UNIVERSITY PARK – The ongoing utilization of Pennsylvania’s Marcellus Shale natural gas deposits has the state weighing the pros and cons of taxing the drilling activity. A study recently released by Penn State’s College of Agricultural Sciences used state tax information in an effort to begin an objective analysis of the drilling’s impact on local economies and state tax collection.
The research, summarized in a four-page booklet titled “State Tax Implications of Marcellus Shale: What the Pennsylvania Data Say in 2010,” compared counties where there is Marcellus Shale drilling and production activity with non-Marcellus counties. The study was authored by Timothy Kelsey, professor of agricultural economics and Penn State Extension state program leader for economic and community development, and Charles Costanzo, an undergraduate student majoring in community, environment and development.
Data are drawn from the Pennsylvania Department of Environmental Protection’s report, “2010 Wells Drilled by County as of 02/11/2011,” as well as from the Pennsylvania Department of Revenue’s “Personal Income Statistics for 2007 and 2008” and its “Tax Compendium (2007-08 through 2009-10) with Statistical Supplements.”
Kelsey said while it’s still early in the natural gas drilling process, the analysis indicates that Marcellus Shale development brings some positive economic activity for communities.
The study found that state sales tax collections were up by an average of 11 percent in counties with major Marcellus activity, while collections dropped an average of more than 6 percent in counties without any Marcellus. Sales tax collections are an indicator that retail sales are booming in Marcellus counties.
“Tax revenues are only one side of finances, however, so this analysis only considers half of the issue,” Kelsey said. “The impact of Marcellus drilling on state and local government costs is yet unclear, so it is too early to understand the overall impact of Marcellus on the state government. This state tax analysis does not indicate the impact of Marcellus development on local government and school district tax collections, since royalty and leasing income is exempt from the local earned income tax, and local jurisdictions cannot levy sales taxes.”
Kelsey said researchers wanted to find out if state tax records could yield objective financial data on how local economies are being affected by Marcellus Shale development.
“The state tax information provides a glimpse at how sales activity and personal income are changing,” he said. “The state collects objective tax collection information every year, and that can provide a good snapshot of how residents’ income is changing and the amount of retail activity going on.”
Kelsey explained that the booklet can help the average citizen to understand that Marcellus Shale development is having a discernible economic impact on residents and in communities.
“We’re early enough in the development of the shale that much of what we ‘know’ is based on anecdotes and personal stories,” he said. “This analysis provides some real numbers behind those anecdotes. The data show clearly that there are economic benefits that are accruing because of the gas activity — higher personal tax collections, higher sales tax collections. Realty tax incomes in drilling counties are decreasing, but less than in non-drilling counties.
“The booklet will not tell you how those benefits relate to costs, because we weren’t able to look at that,” he added. “So, it is only a partial picture of what’s going on. You know there are dollars coming in but you don’t know if it’s a net gain or a net loss to the community.”
Kelsey cited increased highway repair and maintenance, greater administrative demands, changing human service needs, and law enforcement and courts among the costs that determine whether the drilling activity is adding to or subtracting from a county’s bottom line.
Kelsey stressed that, because the study focuses only on state tax collection, it doesn’t support assumptions about local tax changes. He points out that local governments don’t have the option of a sales tax, and that the personal income tax increases seen in the study are largely the result of leasing and royalty income, which are both exempted from earned-income tax.
“So we know from this analysis that state revenues are going up, but we don’t know if local tax revenues are increasing or decreasing as a result of the activity,” he said. “That’s a huge caveat.”
Single copies of “State Tax Implications of Marcellus Shale” can be obtained free of charge by Pennsylvania residents through county Penn State Extension offices or by contacting the College of Agricultural Sciences Publications Distribution Center at 814-865-6713 or by email at AgPubsDist@psu.edu. For cost information on out-of-state or bulk orders, contact the Publications Distribution Center. The publication also is available on the Web at http://pubs.cas.psu.edu/FreePubs/pdfs/ua468.pdf.
Gary Abdullah, Penn State University