4th Floor, Woodrow Wilson Center

Bring Your Own Lunch (BYOL) Policy Roundtable "Taxing Fracking in the Shale Era" with Barry Rabe, PhD

“Taxing Fracking in the Shale Era: The Popular Energy Tax” 

With the rising importance of shale gas in state and provincial economies, there has been an increase in the taxation of these resources. Dr. Barry Rabe discussed his research into the taxation of fracking at the Canada Institute on September 1st, 2015. The issues of shale gas taxation are important to Canada and the United States due to the abundant nature of the resource in both countries.  However, with this rising importance come many questions. How to use these funds? What happens when governments realize they have large amounts of shale gas? Are these extraction taxes an alternative to a carbon tax?
It is these questions that are examined in Barry Rabe’s presentation.

“Petro-Populists and Severance Taxes”

It is clear that severance taxes, a tax on the extraction of non-renewable resources, are tremendously popular amongst voters. In states such as Alaska, a large amount of state revenue comes from the taxation of shale energy. Rabe uses Alaskan governors Sarah Palin and Jay Hammond as examples of petro-populists, who are politicians that believe resources belong to the public. This means the public has rights to part of the profits from these resources being extracted. Their positions on severance taxes are consistent with popular opinion in Alaska. This has proven true in Alberta as well where royalties have become an important aspect of both the economy and government revenue of the province. With this influx of revenue, Rabe notes there has been “some effort” taken to shift revenues from state to local authorities. However this has proven ineffective as state and many provincial governments are not taking this step. Largely, the adoption of local revenue collection is “very restricted.”

Trust Funds

Along with the severance taxes, shale gas extraction has led to the rise of state trust funds. There has been a rise in states beginning trust funds of this nature with West Virginia, Utah, and North Dakota in the last decade. Rabe’s states this recent rise in trust funds in these states can be attributed to “resource curse aversion, public resource ownership, and fiscal conservatism.” There is a history of trust funds in the United States with one such fund being set up in Texas before the Civil War. Texas’s trust fund and those set up in other states in the 1970s have proved both durable and popular. However, there have been questions on how states should set up these trust funds. Rabe focused on North Dakota which, after an extensive study of trust funds\ across the world, modelled theirs after Norway as it is considered the global leader in severance tax trust funds due to their sovereign wealth fund.

What to do?

In Rabe’s presentation, both severance taxes and trust funds raise numerous questions such as; are these developments flukes, or are they a way to address boom/bust cycles in resource extraction. Should the revenue from severance taxes be used to fill state budgets or saved to deal with “shale development negative externalities?” While there was hope that the rise of shale gas would be similar to the oil boom of the 1970s, it has not proven to be the case with constant new complexities in shale that require the investment to remedy. Additionally, Rabe questions if extraction taxing is a viable alternative to a carbon tax due to its unpopular nature. There are also implementation issues as many U.S. states do a good job on the fiduciary side of this issue, but long term planning is far more difficult. Rabe’s presentation brings up more questions about shale gas taxation. In the end, state and provincial governments have the responsibility of determining how to answer these questions.

 

Barry is currently a Public Policy Scholar at the Wilson Center.