Marcellus Shale Gas Development and Pennsylvania School Districts: What Are the Implications for School Expenditures and Tax Revenues?

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A new report issued as part of an ongoing Marcellus Education Fact Sheet series from Penn State University Cooperative Extension. This report analyzes the impacts of revenue and costs to school …

A new report issued as part of an ongoing Marcellus Education Fact Sheet series from Penn State University Cooperative Extension. This report analyzes the impacts of revenue and costs to school districts where there is active Marcellus Shale drilling activity. With some surprising conclusions.

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  • Marcellus ShaleThe overall impact of Marcellusshale development on school dis-trict finances depends on the im-pact on revenues and on costs, notjust one or the other.

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  • 1. MarcellusEducationFact Sheet Marcellus Shale Gas Development and Pennsylvania School Districts: What Are the Implications for School Expenditures and Tax Revenues? Introduction Department of Education (PDE) I n 2005, when the first gas wells data, in 2009–2010 Pennsylvania were drilled into the Marcellus schools drew 56 percent of their shale in Pennsylvania, very few revenues from local sources—the people across the state were aware eighth highest rate among all 50 of the existence of Marcellus shale, states.2 The poorest school districts let alone its economic development in Pennsylvania are also far more potential and the significant impacts likely to experience drilling activity for people and communities across associated with Marcellus natural much of the Commonwealth. By gas. For example, only one of the early 2012, however, almost 5,000 50 wealthiest school districts had a wells had been drilled into Penn- single Marcellus well by the middle sylvania’s Marcellus shale layer. of 2010.3 However, during the same With estimates of 60,000 or more time period, 18 of the poorest 50 Marcellus gas wells projected in school districts had experienced the coming decades, new economic Marcellus drilling, accounting for studies began to suggest significant a total of 364 wells. At the same employment and income gains, and time, the Marcellus shale gas indus- Governor Tom Corbett declared his try may result in extra and perhaps intent to make Pennsylvania “the unanticipated costs and challenges Texas of the natural gas boom.”1 for school districts, including new The Marcellus shale gas develop- traffic congestion and road condi- ment has been heralded by many as tions that disrupt bus schedules, an unprecedented economic oppor- changes in student populations, and tunity for Pennsylvania, especially tightened housing markets.4 since much of the drilling activity To what extent does new eco- in the state has been located in eco- nomic activity associated with nomically lagging and often rural Marcellus shale gas extraction ex- areas with, until recently, relatively tend to benefits for Pennsylvania few employment opportunities. schools? What are the current tax These developments raise many regulations in Pennsylvania per- questions, including what the taining to school districts, and what growing Marcellus industry means evidence is there to suggest eco- for school districts. Pennsylvania nomic impacts for school districts? school districts rely heavily on lo- What evidence exists to suggest cal funding to support their opera- that increased costs to school dis- tions. According to Pennsylvania tricts are associated with Marcellus
  • 2. development? In examining these rary basis, their wages are not sub- used by the state to distribute statequestions in this fact sheet we take ject to the earned income tax. How- aid. The poorer the district, thea particular look at Act 1 of Special ever, to the extent that local resi- greater the aid the state gives theSession 2005–2006 and the implica- dents are employed by the Marcellus district to partially adjust for localtions this legislation may have for shale industry, school districts will wealth differentials between dis-augmenting school revenues. see an increase in their earned in- tricts. Consequently, the increased come tax revenues. Further, the roy- unearned income of a district’s resi-School District Taxes and the Marcel- alties and lease payments received dents from Marcellus shale activi-lus Shale: Limited