Proposed legislation seeks to increase tax burden on Marcellus Shale landowners
By Scott P. Borsack
Our elected officials in Harrisburg have been very busy considering how current law affects the development of Marcellus Shale. Some bills have addressed the process of pooling property for exploration. Other pieces of legislation have attempted to apply a tax to the natural gas extracted from the ground, also known as a severance tax. One provision was introduced in the early Spring in the State Senate, known as Senate Bill 744, which attempts to tax the value of royalty rights at the county level. We thought this bit of legislation was so significant that we would share the fact that it has been proposed so that our clients and friends can decide whether this new proposal makes sense to them.
In Pennsylvania and elsewhere, ownership of land brings with it surface rights and subsurface rights. Generally speaking, surface rights describe what a landowner can do with land above the ground, such as erecting buildings, roads and the like. The subsurface rights are those for the use of elements which lie below ground level, such as minerals, sand, stone, natural gas and oil. Under current law real property taxes are determined based upon the value of surface rights alone. The value of subsurface rights are not used to determine the value of real estate for purposes of determining real estate taxes. Enter Senate Bill 744.
As proposed, Senate Bill 744 would create, for the first time, an element in the determination of real estate value to account for the value of royalty rights for purposes of computing the real estate taxes due on property. Once a is drilled on property, or the property is included in a production unit that has a producing well, and the landowner begins to receive royalty payments, the value of the stream of those payments will be subject to the real estate tax. Generally, tax assessors in Pennsylvania have three methods to determine the value of land for purposes of computing the real estate tax – comparable sales, replacement cost and income. Under the income method, an assessor would consider the stream of payments, the projected life of royalty payments, the production model (so called a decline curve) and an appropriate discount rate to account for a concept known as the “time value of money.” The discount rate recognizes the fact that the right to receive future royalties is worth less today than when those payments are actually received. If adopted, this legislation would place county tax assessors into the business of determining the future value of royalty rights once production begins. At this time the potential impact on landowners is hard to estimate. With the increased tax revenue which would come from adoption of this legislation, some change in tax rates might be anticipated.
Passage of this legislation would likely place tens of millions of dollars at the disposal of local elected county officials. Legislative sponsors of this bill have suggested that one of its virtues is that the revenue from exploration will be placed with local officials rather than into the general fund where revenue from a severance tax might find its way. It does thrust the landowner, rather than the exploration company, into the role of paying for natural gas exploration in the Commonwealth. Some landowners might find this objectionable. You might wish to contact your elected officials and let them know how you feel about this legislation. We will keep you posted.
Our elected officials in Harrisburg have been very busy considering how current law affects the development of Marcellus Shale. Some bills have addressed the process of pooling property for exploration. Other pieces of legislation have attempted to apply a tax to the natural gas extracted from the ground, also known as a severance tax. One provision was introduced in the early Spring in the State Senate, known as Senate Bill 744, which attempts to tax the value of royalty rights at the county level. We thought this bit of legislation was so significant that we would share the fact that it has been proposed so that our clients and friends can decide whether this new proposal makes sense to them.
In Pennsylvania and elsewhere, ownership of land brings with it surface rights and subsurface rights. Generally speaking, surface rights describe what a landowner can do with land above the ground, such as erecting buildings, roads and the like. The subsurface rights are those for the use of elements which lie below ground level, such as minerals, sand, stone, natural gas and oil. Under current law real property taxes are determined based upon the value of surface rights alone. The value of subsurface rights are not used to determine the value of real estate for purposes of determining real estate taxes. Enter Senate Bill 744.
As proposed, Senate Bill 744 would create, for the first time, an element in the determination of real estate value to account for the value of royalty rights for purposes of computing the real estate taxes due on property. Once a is drilled on property, or the property is included in a production unit that has a producing well, and the landowner begins to receive royalty payments, the value of the stream of those payments will be subject to the real estate tax. Generally, tax assessors in Pennsylvania have three methods to determine the value of land for purposes of computing the real estate tax – comparable sales, replacement cost and income. Under the income method, an assessor would consider the stream of payments, the projected life of royalty payments, the production model (so called a decline curve) and an appropriate discount rate to account for a concept known as the “time value of money.” The discount rate recognizes the fact that the right to receive future royalties is worth less today than when those payments are actually received. If adopted, this legislation would place county tax assessors into the business of determining the future value of royalty rights once production begins. At this time the potential impact on landowners is hard to estimate. With the increased tax revenue which would come from adoption of this legislation, some change in tax rates might be anticipated.
Passage of this legislation would likely place tens of millions of dollars at the disposal of local elected county officials. Legislative sponsors of this bill have suggested that one of its virtues is that the revenue from exploration will be placed with local officials rather than into the general fund where revenue from a severance tax might find its way. It does thrust the landowner, rather than the exploration company, into the role of paying for natural gas exploration in the Commonwealth. Some landowners might find this objectionable. You might wish to contact your elected officials and let them know how you feel about this legislation. We will keep you posted.