The Real Green Movement?: Taxation’s Impact on Fracking

On May 16, 2012, Vermont Governor Peter Shumlin signed into law a statewide ban on hydraulic fracturing, also known as fracking, making it the first state to ban the controversial natural gas drilling process. In spite of the fact that Vermont had no current fracking operations in use or in planning, Governor Shumlin stated at the bill’s signing: “One of the biggest challenges that future generations are going to face is clean, drinkable water.” He added, “We have an abundance of it in Vermont. I think it’s a great message that we’re going to protect it at all costs.”

Fracking in the United States has had a tortured public history as of late, where a number of news outlets have reported massive environmental concerns as a result of the practice, while at the same time the industry has backed several academic studies defending their operations. Perhaps as a result of this controversy, a number of local governments have joined Vermont in banning fracking. The greatest push is in New York State, where 110 political subdivisions – covering over 4,300 square miles – have imposed fracking restrictions.

Robert Cheren, however, in his article for the Case Western Law Review entitled “Fracking Bans, Taxation, and Environmental Policy”, puts aside the environmental concerns of hydraulic fracturing to focus on what he believes is an understudied motivator of fracking bans: tax regulations.

Cheren surveys the Devonian, Marcellus, and Utica shale plays, a nearly continuous deposit of natural gas-rich shale that spans seven states in the Appalachia region of the United States. Cheren finds that in the over 120,000 square miles of area contained in the Devonian, Marcellus, and Utica shale plays, only 4,400 square miles, or 3.66 percent, have restrictions for fracking. Of these 4,400 square miles, the vast majority, 97 percent, is in New York.

For Cheren, one of the chief reasons why these restrictions are concentrated in New York State is the limited ability of New York localities to effectively tax fracking operations, as compared to the flexibility allowed to municipalities in the other Appalachian states. In New York, the state constitution limits localities to a cap of two percent of the five-year average of the full valuation of the municipality’s taxable property, which severely limits the ability to collect revenue from new property growth. Furthermore, New York City is the only qualifying municipality in the state able to impose a local income tax by state law.

The other six states in the Devonian, Marcellus, and Utica shale plays – Ohio, Pennsylvania, West Virginia, Virginia, Maryland, and Kentucky – allow for some degree of autonomy for their local municipal governments to either raise taxes or issue business permits to benefit from fracking operations. Cheren theorizes that local municipal governments weigh bans on fracking heavily on their ability to raise significant revenue from the operation. If a ban on fracking does not have a great effect on the municipality to raise revenue, then a local government may choose to push for the ban as a politically favorable measure.

The influence of revenue gathering on fracking bans is perhaps best demonstrated in Pennsylvania, which has instituted few restrictions. Only 0.227 percent of Pennsylvania’s shale plays have instituted restrictions on fracking, most of which are concentrated in the Pittsburgh area. These local bans were passed before 2012, when municipalities in Pennsylvania had a fairly limited ability to raise revenue from fracking. However, in February 2012, Pennsylvania passed Public Act 13, which allotted for the institution of an “unconventional gas well fee”. This new fee allowed municipalities in Pennsylvania to raise far more revenue on fracking operations; since the passage of Act 13, there have been no hydraulic fracturing bans pushed for by local governments in the state.

Cheren does not see this connection between tax regulations and fracking bans as evidence of local governments failing to represent their constituents by favoring revenue over environmental concerns. Instead, Cheren states that the interests of the taxpayer may supersede the opinions of voters on certain occasions, when necessary to best represent the public interest for the entire municipality.

Returning to Vermont, it could be seen as significant that a state, even one without any fracking operations, has made the first state-wide legal stand against the potentially harmful practice of hydraulic fracturing. It may also be significant that such a ban is, in the words of Governor Shumlin, a statement of the state’s interest in protecting drinkable water “at all costs.” However, Cheren’s research points to the difficult position of localities looking to maximize their revenue. Fracking ban proposals are on the rise in the US, but without understanding the revenue implications of fracking operations on municipal governments, Cheren believes such bans may plateau in areas with lax property tax restrictions.

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