Benefits to Schools by district residents are classified as ties contributes toward increasingSchool districts in Pennsylvania unearned income and are not taxable the measured wealth of the districtare authorized to levy and collect by school districts. Because of this, and results in potentially less staterevenues from a variety of taxes. the potential for school districts to aid to the district, even though inThe two most important taxes are collect much Marcellus shale–related actuality this new wealth will notthe real estate tax followed by the tax revenues from these two primary increase the district’s local tax col-earned income tax. Together they sources is limited at best (Table 1). lections.account for 98 percent of total Another issue for school dis- Table 2 shows the average per-school district tax revenues. Real tricts is the difference between the cent change in a variety of schoolestate tax is the property tax levied earned income tax, levied by school district tax revenues between theon the assessed value of land and districts, and the personal income 2007–2008 and 2009–2010 academicimprovements within the district’s tax, levied by the state. The differ- years, subclassifying school dis-boundaries. The Pennsylvania courts ence between the two is unearned tricts according to the number ofhave ruled that oil and gas reserves income, which includes dividends, Marcellus gas wells drilled withinare exempt from property taxes, so interest, rents, and royalties. First, each district. With the exceptionthis potential source is unavailable as indicated above, districts can tax of the real estate transfer tax andto school districts. Local earned in- only earned income, which restricts total local revenue, the data suggestcome tax, by contrast, is levied on them from receiving tax revenues no clear pattern of a relationshipthe wages and salaries of residents from the significant lease and royal- between Marcellus gas drilling ac-only. Since many of those employed ty dollars received by local residents. tivity and changes in school districtin Marcellus shale activities are in However, the personal income of the tax revenue. The real estate transferthe district on a limited and tempo- district is part of the wealth measure tax is paid by purchasers when they buy real estate, so total collectionsTable 1. Property tax, earned income tax, and school tax revenue potentials. reflect the amount of real property Type of Tax sales in the district and the value Property Tax Earned Income Tax of those sales. More sales or higherPercent of School District Tax prices will increase the tax collec-Revenues 89% 9% tions. Districts with no drilling sawTax Base Assessed value of property Wages, salaries, commissions, net profits an average 24.1 percent reductionApplication Non-tax exempt property in Residents only in real estate transfer tax revenues, district reflecting the national slump inOpportunity for Tax Revenue Slight: Gas reserves are Slight: Many gas workers are not statefrom Marcellus Activity tax exempt; related land residents; royalties and lease payments housing, while the districts with development will increase are exempt from earned income tax the highest drilling activity on taxes average experienced no change inSources: Pennsylvania Department of Education data; Governor’s Center for Local Government Services, such revenues. Total local revenuesTaxation Manual (2004). include all local taxes and fees. Dis- tricts with no Marcellus drilling onTable 2. Average change in school district finances by level of Marcellus drilling activity, 2007–2008 to average experienced no change in2009–2010 (Number of Wells). total local revenue between 2007– Amount of Marcellus Shale Drilling Activity (Number of Districts) 2008 and 2009–2010. In contrast,Tax Revenues 0 Wells 1–10 Wells 11–39 Wells 40+ Wells districts with drilling on averageEarned Income Tax 1.6% 1.7% 2.3% 0.4% experienced declines in total local (364) (66) (23) (9) revenues, with the average varyingPer Capita Tax -5.2% -2.3% -6.7% -11.4% across different levels of drilling. (214) (50) (13) (6) This is a counterintuitive result forReal Estate Transfer Tax -24.1% -12.2% -16.4% 0% those anticipating economic bene- (387) (69) (23) (8) fits to schools from Marcellus shaleReal Estate Tax 0.5% -1.7% -4.1% -1.0% activities. (398) (69) (23) (9)Total Local Revenue 0% -0.6% -4.5% -0.9% (398) (69) (23) (9)Source: Pennsylvania Department of Education data.
