2002 Court Case Proved Windfall for Shale Drillers
Pittsburgh Post-Gazette
29 September 2010
By Sean D. Hamill, Pam Panchak/Post-Gazette
Fayette County chief assessor James Hercik in his office at the Fayette
County Courthouse in Uniontown.
Every now and again, Pittsburgh attorney Richard DiSalle hears from
people he has never represented or met congratulating him on a case he
won way back in 2002.
They should be calling. And there are several hundred million reasons
why.
Mr. DiSalle's congratulatory callers and writers are natural gas
drillers, producers and wholesalers about to get rich from the state's
Marcellus Shale gas reserve, if its potential is realized.
They'll be much richer thanks to Mr. DiSalle's 2002 case in which he
represented Pennsylvania's Independent Oil and Gas Association and
persuaded the state Supreme Court to ban counties from taxing oil and
gas production.
In the final decision written by Chief Justice Stephen A. Zappala Sr.
before he retired that year, the court unanimously found that assessors
couldn't levy the tax. State law authorizing the taxing of minerals
only mentions coal, not oil and gas, the opinion said, even though for
most of the last century some counties had taxed all three.
"I hate to be boastful, but they congratulate me for the fact that we
had the foresight we had and we dug deep enough to find that there was
no language in the law to enforce the tax," said Mr. DiSalle.
The decision, by one projection, could cost the state's counties,
municipalities and school districts more than $600 million in property
tax revenue from gas production in 2014 alone, when the Marcellus Shale
industry will be maturing.
That money -- $407 million of it to schools -- would go to just 35 of
the state's 67 counties where there's gas production.
While Gov. Ed Rendell and state legislative leaders have spent much of
the last month talking about enacting a severance tax on natural gas,
discussions about authorizing a property tax on gas have been muted.
"It has been the forgotten issue. It kind of got swept to the side when
the governor said he wanted a severance tax," said James Hercik, chief
assessor in Fayette County, which was the county that the oil and gas
association sued leading to the Supreme Court decision.
When IOGA originally sued in 1998, it only wanted Fayette County to
stop trying to assess taxes on land where mineral rights leases had
been taken out and drilling had not yet begun, Mr. DiSalle said.
"But as our research widened, we discovered there was no real authority
for the tax in the state law," he said.
IOGA lost at the first three levels -- the county board, county court
and Commonwealth Court. No one had much hope of winning at the Supreme
Court, either, which, upon reflection, has made some wonder whether
there was a much larger goal -- the revenues of Marcellus Shale -- in
mind.
"We couldn't figure out at the time why [the oil and gas association
was] fighting it tooth-and-nail," Mr. Hercik said. "Then [a few years
later] the light bulb came on. They weren't really worried about this
little $1,000-a-year tax on a well. They were looking more long-term"
at Marcellus Shale drilling.
Louis D'Amico, then and now the oil and gas association's executive
director, insists that wasn't the case.
"We had no clue Marcellus Shale was coming," he said. "If I knew then
that it was coming, I'd be the richest landowner in Pennsylvania right
now."
Mr. Zappala said in an interview that neither he nor anyone else on the
court had heard about the looming Marcellus Shale industry, either.
"Did we prognosticate on Marcellus Shale? No," he said.
The tax back then was relatively small. Fayette County, for example,
only lost $100,000 in oil and gas property tax revenue.
But according to a projection by Resource Technologies Corp. of State
College, which consults on mineral values for counties in Pennsylvania,
West Virginia and other states, Fayette County in 2014 may miss out on
about $3 million in property taxes on gas. The same projection shows
that Fayette County schools would lose out on about $11.2 million and
municipalities $6 million.
The 2002 decision "was a huge travesty because today that would have
meant millions and millions of dollars in tax revenue for our schools
and counties," Mr. Hercik said.
Mr. Hercik is also president of the Assessor's Association of
Pennsylvania, which has been pushing since 2002 to get the Legislature
to add a provision to state law allowing the property tax.
"It would be a simple fix. Just add four words: 'and oil and gas' after
'coal,' " Mr. Hercik said. "Really, it's just a loophole in the law at
this point."
Such a bill was introduced last year in the House by Democratic Rep.
Bill DeWeese of Greene County, but it has gone nowhere.
Mr. Hercik and others who were involved in the 2002 case, including Mr.
DiSalle, said because oil and gas really didn't generate that much in
property taxes in 2002 and only about a dozen counties were applying
the tax, they expected no problem in getting the Legislature to change
the law.
But with ongoing industry opposition, it never happened. And now, with
the potential benefits so much larger -- thanks to Marcellus Shale
revenues -- most involved don't think a property tax provision will be
approved any time soon.
At least one of the groups that had been pushing for an oil and gas
property tax said it had stopped lobbying for it in the last two months.
"The whole Legislature focus has shifted to a state severance tax,"
said Doug Hill, executive director of the Pennsylvania County
Commissioners Association. "And because that's where most of the
attention has been, we've put the assessment issue on the back burner
and instead we're trying to make sure counties get their fair share of
the severance tax."
Mr. Rendell, a Democrat, who has proposed a severance tax based on West
Virginia's model, is "open" to a property tax provision, a spokesman
said, even if he hasn't proposed one.
But Senate Republicans are adamantly against it, in part because of the
projected cost to the industry. But they also believe public schools
have gotten their fair share.
"The one entity that's done well with state government revenue recently
has been school districts," said Sen. Jake Corman, R-Centre, chairman
of the Senate Appropriations Committee. "So, I'd like to help the
governments that are feeling the impact of Marcellus Shale drilling,
the counties and municipalities. I don't think schools could
demonstrate an impact."
Moreover, Mr. Corman said, "if we use the West Virginia tax model,
that's about $1 billion in new taxes. What do you think the impact of
that would be on the one industry in Pennsylvania that's still creating
jobs? A billion dollars on a new industry would be a certain way to
kill the golden goose."
Property-tax proponents point out, however, that nearly every state
that has a severance tax also has property taxes on oil and gas --
including Arkansas, which is the severance-tax model Senate Republicans
and the gas industry support. All of which made that 2002 court ruling
even more astounding to gas companies.
"I would get calls from the big gas companies coming in from out of
state checking with me: 'Are you sure we don't have to pay property
taxes? Maybe we should put some money in escrow just in case,' " said
Jeff Kern, owner of Resource Technologies.
Even in those pre-Marcellus Shale days, the Supreme Court's decision on
Dec. 19, 2002, was a time to celebrate.
In its newsletter that winter, the Independent Oil and Gas Association
wrote to its members that "... each producer should be enjoying this
early gift from the Pennsylvania Supreme Court. Merry Christmas!!!"
Sean D. Hamill: shamill at post-gazette.com or 412-263-2579.