Senator Vincent Hughes of Pennsylvania has a plan to generate $375 million for local school districts. This new plan would tax Oil and Gas operators in Pennsylvania by 5% on all natural gas drilling. Hughes estimates that this would provide over $1 Billion for education by 2020. However, only a portion of the money generated would actually go toward benefiting schools. A little over half would be designated for schools with the remaining amounts being split up among economic development, environmental uses, and other various items.
New Tax the Answer?
The question that should be asked is whether a new tax is the answer. Claims that the tax money is essentially free and not a burden on tax payers is not accurate. By taxing oil and gas operators, this reduces the income they make giving them less capital to drill additional wells. When an operator drills wells, it creates a large number of jobs directly and also indirectly for other companies who support the oil and gas drilling operations. By taking cash away from the companies who operate in the region, this will have a negative impact on mineral owners.
In addition, the questions Pennsylvanians should be asking themselves is whether the cash is being spent appropriately. Increasing tax revenue without fixing the current spending problems and funding mismanagement does not solve the problem. More accountability at the state level for the money already being spent is needed to show citizens that increased tax revenue is the right answer.
Impact on Mineral Owners
As a mineral owner, this is a serious issue. When cash is not available by oil and gas operators for drilling due to a marcellus shale severance tax, mineral owners will shoulder some of the burden. With less cash to operate, this will reduce the amount of cash that operators can afford to pay for a lease bonus. If you’re already receiving royalties, this will reduce the amount you get paid because the severance taxes will directly reduce payments going to royalty owners. On the surface it appears that the money is free, but mineral owners and royalty owners will also take a hit from this decision.
If you’re considering selling royalties, this decision could play a role in how quickly you decide to sell. Future royalty income could be reduced by this decision. The value of royalties payments can be affected by a large number of factors but a 5% reduction in the amount you are receiving will have a large impact than most factors. Carefully consider this as you weight whether selling royalties is the right decision for you.
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