  • 3. School District Costs and the Figure 1. Marcellus drilling activity and changes in student enrollment in school districts through the end of the 2009–2010 academic year.Marcellus ShaleThe overall impact of Marcellusshale development on school dis-trict finances depends on the im-pact on revenues and on costs, notjust one or the other. PennsylvaniaDepartment of Education data pro-vide information about all districtsand allow comparisons between dis-tricts with and without drilling. Welook at two indices here: studentenrollment and spending on specialeducation. Pennsylvania Department ofEducation data in Table 3 show thatbetween 2007–2008 and 2009–2010,districts with more drilling activ-ity on average lost a somewhatlarger percentage of students thandid districts with less activity or no lus shale drilling than in districts Act 1: An Alternative Local Taxdrilling. There was wide variation without such drilling. As with the Option?among districts within comparable student enrollment, there was sig- Act 1 of Special Session 2005–2006drilling levels, so the experience of nificant variation among districts. created a local tax option for schoolan individual district may be some- Two of the nine districts with 40 districts that perhaps unintention-what different from these averages. or wells experienced a decrease in ally gives schools the possibility toBut the trend holds fairly consistent Special Education spending, for ex- capture at least some of the newacross districts; only one of the nine ample, while Wyalusing Area had a income being generated by Marcel-districts with 40 or more wells had 39 percent increase. lus shale development. Act 1 al-an increase of students between These data suggest that, at least lows school districts the option tothese years (Wyalusing Area School so far, the often stated concern replace the earned income tax withDistrict in Bradford County, with about Marcellus shale gas develop- a personal income tax through aan increase of 1.16 percent), and ment increasing student enroll- referendum passed by the local vot-none of the 23 districts with be- ments is not occurring, and in fact, ers. If a district chooses to switch totween 11 and 39 wells experienced development may be associated the personal income tax (PIT), theyan increase of students during these with slightly faster declines in stu- must adjust the PIT rate downwardyears. These data are also represent- dent enrollments. Similarly, Special so the change is revenue neutraled in the school district map (Figure Education spending does not, in (i.e., not creating a windfall to the1), which shows drilling activity most cases, appear to be positively district). In later years after adop-through the end of the 2009–2010 associated with Marcellus drilling tion of the higher local PIT rate,academic year and those districts activity. The negative association the school district must devote thethat experienced net enrollment between enrollment size and drill- same amount of income tax moneygains over the preceding two years. ing activity may be due to the exo- to property tax reduction, but it The Pennsylvania Department dus out of the districts of lower in- may use any natural growth in thisof Education data indicate that on come and renting households who tax for other purposes.average Special Education spend- are leaving because they cannot Important differences betweening increased across all districts afford the higher rents and costs of the earned income tax and the per-between 2007–2008 and 2009–2010. living those communities are expe- sonal income tax affect how peopleHowever, those increases were ac- riencing coupled with the influx of view their fairness. The earnedtually less in counties with Marcel- workers arriving without families.5 income tax is levied on residents’ earned income (such as wages, sala-Table 3. Average change in school district, by level of Marcellus drilling activity, 2007–2008 to 2009–2010 ries, or other reimbursements for(Number of Districts). work). It exempts unearned income, Amount of Marcellus Shale Drilling Activity such as interest, dividends, pensions,Other 0 Wells 1–10 Wells 11–39 Wells 40+ Wells Social Security, and leasing and roy-Student Enrollment (Average DailyMembership) -1% -3% -4% -4% alty income from gas development. (398) (69) (23) (9) The PIT option under Act 1 isSpecial Education Spending 14% 13% 9% 10% identical to the Pennsylvania state (398) (69) (23) (9) income tax and includes unearned income, including leasing and
