A $56 million 'Oops': PA Revenue Department Updates Marcellus Shale Tax Estimates

A blog post by Michael Wood, originally published at Third and State.

Tim Puko at the Pittsburgh Tribune-Review uncovered a $56 million mistake in the Pennsylvania Department of Revenue's reporting of personal income tax (PIT) collections attributed to Marcellus Shale drilling for last year.

Back in May, the Department estimated that taxable Marcellus Shale royalties generated $102.7 million in PIT collections in 2010. Now the Department says that figure is a tad lower — $46.2 million, a decrease of $56.5 million or over 55% from what was reported six months ago. To quote Britney Spears, "Oops!"

How does this happen? By rushing too fast and using incomplete data to make a policy point, as I noted in the Tribune-Review story. This type of cheerleading report for a single industry is highly unusual for the Department of Revenue. There isn't a report of taxes paid by snack food manufacturers, steel producers, or even dairy farms.

The updated Marcellus tax data included another interesting tidbit — how little is paid in PIT from income flowing through to oil and gas company owners. In 2009, the Department reports $9.9 million in PIT from these taxpayers.

Our review of oil and gas drillers in Pennsylvania found that more than 70% of the companies were structured as limited liability companies (LLCs) or some other type of flow-through entity. The owners of these companies are likely a combination of corporate and individual owners, but getting less than $10 million from the individual owners of a booming industry is pretty eye opening to how little drillers are taxed in Pennsylvania.

The gas industry has been very effective in arguing that it is contributing a "game-changing" number of new jobs and tax revenue, and uses these claims to beat back efforts to enact a meaningful drilling tax. We have made the case for some time that these claims are well overstated. The Department of Revenue data, particularly the paltry PIT numbers for 2010, seem to back up our case.

The Department of Revenue's $56 million oops also should call into question some of the other industry estimates it made for 2011. In particular, the Department is forecasting that corporate net income taxes will jump from $82.3 million in 2009 and $96.7 million in 2010 to $254.2 million in 2011. We shall see. This figure is based on estimated tax payments the drilling companies, pipelines, and other tangentially-related companies have made — and are subject to change. Often, companies will overpay their estimated taxes and get a big refund when the returns are settled. So it is not unreasonable to think this figure will come down when all the returns are settled.

The Department of Revenue is usually very conservative about reporting data. The latest PIT statistics are from tax year 2009; the latest corporate tax stats are from tax year 2004. Why? Because it takes time to make sure all of the returns are properly filed, tax liabilities settled, and that glitches in the data are fixed.

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