Gas Lease, Royalty Income Taxes Top $100 Million

Pittsburgh Tribune-Review
29 August 2011
By Timothy Puko

Pennsylvania landowners are paying hundreds of millions of dollars in income taxes on money earned from Marcellus shale gas activity, and the tax revenue, like the drilling, is growing fast.

"I wrote the checks to pay the taxes, so I know," said Rita Resick, a Somerset County farm owner who has collected lease money twice since 2007. "This thing is generating tax revenue. And rightly so. We make money, so we pay taxes. That's how things work."

When Resick paid taxes on the lease-signing bonus in 2007 for gas drilling on her 300-acre farm, she was an early player in what has become a tax boon for the state. Lease and royalty income taxes totaled $17 million in 2007; that swelled to more than $100 million from 2010 earnings so far.

The state has maybe half of the collections still to count for 2010, according to figures from the state Department of Revenue.

Since the shale gas rush started in Pennsylvania in 2005, drillers have bored more than 3,700 wells into the gas-rich Marcellus rock layer, a mile or deeper underground, according to the Department of Environmental Protection. They have sought nearly 8,600 well permits through Aug. 12, the most recent statistics available.

An Associated Press survey identified at least 8 million acres of leased gas land --- more than a quarter of the state's total area. Department of Revenue figures show that more than 50,000 taxpayers a year collected oil and gas revenue between 2007 and 2009.

Until this year, leases and bonus payments were the biggest expense for drillers. They spent about $2 billion a year just on leases from 2008 to 2010, according to industry figures from a survey released this summer.

As more wells are drilled and production increases, lease payments will shrink and royalty payments will skyrocket. Royalties are expected to jump from $53.4 million in 2009 to nearly $1.9 billion in 2012, according to the survey, which was funded by the Marcellus Shale Coalition industry group and conducted by professors at Penn State University and the University of Wyoming.

"For counties with heavy (Marcellus shale) drilling activity, the increase in rent and royalties income offers the best proof of the positive economic impact of the industry," Frank Gamrat, a researcher at the Allegheny Institute for Public Policy, wrote in an e-mail. "The question is: How much more will it grow? It may eventually contribute a lot to income tax coffers, but right now is small in terms of total income reported."

Pennsylvania treats the money as earned income. Individual landowners pay at the 3.07 percent income tax rate, and corporate owners pay at the 9.99 percent corporate tax rate.

The state so far tallied $102.7 million in such tax revenue for 2010 on an estimated $2.4 billion in earnings, according to state and industry figures. That's the first time the tax revenue topped $100 million, and it was collected from only 29,396 taxpayers -- compared with 64,848 in the prior year.

Why the difference? The state still must count returns from all the taxpayers who requested extensions, which should be finished this fall, Department of Revenue spokeswoman Elizabeth Brassell said. State officials are not sure how big the late-coming payments are, but economists who reviewed the number said the tax revenue might double to more than $200 million if as many taxpayers file for 2010 as there were in 2009.

The partial counting of returns is just one reason why 2010 collections could be considerably higher, said Seth Blumsack, an assistant professor of energy policy and economics at Penn State. The department counted oil and gas rent, and royalty revenue from the 23 counties in the state that have extensive drilling. Another Penn State study due out today will note that about 25 percent of the owners of that gas land live in other counties and were not counted in those numbers, although they still pay taxes to the state, Blumsack said.

"The conclusion is the state's bringing in a non-trivial amount of tax revenue from this," said Blumsack, one of three academics who studied numbers for the Marcellus Shale Coalition.

Analysts are still debating drilling's true potential tax impact on Pennsylvania.

Drillers have at times overstated their impact on the economy to gain public and political favor, said Sharon Ward, director of the Pennsylvania Budget and Policy Center. Pennsylvania is the only major drilling state without a severance tax on the fuel that drillers extract.

The state could have collected another $220 million if it had passed a tax similar to West Virginia's when then-Gov. Ed Rendell proposed it in 2009, according to the center's calculations. Gov. Tom Corbett has said he opposes an extraction tax.

"The way I liken the industry is that it's like a newborn baby. It's tiny, and it gets all of the attention," Ward said. "The public should look at all the numbers bandied about with the Marcellus shale because they're (often) publicity numbers, and they're used as publicity numbers."

A drilling tax might be useful if its proceeds go back to drilling communities, said Resick, who, with her husband, bought Laurel Vista Farms in Lincoln, Somerset County, in 1988. Now drilling communities have extra road repairs and government and legal work -- without any gas tax money to pay for it. But she isn't sure whether a tax limited to paying for local impacts could even work or get approval statewide, she said.

"It's complex," she added. "Taxing -- it depends on how the tax is structured, what they do with the proceeds for the tax. It's a hard thing to consider in a vacuum. I don't know what to think about it."

Timothy Puko can be reached at or 412-320-7991.