  • 4. royalty dollars that mineral right ing and royalties will not be steady to cover current operating expenses,owners are receiving from Marcel- over the years, even though some reducing taxes in the short run. Butlus shale activity. Importantly, both estimate that shale gas wells will the dollars result from the sale of athe earned income tax and personal be producing for 30 or more years. capital asset, so they should be usedincome tax exempt Social Security Due to the natural productivity of for capital expenditures that benefitand pension income from taxation. shale wells, a majority of the total more than just current residents; Shifting from the earned in- value of the well is produced within the gas being sold is also owned bycome tax to the personal income tax the first few years of the well. This future generations of residents, whowould widen the district’s local tax means mineral right owners will be also should benefit from the sale.base to more accurately reflect the receiving the majority of their roy- Good fiscal management suggestsincome of residents, particularly for alties within those first few years, viewing these dollars as a way tothose receiving leasing and royalty so personal income tax collections invest in the future of the district,income. Some would argue that will be highest when wells are be- building infrastructure or purchas-such a change would make the local ing drilled. ing land and other assets that ben-income tax fairer because it would efit current and future residents. Inmore accurately reflect ability to Dollars the District May Receive other words, districts will plan stra-pay, which is a common criterion for on Its Own Land tegically when they determine waystax fairness. Because lease and royal- Districts considering leasing land to use the windfall gains to improvety income is exempt from the earned should work very closely with their the school district—and commu-income tax, landowners receiving solicitor and carefully consider the nity—for the long run, not just forlarge amounts of such income due ramifications of such a decision. the time when the gas is flowing.to Marcellus shale development Gas development is a source ofmay have much higher income than conflict in many Pennsylvania com- Conclusionstheir neighbors yet pay lower local munities, with residents divided The current structure of schoolincome tax bills simply because the between those “for” and those funding in Pennsylvania meanssources of income are different. “against” drilling. In this context, that in most instances schools will Statewide, the average reduc- decisions about whether to lease likely not see significant economiction in the local income tax rate can be very political and potentially benefits as a result of local activ-if districts shifted from an earned controversial, so such decisions ity associated with the Marcellusincome tax to a personal income should not be taken lightly. If a shale natural gas industry. The datatax would be 7.8 percent, but the district decides to lease, it should we examine here also appear topossible tax rate reduction varies consider adding additional riders support this conclusion. The mosttremendously across school dis- to the lease, such as a “no surface recent legislation regarding drillingtricts—from 33 percent in the Mon- access” clause that allows the gas impact fees will also have no effecttrose Area School District to only company to develop the resource on school districts as none of these1.7 percent in the Chester Upland underground without physically revenues are earmarked for schools.School District. School districts coming onto the school’s property. While Act 1 of 2006 provides an op-with significant Marcellus shale Such a restriction means any wells, tion for districts to capture some ofdrilling activity on average would access roads, or pipelines associ- the economic benefits, as does leas-be able to reduce their local income ated with the gas under the school’s ing of their own land, both optionstax rates much more than districts property will occur on nearby leased require very careful considerationwithout any drilling. For example, properties rather than on the dis- by districts.as Table 4 shows, districts with 40 trict’s land. While shale gas developmentor more Marcellus wells within If a district chooses to lease its in areas with high drilling activitytheir boundaries on average could land for natural gas development, has not, in most instances, appearedhave reduced their income tax rate it is important for school officials to be associated with enrollmentby 16.7 percent in 2009. to carefully consider how leasing spikes or increased special educa- Districts need to be aware that and royalty income will be used. It tion funding, it is not clear whatthe stream of income from leas- may be tempting to use the funds other unanticipated costs districts may experience, such as increases in transportation expenses and newTable 4. Average reduction in local tax rate if switch from earned income tax to personal income tax, 2009. challenges in recruiting and retain- Average Percent Reduction ing staff in the face of rising localDrilling Activity in the School District in Tax Rate Number of Districts housing costs. These are importantNo wells 7.4% 398 questions that will deserve close1–10 wells 8.8% 69 attention over time.11–39 wells 8.7% 2340 or more wells 16.7% 9All districts 7.8% 499Source: Pennsylvania Department of Education data; Pennsylvania Department of Environmental ProtectionSPUD data.
