Friday, February 19, 2016

Impact Fee Revenues Expected to Decrease

Earlier this week, the Independent Fiscal Office (IFO) released its calendar year (CY) 2015 projections of the impact fee collections and its estimates of the resultant annual average effective tax rate (ETR).  The impact fee is imposed on specified unconventional natural gas wells that were drilled or operating in the previous calendar year.  The proceeds of the impact fee are used to offset the impact that unconventional oil and gas operations have on the rural areas of the Commonwealth.  The money raised is used to provide infrastructure improvements and repairs, emergency services, and other programs that are affected by unconventional oil and gas activities.

The IFO projects that the impact fee will bring in its lowest amount to date, $185.5 million.  The projection is based on data published by the Department of Environmental Protection’s oil and gas production reports for 2015.  The $185.5 million is $38.0 million less than last years collected amount.  There are a couple of primary reasons for the decrease in revenue.  The first is the lower fee schedule.  The annual average price of natural gas on the New York Mercantile Exchange was $2.66 which moved below the $3.00 per MMbtu threshold.  The fee schedule is adjusted downward when the average price falls between $2.25 and $2.99.  The second reason is that there were fewer new wells drilled in CY 2015.  There was a 42.9 percent decline in the amount of wells drilled in comparison to the previous year.  Gas wells pay the most in their first year of operation because as wells age they migrate down the fee schedule.

The research brief also projects the ETR.  The ETR is calculated to measure the “tax burden relative to natural gas sales.”  The ETR is “equal to the annual impact fee revenues divided by the total market value of unconventional natural gas production.”  The CY 2015 ETR is estimated to be 5.5 percent, an increase from 3.4 percent in CY 2014.  The 2015 increase can be attributed to the decline in natural gas prices.

Written by Stephen Kenney
Research Assistant
Center for Agricultural and Shale Law

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