Representation without Taxation: How Natural Gas Producers Escape Taxes in Pennsylvania

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Natural gas drillers in Pennsylvania pay very little in state and local taxes, despite industry claims to the contrary.  In tax year 2008, the oil and gas industry[1] paid $38.8 million in Pennsylvania state business taxes.[2]

Of the 783 companies to file corporate net income tax returns, only 15% owed any tax.  A significantly larger number of drillers — including nine of the top 10 permit holders in the Marcellus Shale — structure their businesses as limited liability companies (LLCs) or limited partnerships (LPs).  This allows them to attract investment capital from individuals who avoid the corporate net income tax altogether and pay the much lower personal income tax on their share of the LP or LLC’s profits, which lowers the effective tax rate for the LLC or LP.  

In 2008, 120 companies paid $17.8 million in corporate net income taxes.  51% of companies had capital stock and franchise tax liability, paying $8 million.  While a greater proportion (56%) of LLCs and partnerships had tax liability, they paid in total $13 million in personal income taxes.

According to the Pennsylvania Department of Revenue, drillers in the Marcellus Shale paid $44.4 million in sales and use tax, corporate net income tax and capital stock and franchise tax in 2009[3]

Drilling companies enjoy favorable tax treatment in the Commonwealth.  They are exempt from property taxes on oil and gas reserves, and most of the equipment used in the drilling process, the largest expense, is exempt from the state sales tax.

Table 1. Pennsylvania Business Taxes Attributed to Natural Gas Drillers (Tax Year 2008)

Tax Type Tax Paid Returns with Tax Total Returns % with Tax
Corporate Net Income Tax $17.8 million 120 783 15.3%
Capital Stock and Franchise Tax $8.0 million 421 824 51.1%
Personal Income Tax $13.0 million 818 1,458 56.1%
Total[4] $38.8 million      

Source. Pennsylvania Department of Revenue

The Marcellus Shale Coalition, an industry group, claims that natural gas producers already pay significant state and local taxes in Pennsylvania.  For example, former Governor Tom Ridge, whose lobbying firm promotes the Marcellus Shale Coalition, recently said:

“In just two short years, this ancient rock bed of quartz and calcite has helped our state generate more than 75,000 new jobs, and in the process helped the state generate more than $1 billion in revenue to state and local governments, at a time when those resources have never been needed more."[5]

This claim is not supported by any evidence that we can verify, particularly not from the oil and gas drillers, themselves.

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[1] Oil and gas producers are defined as being in either the oil and gas extraction business or support activities for mining, which includes services for the oil and gas business.

[2] Data queried by the Pennsylvania Department of Revenue in 2009 for tax year 2008. Included in the figures are tax payments from firms in the Oil and Gas Exploration (NAICS 2111) and Support Activities for Mining (includes oil and gas) (NAICS 2131) industries.

[3] Commonwealth of Pennsylvania, Governor’s Executive Budget 2011-12  page A.1.11.

[4] The total number of companies is not provided due to likely double counting. Corporations are required to file both corporate net income tax and capital stock and franchise tax returns. S-corporations, limited liability companies, and limited partnerships are required to file capital stock and franchise tax returns. Income from these entities flows to the owners (whether they are corporations or individuals) who pay the income taxes due.

[5] Governor Tom Ridge, “Commitment to the community,” Marcellus Quarterly, Spring 2011, p. 16