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.