Pa. towns lose their right to zone but get a fracking piece of a fracking “fee'”

In depriving them their right to zone, the carrot to the Pa. towns - who have no property tax on wells - is to pay them some of the puny fee the state will collect on gas wells. This, in ‘exchange’ for taking away their zoning rights. The Pa. Supremes first took away the town’s right to tax wells, then confirmed their right to zone in ’09 - the Pa. leg. has now reversed both. They have lost their right to zone, in exchange for a piece of the new “fee” on producing wells that the state enables counties to adopt. If the counties do not adopt the fee, the towns in the county can compel the county to adopt the fee. (Got that ?)

http://www.deloitte.com/assets/Dcom-UnitedStates/Local Assets/Documents/Tax/us_tax_multistate_PA_Alert_3-2-2012.pdf

They call it a “fee” instead of what it is, which is a tax on producing wells. Because the “T” word is a political no-no. The “tax that dare not speak its name” is shared with local governments. No big deal there. Most states share their severance tax with the impacted counties, etc. But in other states, the local authorities also tax the wells based on their productivity - in addition to a state-wide tax on production.

The Pa. “fee” is sliding scale tax on producing wells - that does not take the well’s production volume into account ! That would be like taking a royalty check as a flat annual fee. No one would sign a lease for that, not even a dude in a beard driving a buggy. But Pa. just did it that way. Because Pa. Has the Best Politicians That Money Can Buy.

The Pa. “fee” falls at the low end of severance taxes - compared to say 7.4% in Texas. Since all other states (except NYS) tax at both the state and local level - the implied “combined” rate is rather low. (For instance, Texas the local property mill rate of 2.5% + the state severance rate of 7.4% = 9.9% gross)

http://www.scribd.com/doc/63145368/NY-Property-Tax-On-Gas-Wells

This sort of multiplier methodology was abandoned by most O&G states years ago. In favor of a straight NPV calculation - at the local level . And a straight mcf rate (true production sharing) by the state. On balance - better than what Pa. had before - which was nothing. Like it still is in New York, gas production is tax free at the state level:

http://www.scribd.com/doc/63145742/New-York-State-Gas-Production-Tax

By not tying this new “fee” directly to volume, any big IP gas well gets off very easy. Since the fee is paid as long as the well is producing, a short-lived, high IP shale well is under-taxed by this methodology - just what the industry wanted.

If the well has a 5 year productive life (typical life expectancy of some shale wells) then only 5 years worth of fees. . . With no allowance for what it actually produced. From a NPV model, this yields the worst case tax scenario, which is why Pa. went with this crude approach.

· Gas volume is not measured

· All wells pay the same fee so long as a minimum volume is produced

· Inflation adjusted - (what inflation ?)

A minimum daily volume of 90,000 cf/day is set as a minimum threshold. A theoretical shale gas well that produced 4,000 MCF on its first day (a good producer) and declined in accordance with the Penn State Royalty Calculator . If this gas was worth $4 per MCF (which it is not currently), and if the “fee” is as shown by Deloitte, then you can convert the “fee” to a % of gas value produced.

For this hypothetical well, the “tax that dare not speak its name” would be about 2.5% to 3% during the first 10 years. For a more productive well, the effective % goes down and for a less productive well, the % goes up. In a real severance tax, which is tied to production, the effective percent is the same regardless of the volume.

The Pennsylvania “tax that dare not speak its name” is a poor excuse for a production tax.

Which is what the gas industry paid for . . .

James “Chip” Northrup

http://www.scribd.com/northrup49