Sustained Outrage

Getting the right information on Marcellus Shale

West Virginia’s political leadership and much of the media continue their push to show how great Marcellus Shale drilling is going to be for our state, and to dispel any notion that the state’s tax structure and regulatory requirements are not tough enough on the industry.

Take today’s top story in the Charleston Daily Mail, in which statehouse reporter Ry Rivard writes:

West Virginia appears to place a higher tax burden on natural gas operators than five surrounding states, according to a recent study by the Marshall University Center for Business and Economic Research.

A team led by professor Calvin Kent compared West Virginia to 18 other states, including Kentucky, Maryland, Ohio, Pennsylvania and Virginia.

“West Virginia places more taxes and fees on natural gas production than most of the other states which were studied,” Kent and his team concluded. That includes Pennsylvania, which is in direct competition with West Virginia for drilling activity.

Before we’re too tough on our buddy Ry, though, let’s not forget that the Gazette’s statehouse reporter, Phil Kabler, took this Marshall spin without question, writing last week:

A report by the Marshall Center for Business and Economic Research found that West Virginia’s taxes and fees imposed on natural gas production are comparable overall with other natural gas producing states, but noticeably higher than surrounding states.

West Virginia’s severance tax, 5 percent of gross value, is higher than neighboring states, including the states of Pennsylvania and Maryland, which have no severance tax on natural gas.

“You’ve got a huge advantage in Pennsylvania right now, because natural gas is being exploited out of that state with very minimal taxation,” Marshall professor Cal Kent told an interim committee on Finance.

The report said it is impossible to determine what impact the tax rates will have on development of Marcellus Shale drilling in the state, since taxation is only one of many factors that determine where companies will locate.

Now, this Marshall University report is certainly being promoted by industry groups and their supporters. But if anybody had bothered to dig a little deeper, they might have found this preliminary analysis by the West Virginia Center for Budget and Policy, which explains that simply comparing the basic tax rate isn’t enough — it doesn’t show the full picture. To do that, as the center explains, you have to look at “effective rates” of taxation:

However, effective rates are often lower than statutory rates. The effective rate is the end result after you adjust for deductions, limits and credits.

As we’ve written before over on the Gazette’s Coal Tattoo blog, that sort of review paints quite a different picture, showing that West Virginia’s severance tax (for all mining – industries, including coal and natural gas):

Using this method, West Virginia has an effective severance tax rate of 3.2%, well below the average of 5.2% for the top ten states. Alaska had the highest effective rate at 11.2%. Of the ten state’s most reliant on the severance tax, West Virginia ranked 7th for effective rate. West Virginia also had a lower effective rate than neighboring energy producer Kentucky, and a lower rate than the western states whose production is growing more competitive with West Virginia every year.

Sean O’Leary, a policy analyst at the center, also explained:

Studies of severance taxes in other states have shown tax rates have little effect on production.

Studies in Wyoming1 and Utah2 have found that even significant changes in in severance tax rates had little impact on industry production, but had a large impact on government revenues.

There is also little evidence of different effective rates leading to more or less investment from state to state.

The coal, oil, and gas industries are guided by the location of reserves, access to markets, and technology and are less able to relocate than industries with mobile capital resources.

Sean posted a new response to the Marshall study and its media coverage on the center’s blog here. He explained:

In the final analysis, the Marshall study doesn’t show that West Virginia’s tax burden is higher than other states, nor does it show that a high tax burden significantly influences the industry when deciding where to produce. Focusing too much on tax policy distracts from other important issues that need our attention. We need to focus more on how the state can mitigate environmental impacts, boost employment of in-state residents, and how we can be better positioned once the energy boom ends and the resources are depleted.

But this isn’t the sort of analysis that helps the industry and political leaders make their case … and perhaps that’s part of the problem, as Bucknell University professor Thomas C. Kinnaman explained in a recent article examining several recent studies that examined the potential economic impacts of the Marcellus Shale.  Kinnamen’s article — unlike the Marshall tax study or a recent West Virginia University study promoting the Marcellus Shale drilling — appeared in a peer-reviewed journal, Ecological Economics. It concluded:

Recent advances in drilling technology have allowed for the profitable extraction of natural gas from deep underground shale rock formations. Several reports sponsored by the gas industry have estimated the economic effects of the shale gas extraction on incomes, employment, and tax revenues. None of these reports has been published in an economics journal and therefore have not been subjected to the peer review process. Yet these reports may be influential to the formation of public policy. This commentary provides written reviews of several studies purporting to estimate the economic impact of gas extraction from shale beds. Due to questionable  assumptions, the economic impacts estimated in these reports are very likely overstated.

Kinnaman is on the agenda for next week’s WVU College of Law program on natural gas drilling, and it should be interesting … he’s on a panel with Tom Witt, co-author of the WVU study promoting the Marcellus Shale industry. Stay tuned …