Tuesday, September 07, 2010

EDITORIAL >>How to tax natural gas

Five years have lapsed since the beginning of the great rush to develop the vast reserves of shale gas in the hills north of us and two years since the state levied a little tax to reserve some of the vast profits from the gas for the people of Arkansas and repair the environmental and infrastructure damage the drilling rampage was causing and was sure to cause in magnifying volumes in the future.

It is time, long past time in fact, to assess the effects of state policies on the exploration of the Fayetteville shale play or, more accurately, the lack of policies. In the best of worlds, Gov. Beebe would have ordered a thorough analysis by the state environmental agency, the oil and gas regulatory agency, the state Highway Commission and the state fiscal department, Finance and Administration. Legislative interim committees, in preparation for the biennial session in January, would be devouring the data and holding hearings on the impact of the exploration and production on the region north of the Arkansas
River Valley and on the state as a whole.

None of that is happening, at least on a scale that is worth noting. The state Department of Environmental Quality and the Oil and Gas Commission want a few more employees to check on things up there, but there is no initiative to demand more accountability of the 15 or so exploration companies drilling in the shale. The state Highway and Transportation Department and county governments want the state to find some revenues somewhere to help them with the crumbling roads.

New horizontal-drilling technology opened up millions of acres where gas is trapped in deep rocks. From New York to Wyoming, the finished wells are hugely productive but the environmental cost is equally huge. It takes millions of gallons of water and chemicals to liberate the gas and they can destroy the land and sometimes the water table. “Gasland,” a documentary by a young Pennsylvania filmmaker, caused a little stir around the country and finally in Arkansas last month. The Arkansas State Chamber of Commerce, answering the call from a couple of the big drilling companies, urged people to boycott the film and to write letters to the editor condemning it.

That is why Gov. Beebe and the legislature haven’t done anything and aren’t likely to do anything. The shale development is supposed to bring great wealth to the state and create thousands of jobs, and no one wants to be seen as doing anything to impinge on economic development. Lord knows we need every job we can get.

But the cry from industry always is that regulation and taxes are “job killers.” It usually doesn’t translate that way, and it won’t with shale regulation and taxation either. Until recently, we never had to choose between good environmental policies and economic development. The Clean Air Act and Clean Water Act did not kill economic growth as many claimed it would but spurred it.

The Walton College of Business at the University of Arkansas predicted that shale production would have a spectacular impact on the state from 2005 to 2008: $5.5 billion fed into the economy, 9,700 new jobs and $358 million of state and local tax revenues. The impact was significant but, as the Arkansas Democrat-Gazette pointed out in a good survey Sunday, it fell far short of the forecasts.

A big reason was that shale development spread all across the country, production boomed, prices fell and the demand for gas slumped when the economy collapsed in 2008. But the environmental impact did not abate and production continues to rise.

The state and local governments received only a sliver of the tax revenues forecast for them. It was better than if the state had done nothing. The state had an invisible tax of three-tenths of a penny on each thousand cubic feet of gas until a former gas company executive threatened in 2008 to put an initiated act on the ballot to tax the gas at Texas’ rate, 7 percent of the wellhead price. The industry asked Governor Beebe to protect it. He called a special legislative session, where a tax largely written by industry lawyers was enacted. It taxed gas at 5 percent of value but created so many loopholes that the tax hasn’t produced much money for highways, roads and environmental regulation and cleanup.

An invigorated state pollution agency needs to devise strong and realistic standards for shale drilling, but that won’t happen without a strong governor at its back.

The revenue problem is easier, and as luck would have it, we have a modest solution.

That is to restore the severance tax rate to the level of 1947, which was 2.6 percent of value. That was when a governor with extensive family oil and gas holdings and a powerful new entrepreneur in the gas business got the legislature to virtually eliminate the tax on gas production.

A flat 2.6 percent tax would produce far more than the riddled 5 percent tax and it still would be about the lowest tax rate in America. It could be passed with a simple majority in the legislature, too. Beebe moved heaven and earth two years ago to get three-fourths of the legislature to pass a phantom tax rate that the industry wanted. A real solution for the people, restoring the post-World War II rate, would have been a cakewalk. What is he waiting for?