One Size Shouldn’t Fit All

For most of our history, states have been viewed as the laboratories of democracy, allowing them to determine what is in the best interests of their citizens. Individual state policies, programs, and related matters can be assessed by other states as part of the learning experience that can lead to a movement toward “best practices”. It should remain that way as individual states decide on how best to participate in the natural gas renaissance brought about by fracking and how to use the economic benefits that come with it.

The debate over severance taxes and impact fees will not be resolved over a few years since the Pennsylvania approach is based on a 15-year time frame. And, doing an apples to apples comparison is a very difficult undertaking, that at a minimum requires wells that are comparable in terms of geology and estimated production as well as normalizing other factors that determine the business climates between states.

Low tax rates create an incentive that can attract exploration business. With Pennsylvania’s high corporate tax rate and other costs of doing business, a company has to compare investment and potential returns among alternative investment opportunities. The fact that exploration and production has passed Louisiana in natural gas production can be seen as a result of its novel long term and flexible approach to taxing production. Since the governor’s opponents have made the impact fee an election issue, voters in the Keystone state will deliver the only verdict that counts.

A related issue is what states do with the revenue from natural gas production. The so called “boom and bust” cycle associated with natural resource development has in recent decades been associated primarily with crude oil and its price volatility. While it is impossible to predict the host of factors that influence oil and gas prices beyond the immediate future, the outlook for gas over a somewhat longer time horizon is promising because demand is likely to outstrip supply on a global basis. That is a reason for optimism about domestic gas production, if as a nation we adopt policies that enable the US industry to maintain its global leadership.

States like private businesses should take a long term economic perspective in looking at revenues, of which one component is from natural gas production. States that have an investment friendly business climates and exercise fiscal prudence will continue to attract job creating businesses and produce the economic benefits that those investments create.

Economic cycles are a fact of life and no matter what the source of new revenue is, states need to plan for lean years and circumstances that are beyond their control. We are approaching the 7th year of the natural gas boom and states can make judgments about which ones have adopted the most enlightened policies for using natural gas revenues and for adopting a regulatory structure that strikes a balance between investments and impacts.

Partner & Fellow Blogs