Fine print - July 2011

Charging shales tax

By G.D. Gearino

I’ll start by noting this minor surprise: An immense amount of natural gas is thought to be in the ground beneath a patch of rural North Carolina, and nobody to date has evoked The Beverly Hillbillies. This perhaps is explained by the fact that it’s too early to know whether any appropriately grizzled and rustic landowner will become an instant millionaire. Or maybe it’s simply that most 1960s-era television shows have disappeared from the pop-culture radar. But now that I’ve plucked that bit of low-hanging “hillbillies” snark, let’s move on to another matter. If North Carolina is about to become a big-time energy producer (cover story, January 2011), maybe we should affix to the wrist of every state legislator a bracelet carrying the initials WWWD — as in, What Would Wyoming Do?

Discoveries of oil and natural gas tend to be game-changing events for states. Imagine what Texas would be like if oil hadn’t been discovered there. Probably just a vast livestock ranch with an occasional cotton field to break up the monotony. No Cadillacs decorated with longhorns, no TV shows about scheming oilmen and no 50-mile-long ship channel that allows an inland city dominated by refineries (Houston) to call itself an ocean port. A Texas without oil might have meant a world without OPEC. You might not know this, but the most effective cartel in history was modeled after the Texas Railroad Commission, which back in the Gusher Age was given the job of regulating the supply of Texas oil to control prices.

North Carolina’s energy boom will be less substantial, of course, but a little bit is better than nothing — and nothing is pretty much all we’ve had since the mid-20th century, when the Deep River coal mines petered out. Now geologists have declared that the shale formation in the same neighborhood as the mines (Lee, Chatham and Moore counties) harbors an impressive supply of natural gas. How much? Enough to supply the state for decades, perhaps enough to export as well. Within this news is a problem but also an opportunity for the state.

The problem is that the gas can only be retrieved through a process known as hydraulic fracturing — “fracking” — in which a hole is drilled into the ground and a mixture of water, sand and chemicals is forced into the shale. This loosens the natural gas so that it flows freely. There is some belief that this contaminates groundwater, which, if true, would be a problem. But the real roadblock is that under North Carolina regulation, only a couple of substances are allowed to be injected into wells. That fracking mixture isn’t one of them. In short, fracking is illegal. There will be no energy boom unless, and until, the regulations are relaxed.

That may well happen. A bill being considered in the General Assembly would order the state Department of Environment and Natural Resources to reconsider the ban on fracking and report back to the legislature pronto (“pronto” being defined as May 2012). If those regulations are indeed revised, that’s when opportunity knocks — in the form of a minerals-severance tax.

A little context: In 1967, a fellow named Stan Hathaway became governor of Wyoming and learned that the state treasury had less than $100 on hand. He may have been a Republican, and Wyoming was (and is) a place where disdain for taxes is healthy and widespread, but he knew he had to generate income. Because Wyoming also is a place where energy resources are extracted on a grand scale, he settled on a severance tax. He parked the proceeds in a permanent trust fund, interest from which helps support the state budget. It’s not coincidental that Wyoming levies no income tax, personal or corporate. It doesn’t need to. The minerals-severance tax fills the gap.

North Carolina has no severance tax. I know this because the state Revenue Department, upon my request, researched the matter. It took most of a full business day before I got the answer: no such levy. (I suppose I should be gratified that state officials took care to give me accurate information, but mostly I’m alarmed that there are so many tax levies that a simple question can’t be answered right away.)

A severance tax acts, in effect, like an export tax. In Wyoming’s case, the levy generates money from out-of-state power companies that buy the abundant High Plains coal. When the coal is gone and there’s nothing but huge holes left behind, at least Wyoming will have that permanent trust fund producing money for the state. North Carolina could see a similar windfall with a severance tax levied on whatever portion of its shale gas is sold to out-of-state buyers. Better yet, the state need not wait until fracking is approved. It can start collecting severance taxes right now.

Near Aurora, just a few miles from Pamlico Sound, a Canadian company operates the world’s largest mine and plant for phosphate, from which fertilizer and animal-feed supplements are made (“Leviathan’s Lair,” October 2007). According to the company website, more than 4 million tons are mined every year. The price per ton these days is in the neighborhood of $182 and as recently as 2008 was as high as $430. That’s billions of dollars of rock that were dug up, and the state doesn’t have a penny to show for it. Why is North Carolina leaving money on the table?