A proposal by the Rendell administration to apply a gross
profits tax to oil companies could eventually trickle down to local
independent oil and gas producers, potentially harming the
economies of the communities where the enterprises are located.
On the local level, officials within the petroleum industry
reacted sharply to Rendell’s plan, calling it a method of “double
taxation.”
The proposed legislation – which contains a new 6.17 percent tax
on large, integrated oil companies – is one effort by Rendell to
fix the state’s ailing mass transit agencies. If enacted, the Oil
Companies Gross Profits tax would go into effect on Jan. 1, 2008,
and generate an estimated $760 million a year, administration
officials said.
Officials said the gross profits tax, along with a 1 percent
hike in the state sales tax and the sale or lease of the
Pennsylvania Turnpike, would raise $1.7 billion a year for mass
transit and repairs to the state’s highway system.
“We are very much opposed to the legislation. It would hurt not
only the refinery, but also crude oil producers and fuel
distributors,” American Refining Group President and Chief
Operating Officer Harvey Golubock said on Wednesday, adding
officials with the refinery have already discussed the matter with
Senate President Pro Tempore Joe Scarnati, R-Brockway. “It doesn’t
make sense to tax rural western Pennsylvania refiners and producers
to increase mass transit in metro areas.
“I didn’t see anybody from Philadelphia or Pittsburgh running to
support the refinery in Bradford when it was on the ropes (in the
late 1990s). Nobody was writing checks to the refinery or Bradford
to save those jobs and industry.”
Golubock was not alone in his assessment.
“It’s another example, I think, of Gov. Rendell trying to take
care of the Philadelphia problem, which is supporting mass
transportation on the backs of the hard-working oil industry and
the ma and pops,” Fred Fesenmyer, president and chief executive
officer of Minard Run Oil Co., said.
Meanwhile, Joyce Cline of the Pennsylvania Independent Petroleum
Producers, said officials are still trying to learn more about the
proposal, but said “it’s not the right way to go. We are going to
do everything we can to block it. For them to think they can put
that tax on anybody and not have it passed down to the consumer is
wrong.”
Cline, how owns Cline Oil along with her husband, Willard, added
small oil producers will suffer the brunt of the new tax.
The Pennsylvania Oil and Gas Association (POGAM) is concerned
about the “potentially devastating harm” of the tax on ARG, the
only refinery in the state that operates exclusively on crude oil
supplies from Pennsylvania and the neighboring Appalachian Basin
states.
Testifying before the Senate Transportation Committee on
Tuesday, POGAM President Stephen Rhoads said the language of the
bill casts a much wider net and would also likely impose the gross
profits tax on the total wellhead value of the state’s oil and
natural gas production, too.
Rhoads said Rendell’s proposal would use “combined reporting” to
identify the share of a company’s profits earned in Pennsylvania.
Large oil companies would be exempt from the state’s 9.99 percent
corporate net income tax in exchange for paying the 6.17 percent
gross profits tax.
However, most of the state’s oil and gas producers are organized
as Subchapter S corporations or partnerships – such as ARG – and
are not currently subject to the corporate net income tax. As a
result, they would not benefit from the corporate net income tax
relief under the governor’s proposal.
“In effect, the proposal amounts to double taxation on the
producer’s income because the company would have to pay the gross
profits tax, while the individual would have to pay a tax on the
net income of the company through personal tax returns,” Rhoads
said.
Meanwhile, the use of “combined reporting” could easily make a
producer’s unrelated income subject to the tax. For example, if a
building contractor or store owner operates a few wells on his
property, the income from his other businesses would also be taxed
by the gross profits levy.
Based on 2005 oil and gas production totals, according to
Rhoads, the state’s producers would be responsible for more than
$99 million in gross profits tax revenue under the Rendell
proposal.
“That is $99 million that would be removed from the
resource-based economies of hundreds of rural western and northern
Pennsylvania communities to subsidize mass transit services …,”
Rhoads said.
Fesenmyer believes the governor is “being misled by all the
alleged money we (petroleum industry) are supposed to be making.
It’s always been my contention that it takes a lot of capital to be
in this business. It takes a lot of money to make a lot of
money.”
Fesenmyer said if the gross receipts are taxed, it takes away
the ability of smaller oil and gas producers and companies that
borrow money to get production to a point where they can sustain
themselves. In turn, that filters down to how much money a company
can use to hire everyone from professionals to roustabouts.
“The little guys provide a significant amount to the market. It
really goes to the heart of employment here in the community.
Companies could go out of business.”
