HARRISBURG, Pa., April 26, 2011 /PRNewswire-USNewswire/ -- Natural gas drillers claim they have paid hundreds of millions of dollars in Pennsylvania taxes, but data from the state Department of Revenue tell a different story, according to a report from the Pennsylvania Budget and Policy Center.

Of the 783 companies to file corporate net income tax returns in 2008, 85% paid nothing in taxes. Many other drillers, including nine of the top 10 permit holders in the Marcellus Shale, structure their businesses so that they pay the much lower personal income tax, avoiding the corporate net income tax altogether.

"Drillers profiting from the rich gas reserves of Pennsylvania's Marcellus Shale are getting a free pass," said Sharon Ward, Director of the Pennsylvania Budget and Policy Center. "Federal incentives significantly cut their tax bills at all levels. Most drilling corporations pay no corporate income taxes, and the majority of all big oil and gas companies in the Marcellus Shale are paying the same tax rate as the person serving coffee at the corner diner."

The industry claims Marcellus Shale production has generated more than $1 billion in state and local tax revenue, but the Pennsylvania Department of Revenue data show the oil and gas industry paid only $38.8 million in state business taxes in 2008. That includes $17.8 million in corporate net income taxes, $13 million in personal income taxes and $8 million in capital stock and franchise taxes.

In 2009, oil and gas drillers in Louisiana, Texas and West Virginia paid considerably more in state and local taxes than they did in Pennsylvania. Drillers paid $44 million in Pennsylvania sales and business taxes, while in Texas, they paid $8.8 billion in drilling, property, sales and corporate taxes.

"Texas has about 34 times as much oil and gas drilling as Pennsylvania, but took in 200 times as much in taxes from the industry," Ward said. "Clearly, drillers are getting big tax breaks in Pennsylvania that they don't enjoy anywhere else."

In drilling and property taxes alone, oil and gas drillers paid $820 million in Louisiana and $183 million in West Virginia. (Data on business and sales taxes paid by oil and gas drillers in those states were not available).

The center's report recommends that Pennsylvania policymakers follow the lead of every other major gas-producing state in the nation and enact a single statewide drilling tax, without costly upfront tax exemptions. It also recommends closing a court-imposed tax loophole that prevents local governments from assessing property taxes on oil and gas reserves.

"Virtually every other state with natural gas reserves is able to marry robust economic growth with a boost in tax revenue to support schools, health care, the environment and other investments in the state's long-term prosperity," Ward said. "Pennsylvania should do the same."

Special Tax Breaks Abound for Drillers

Generous federal tax incentives for energy production sharply reduce the state and federal income taxes paid by drillers. For example, Range Resources, the No. 2 Marcellus Shale well driller in Pennsylvania, had an average federal income tax rate of 0.4% from 2005 to 2008, due in large part to these giveaways.

But federal incentives are only part of the picture. Loopholes, tax breaks and other giveaways in Pennsylvania's antiquated tax system make this a very favorable tax state for the industry.

Drillers operating as corporations can shift income earned here to tax-haven states like Delaware, leaving little or no income on the books in Pennsylvania. This is one reason why 85% of the drilling companies that filed corporate tax returns in 2008 paid no corporate income taxes at all.

A much larger number of drillers structure their businesses as limited liability companies (LLCs) or limited partnerships (LPs) to avoid corporate income taxes altogether and instead pay the much lower personal income tax rate on profits. At least 80% of all permit-holding drilling companies are now operated by LLCs or LPs.

While many drillers also paid capital stock and franchise taxes in 2008, this levy's days are numbered. The tax will be completely phased out by 2014, amounting to yet another tax break for gas drillers in Pennsylvania.

Drillers also pay state sales taxes on non-drilling items like computers and office chairs, but a manufacturing exemption in the tax means much larger purchases, including fracking chemicals, drilling equipment, testing equipment, and pollution control devices, are tax free in Pennsylvania.

At the local level, drillers also enjoy generous tax breaks and exemptions.

A 2002 court decision prohibited municipalities and school districts from collecting property taxes on oil and gas reserves. Unlike in most states, Pennsylvania's property tax also exempts trucks, equipment and supplies in the drilling process.

Other local tax breaks further reduce drillers' tax bills:

• Drillers avoid paying local business privilege taxes since gas drilling falls under a manufacturing exemption to that tax.
• Net profits earned by drilling corporations are exempted from local earned income taxes.
• State and local hotel taxes are waived on the long-term rental of living quarters for out-of-state industry workers.

View the full report at: http://www.pennbpc.org/gas-drillers-escape-taxes

The Pennsylvania Budget and Policy Center (PBPC) is a non-partisan policy research project that provides independent, credible analysis on state tax, budget, and related policy matters, with attention to the impact of current or proposed policies on working families. To learn more, go to www.pennbpc.org.

SOURCE Pennsylvania Budget and Policy Center