70% of Marcellus Shale Wells Don't Pay Corporate Net Income Tax

June 29, 2009

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The Pennsylvania Legislature is debating whether the state should levy a severance tax on the extraction of natural gas to help reimburse state and local governments for environmental, infrastructure, and societal costs imposed by the industry.  Until recently, Pennsylvania has had a modest natural gas extraction industry. The commercial development of the Marcellus Shale, which underlies 55 counties in Pennsylvania, seems poised to make the state a major supplier over the coming decades.

In enacting a severance tax on natural gas, the state would be joining every other state with greater natural gas production than Pennsylvania. These states already levy a severance tax or environmental fee on gas drilling.

One of the central claims of critics regarding the proposed tax is that it is unneeded as drillers here “face the highest corporate tax rate in the nation.” A closer look at the evidence shows that this is not the case for most companies. In fact, the drillers of more than 70% of the wells in the Marcellus Shale will pay the state’s 3.07% Personal Income Tax (PIT) rather than the 9.99% Corporate Net Income Tax (CNIT).[i] The following table lists all companies with permits to operate wells in the Marcellus Shale and highlights the firms that are paying the lower PIT rate.

TABLE 1. Over 70% of Wells Drilled in Marcellus Shale are Not Subject to Corporate Net Income Tax

Methodology

On June 23, the House Environmental Resources and Energy Committee amended and approved House Bill 1489 to exempt low producing wells from the proposed severance tax. This effectively limits taxation to the wells drilled in the Marcellus Shale. The Pennsylvania Department of Environmental Protection (DEP) issues periodic reports summarizing the companies operating and the number of wells drilled in the Marcellus Shale, most recently on June 16. These companies were examined for their operating structure. Initially, the companies including LLC or LP in their corporate name reported to DEP were identified as companies that would be paying PIT in Pennsylvania. For the other companies, publicly available Securities and Exchange Commission filings and corporate reports were examined to determine the operations being conducted in Pennsylvania. If these reports indicated that drilling operations in Pennsylvania were being conducted by a subsidiary listed as an LLC or LP, the company in question was added to the list of those not subject to CNIT. The wells owned by these companies (1,062) were compared to the total number of wells in the Marcellus Shale (1,504) to arrive at the 70.6% figure.