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States lower energy taxes to attract business as production thrives

Shane Thielges | Shale Plays Media

A new report has found that state tax rates on fossil fuel extraction have stayed consistent or even fallen since the hydraulic fracturing boom began, despite rising profits for the energy sector.

U.S. News and World Report says the report’s authors, Barry Rabe and Rachel Hampton of the University of Michigan’s Center for Local, State and Urban Policy (CLOSUP), attribute the low tax rates to states’ desires to remain competitive with their neighbors. Though a severance tax would earn more money for the state per volume of extracted fuel, it could also drive energy companies to nearby, more lightly taxed states, lowering the overall economic return.

These states, “may want to keep the severance taxes at a low point in order to boost employment in the energy and related industries,” Paul Sullivan, an economics professor at National Defense University and an adjunct at Georgetown University, says. “Investment in exploration and production in Texas, North Dakota, Pennsylvania, etc. also [has] to compete with potential international investments that some of the [major oil and gas producers] might be thinking about.”

Mississippi, Oklahoma and Idaho have all lowered extraction taxes in recent years in order to stay competitive with nearby states. Alaska repealed an energy tax hike instituted by former Governor Palin after just six years. And Pennsylvania has staidly refused to initiate a per-volume tax on gas extraction despite widespread public support, opting instead for “impact fees” that are much cheaper than true taxes.

Yet, U.S. News reports, severance taxes can actually offer several distinct benefits. The payments are not made directly by voters, as is the case with taxes on consumer gasoline, removing the risk of political backlash. Additionally, unlike factories or facilities that can be built in any state, wells have to be located where the resource deposits exist. States with the most lucrative shale plays, therefore, can get away with enforcing higher tax rates.

Overall, Rabe and Hampton say it’s difficult to compare rates between states as a unique combination of geology and bureaucracy make different tax incentive packages highly complicated. The real indicator of change is the number of statutes and amendments to state severance taxes. At least seventeen have been filed across eleven states in the past two years, and even more have been enacted to specify how revenue is allocated.

“There does seem to be, just in the last year or two, a big increase in the amount of attention elected officials are paying to this,” the professor describes.

Read more at U.S. News and World Report: Study: As Oil and Gas Boom, Energy Taxes Fall

Related: Public’s support for gas tax is misguided, Corbett says


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