  • 5. Notes References Prepared by Timothy W. Kelsey,1. Estimates from N. Johnson, Re- Bureau of Oil and Gas Management. professor of agricultural economics; port 1: Marcellus Shale Natural “Marcellus Wells Drilled 2007 to William Hartman, professor of edu- Gas and Wind—Pennsylvania 2010.” Harrisburg: Pennsylvania cation; Kai A. Schafft, associate pro- Energy Impacts Assessment (Ar- Department of Environmental Pro- fessor of education; Yetkin Borlu, lington, Va.: The Nature Conser- tection, 2011. graduate student in rural sociology; vancy, 2010). Quotation from and Charles Costanzo, undergradu- Governor’s Center for Local T. Corbett, “Governor Tom Cor- ate student in community, environ- Government Services. Taxation bett 2011–12 Budget Address,” ment, and development. Manual. Harrisburg: Pennsylvania March 8 (Harrisburg, Pa.: Office Department of Community and of the Governor, 2011). Economic Development, 2004.2. U.S. Census Bureau, Public Edu- cation Finances: 2009 (Washing- Pennsylvania Department of ton, D.C.: U.S. Census Bureau, Education.“Act 1/Act 511/First 2011), Table 5. www2.census Class SD Taxes, 2007–2008.” Har- .gov/govs/school/09f33pub.pdf. risburg: Pennsylvania Department of Education, 2009.3. As measured by Pennsylvania Department of Education school ———. “Act 1/Act 511/First Class district aid ratio calculations SD Taxes, 2009–2010.” Harrisburg: from 2005 to 2006, prior to the Pennsylvania Department of Educa- onset of drilling in the Marcellus tion, 2011. shale. ———.“Expenditure Data for all4. K. Schafft, L. Glenna, Y. Borlu, LEAs, 2007–2008.” Harrisburg: and B. Greene, Marcellus Educa- Pennsylvania Department of Educa- tion Fact Sheet: Marcellus Shale tion, 2009. Gas Development—What Does It Mean for Pennsylvania Schools? ———.“Expenditure Data for all (University Park: Penn State Co- LEAs, 2009–2010.” Harrisburg: operative Extension, 2012). Pennsylvania Department of Educa-5. Ibid.; J. Williamson and B. Kolb, tion, 2011. Marcellus Natural Gas Devel- ———.“Revenue Data for all LEAs, opment’s Effects on Housing in 2007–2008.” Harrisburg: Pennsylva- Pennsylvania (Williamsport, Pa.: nia Department of Education, 2009. Center for the Study of Commu- nity and the Economy, 2011). ———.“Revenue Data for all LEAs, 2009–2010.” Harrisburg: Pennsylva- nia Department of Education, 2011. Pennsylvania Department of Rev- enue. “Personal Income Statistics,” for 2007, 2008, and 2009. Harris- burg: Pennsylvania Department of Revenue. Schafft, K., L. Glenna, Y. Borlu, and B. Greene. Marcellus Education Fact Sheet: Marcellus Shale Gas Development—What Does It Mean for Pennsylvania Schools? Univer- sity Park: Penn State Cooperative Extension, 2012. Williamson, J., and B. Kolb. Marcel- lus Natural Gas Development’s Ef- fects on Housing in Pennsylvania. Williamsport, Pa.: Center for the Study of Community and the Econ- omy, 2011.
  • 6. Put Our Experience to Work for YourCommunityThe Penn State Extension Marcellus Edu-cation Team strives to bring you accurate,up-to-date information on natural gas ex-ploration and drilling in Pennsylvania. Learnabout your rights and choices as a land-owner, a businessperson, a local official, ora concerned citizen. Discover the resourcesavailable to you.Visit naturalgas.psu.edu. Penn State Extension Penn State Extension has a special mission—to enable individuals, families, communities, agri- culture, businesses, industries, and organizations to make informed decisions. Through a system of county-based offices, we extend technical ex- pertise and practical, how-to education based on land-grant university research to help Pennsylva- nians address important issues, solve problems, and create a better quality of life. From improving agriculture and building stronger communities, to developing skills with today’s youth, we are dedicated to giving Pennsylvanians the means to grow, achieve, compete, go farther, and do more. Learn what extension can do for you. Contact your local extension office or visit extension.psu.edu. The Agricultural Law Resource and Reference Center The Agricultural Law Resource and Reference Center is a collaboration between Penn State’s Dickinson School of Law and Penn State’s Col- lege of Agricultural Sciences. Located at both the University Park and Carlisle facilities and funded in part by the Pennsylvania Department of Agriculture, the center is designed to provide the highest-quality educational programs, informa- tion, and materials to those involved or interested in agricultural law and policy.Penn State College of Agricultural Sciences research andextension programs are funded in part by Pennsylvaniacounties, the Commonwealth of Pennsylvania, and theU.S. Department of Agriculture.Visit Penn State Extension on the web: extension.psu.eduThis publication is available from the PublicationsDistribution Center, The Pennsylvania State University,112 Agricultural Administration Building, University Park,PA 16802. For information, telephone 814-865-6713.This publication is available in alternative media onrequest.Penn State is committed to affirmative action, equalopportunity, and the diversity of its workforce.Produced by Ag Communications and Marketing© The Pennsylvania State University 2012CODE# EE0022 2M3/12mpc 4937