylvania and its border states are home to the largest number of people at 61.6 million, or nearly 20% of the nation's population.

Using Drilling Revenues to Protect Our Environment and Invest Aggressively in Education

The McCord Plan not only ensures that Pennsylvania is fairly compensated for allowing drillers to generate billions of dollars in profits by harvesting its natural resources, it also generates revenue that will be used to make investments in education and the environment.

A significant portion of the revenue will be used replace the $1 billion in cuts made to Pennsylvania classrooms. In addition, McCord will invest in expanded after school programs and make voluntary, high-quality early learning programs more affordable and accessible for parents who want to provide their children with the benefit of early education.

The McCord Plan will also "hold harmless" the counties and local governments that now benefit from the impact fee for infrastructure repairs and improvements, environmental protection measures, conservation work, and public safety among other uses. It will also work to encourage drillers to adopt industry best practices and fund improved enforcement activities, among other things.

A Plan for Safe Natural Gas Development in Pennsylvania

Pennsylvania can only realize these significant revenues from natural gas development if the industry acts responsibly. McCord's plan for natural gas drilling in the commonwealth is focused on tough, but fair, oversight of the industry, and working collaboratively to integrate industry best practices that protect citizens and the state's natural resources. That starts with repealing and replacing Act 13.

The state constitution's environmental protection amendment is at the heart of the McCord Plan. The amendment, ratified by a four-to-one margin by voters in 1971, explicitly states the "people have a right to clean air, pure water, and to the preservation of the natural, scenic, historic and aesthetic values of the environment" and that the state's "public natural resources are the common property of all the people, including generations yet to come."

Furthermore, the amendment states, "the Commonwealth shall conserve and maintain them for the benefit of all the people." The state Supreme Court's ruling against Act 13 was notable because it reinforced the importance of this amendment, and it made clear that Pennsylvania is richer if we work to increase the total prosperity of our citizens.

Repeal and Replace Act 13

The Pennsylvania Supreme Court made clear what the public already knew: Act 13 was a bad - and unconstitutional - law. Pennsylvanians deserve a law that acknowledges the incredible opportunities natural gas can provide for the state's economy, but one that does not pursue those opportunities at the expense of our environment or the decision-making authority of local communities.

As governor, McCord will push for a new environmental protection law on drilling companies that:

• Restores the authority of trained inspectors in the field to make professional and scientific judgments when it comes to regulatory action. Under the current administration, Department of Environmental Protection officials barred regional inspectors from issuing citations to gas drillers without the DEP secretary's consent. Act 13 further removed the authority of inspectors to shut down drilling operators who were breaking the law, instead giving that discretion to DEP's secretary.
• Prohibits political appointees from making exceptions to the law that jeopardize sound environmental protection practices. Act 13 established new setback rules to dictate how close wells could be drilled to houses and natural resources, but the law gave the DEP secretary the authority to waive those rules.
• Requires drilling companies to use best practices that are environmentally friendly, such as preventing methane emissions, wastewater recycling and tracking, and a ban on flaring. Additionally, McCord would require the use of technology and systems to cut air emissions and prevent gas from escaping from the well or from any point along the transmission pipeline.
• Increases well permit fees, which will give DEP additional resources to hire more staff to oversee the industry.
• Bans any discharge of drilling wastewater into Pennsylvania's rivers and streams that is not treated to standards of the Safe Drinking Water Act.
• Bans the use of open wastewater pits.
• Improves public access to drilling information. Act 13 bars the state and emergency responders from sharing much information about drilling activities with the public, including what chemicals are used at a well for fracking (even in the event of a medical emergency) and the wastewater tracking reports of drillers.
• Rescinds the power of eminent domain by private gas companies to develop a natural gas storage facility.
• Eliminates the blanket bonding option that allows drilling companies to pay less to the commonwealth for their gas wells, giving the state fewer resources to restore or plug wells in the event the owner abandons their obligations.
• Prohibits any further leasing of state lands for natural gas development. The FY 2014-15 budget proposal includes plans to lift the existing moratorium on state forest drilling in order to raise $75 million in revenue, yet fails to divulge any details of the plan to the public - continuing a troubling trend of preventing public access to information on how the state plans to protect its natural resources.
• Ceases the transfer of funds from the Oil and Gas Lease Fund to finance operations at the Department of Conservation and Natural Resources. Instead, McCord will abide by the fund's original intent to invest in the conservation and infrastructure of state lands, and he will dedicate a portion to financing a Growing Greener III program that will invest in job-creating environmental protection and remediation work in communities across the state.