Taxation Issues Related to Gas Drilling in New York State

1. Taxation Issues Related to Gas Drilling in New York State Carol Chock and Don Barber March 22, 2012 http://tinyurl.com/GasAssessment

2. Carol Chock • Elected Official: Tompkins County Legislature • Chair: Facilities and Infrastructure Committee • Former Vice Chair: Planning, Development and Environmental Quality Committee • Liaison: WRC, STPB • Liaison: Tompkins County Council of Governments • Chair: TCCOG Assessment and Land Valuation Subcommittee

3. Don Barber • Elected Official: Town of Caroline • Supervisor since 1997 • Board member 18 years • TCCOG: Former Chair and Co-chair: Tompkins County Council of Governments • NYS Association of Towns: Executive Committee

4. ECL Article 23-0303 The provision of this article shall supersede all local laws or ordinances relating to the regulation of the oil, gas and solution mining industries, but shall not supersede local government jurisdiction over local roads or the rights of local governments under the real property tax law.

5. Tompkins County Council of GovernmentsTask Force on Gas DrillingAssessment and Land Valuation Subcommittee • Gas leases affect ability to mortgage property • Lease information unavailable • Cumulative impact: ramping up affects individuals, banks, markets, governments • NYS systems to measure and tax gas production are insufficient • Local expenditure required years before cost recovery

9. Problems with current system • There will be local costs during drilling • NYS has insufficient systems to measure and tax gas production • Time lag between local expenditures and any potential revenue • Gas Revenues are not predictable

10. Local Government Costs • Costs are significant • Total is unknowable in advance • Incurred during drilling period, pad and road construction • Costs will be spread through many parts of municipal budgets • Time lag

11. Cost examples • Road maintenance and repair • Drafting and oversight of new laws • Monitoring air and water quality • Additional staff for building permits • Sheriff, accidents and overweight vehicle inspections, scales • Fire/EMS • Soil and Water Conservation District • County Health Department • Highway construction permits and road use laws • Social Services

12. Principles • Taxpayers shouldn’t be responsible • Cover local as well as state costs • Cost recovery: • Severance tax • Permit fees • Updating local ad valorem property tax • Each cover different costs • Other states use all three • No permits until changed

13. Tax Paper Findings • Establish a severance tax • Verify measurement of gas • Update the Unit of Production Value (“UPV”) formula • Address the delay in collection of tax revenue

14. Definitions • ORPTS • Ad valorem • UPV

15. Local Government Control? • Revenue Sources: • Ad valorem tax on production • Minimal fees • Method set by ORPTS • State-set UPV * Number from the meter • UPV is not calculated for shale gas • Meter un-inspected • Meter reading is self-reported, unverified

16. UPV Formula • Unit production value formula developed in 1978 • Developed for gas in non-shale formations • set for the 5-10 year steady production cycle, not steep decline of shale gas output • Set for different costs of production • Discount rate at 17.5 %, while rates for competing activities at 8-10%

17. UPV Formula

18. Gas Drilling, Production and the Assessment Cycle LAG BETWEEN DRILLING & PRODUCTION Year 1 PRODUCTION—Year 1 PRODUCTION—Year 2 Production for Year X reported Year 2 Value Placed on Assessment Roll Taxed on School Taxes Taxed on County Taxes Production for Year X reported Year 3 Value Placed on Assessment Roll Taxed on Village Taxes Taxed on School Taxes Year 4 Taxed on County Taxes Taxed on Village Taxes Well is constructed—Mid year, Year 1

19. Time Lag: Local expenditure years before cost recovery • Four year time lag between local budget, drilling, and receipt of taxes • That is best case, production delays would increase lag.

20. Town of Caroline Tax Example TOTAL Tax estimated per year for 320 Wells. Estimate for illustration purposes

22. Net income to our towns? • Will county or municipalities in Tompkins County gain in dollars? • Production delay increases lag • Bradford County, as of 4/11: • 1700 permits, 240 producing wells • Chesapeake moving rigs to other states. • Price influence on production timing • Industry strategy for NE formed at $12/mcf • Break even pricing estimated $4-7/mcf • Gas price currently $2.50/mcf

23. Additional issues • ORPTS staff recently reduced from 220 to 150 people, not replacing retirees. • NYS unprepared to track billing address in situations where there is severance of subsurface rights.

24. Process • How to change current tax method? • Open, transparent, public feedback • Subcommittee comments a year ago • 8 options presented to Governor’s panel lacked local cost recovery

25. Property and Land Valuation • Unknown, market determined • Uneven among properties and towns • Projections unverifiable and vary widely • NYS distinguishes sweet spot vs. adjacent properties • Denton, TX and other examples show change over time • Boom/bust cycle

26. Conclusions • NY must establish a severance tax and higher fees • Both must be shared with local governments • Establish accurate, verifiable methods to measure output • Update the UPV formula for shale • Address time lag through taxes, fees, and minimum annual assessment • No permits until this is done

27. Weigh in to Governor and Panel • NYS is currently examining this • Write letters • Pass resolutions weighing in • Spread the word tinyurl.com/GasAssessment