Policy Documents

Research & Commentary: Hydraulic Fracturing Impact Fees

March 12, 2012

Hydraulic fracturing has enabled profitable extraction of oil and gas in diverse areas of the country. As a result, many states sitting atop the country’s shale formations are reconsidering the way they tax these resources, to fill budget holes. Many of these debates are occurring in states with unconventional deposits and where the tax code was not constructed with these revenues in mind.

Proponents of tax and fee increases say they want to use the additional revenue not only to fund programs directly related to hydraulic fracturing (such as additional well inspectors, water treatment upgrades, and road maintenance) but also programs with no discernible connection to industrial impacts. This is fiscally unwise: Using such a volatile funding mechanism for programs unrelated to the industry can wreak havoc on state budgets. For example, Oklahoma is being forced to revise its budget projections because low natural gas prices have reduced expected revenue by $86.9 million.

Market advocates say any fees should be tied to objective metrics that accurately weigh the additional impact caused by hydraulic fracturing and fund only programs directly tied to those impacts. Understanding that industrial activities, such as oil and gas drilling, may have an impact beyond what is covered under the existing tax code, local governments should be free to impose additional fees to reimburse the citizens for the companies’ increased use of government services beyond what is covered under their existing taxes.

Implementing these fees at the local level would give sufficient incentive to create competitive rates as municipalities compete with one another for mobile capital. A fee imposed at the state level would force individual jurisdictions to implement suboptimal fee schedules that are either too high or too low. When fees are imposed at the state level, regions without development attempt to siphon off revenue to their own communities. Vesting fee control in local governments keeps more money in the communities most directly affected by development.

When considering changes to a state’s tax structure, it is also important to look at the entire business climate, not just severance tax rates. Texas and Wyoming, for example, are often cited for their relatively high severance tax rates of 7.5 and 6 percent, respectively. But neither state imposes individual or corporate income taxes. Putting severance taxes and impact fees in their full context is necessary to determine what impact a tax increase would have on the state’s competitiveness.

The following documents and Web sites provide additional information about hydraulic fracturing impact fees.

Oil and Gas Severance Taxes: States Work to Alleviate Fiscal Pressures Amid the Natural Gas Boom
http://www.ncsl.org/issues-research/energyhome/oil-and-gas-severance-taxes.aspx
The National Conference of State Legislatures compiles a list of oil and gas severance taxes throughout the nation and provides a list of relevant bills under consideration in the current legislative session.

Podcast: Fracking Legislation in Pennsylvania
http://heartland.org/podcasts/2012/02/22/katrina-currie-fracking-legislation-pennsylvania
Heartland Senior Fellow James M. Taylor speaks to Katrina Currie of the Pennsylvania-based Commonwealth Foundation about the state’s recently passed hydraulic fracturing legislation, which includes a new tax on natural gas, local zoning restrictions, and corporate welfare programs.

Marcellus Shale Impact Fee
http://www.commonwealthfoundation.org/research/detail/marcellus-shale-impact-fee
The Commonwealth Foundation details five free-market principles for imposition of an impact fee. The foundation emphasizes the importance of judging fees and taxes within the broader context of business climate.

Marcellus Shale Bill Passes West Virginia Legislature
http://westvirginia.watchdog.org/3846/marcellus-shale-bill-passes-west-virginia-legislature-video/
In a December special session, the West Virginia legislature passed a Marcellus Shale package that increased permit fees by 900 percent. The bill imposed additional notice and comment requirements and updated regulations on issues ranging from well setbacks to wastewater disposal.

2012 State Business Tax Climate Index
http://www.taxfoundation.org/news/show/22658.html
The Tax Foundation’s annual ranking of state business tax climates provides a more complete picture of a state’s competitiveness when considering imposing additional taxes and fees. The study finds the shale states with the best business tax climates are Wyoming, South Dakota, Montana, Texas, and Utah.

Governor Kasich’s Difficult Balancing Act on Energy and Taxes
http://buckeyeinstitute.org/the-liberty-wall/2012/03/08/governor-kasichs-difficult-balancing-act-on-energy-and-taxes/
Kevin Holtsberry, president of the Buckeye Institute for Public Policy Solutions, discusses the tradeoffs that Ohio Governor John Kasich must strike between increasing taxes on the oil and gas industry while simultaneously lowering the income tax. Holtsberry contends Ohio conservatives should be open to the potential of shifting tax burdens from income and investments to use and consumption.

Innovation Ohio Report: Fairness, Fracking and the Future
http://innovationohio.org/featured/report-fairness-fracking-and-the-future
The liberal advocacy organization Innovation Ohio details its proposal to increase taxes on oil and natural gas drillers in the Utica and Marcellus Shale. The organization advocates creating a “Landowner Bill of Rights” and forcing operators to hire Ohio residents. 

AR: On the Road, Severance Tax Hike Foes Pan Proposal
http://arkansasnews.com/2012/02/01/on-the-road-severance-tax-hike-foes-pan-proposal/
In Arkansas, activists are gathering signatures for a ballot initiative that would reform the state’s severance tax structure, eliminating exemptions and raising rates from 5 to 7 percent. Opponents of the proposal, including the Conway Chamber of Commerce, say it will “hit Arkansas families square in the wallet.”

For further information on this subject, visit the Environment & Climate News Web site at http://news.heartland.org/energy-and-environment, The Heartland Institute’s Web site at http://www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, you may contact Heartland energy and environment legislative specialist John Monaghan at jmonaghan@heartland.org or 312/377-4000.