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Marcellus Works sparks wider incentives debate

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Critics of a plan called Marcellus Works that would spend taxpayer money to increase the use of natural gas as a transportation fuel are questioning the motives behind what appears to be the plan's deviation from free-market principles.

On face value, the package of bills would decrease dependency on foreign oil, put people to work in Pennsylvania and encourage use of a less-expensive, less-polluting fuel.

Marcellus Works also would expand the end market, and therefore the demand, for the gas drilling industry's product with public funds instead of letting the market run its course.

"The criticism on the right on many tax credits in the past is that they pick winners and losers ... but you do have to wonder what has changed their perspective when it comes to natural-gas tax credits," said Bill Patton, spokesman for the House Democratic Caucus.

But the Marcellus Works package is not about picking winners and losers; it is about leveraging a state resource to create jobs, said Steve Miskin, spokesman for House Republicans.

The tax credits are intended to maximize employment opportunity, grow the tax base and build upon the state's success — without overtaxing the burgeoning industry, Miskin said.

House Democrats tried and were blocked from getting amendments considered to pay for the tax credit bills other than with general tax dollars, Patton said.

Those alternatives included raising the state impact fee on drillers, creating a severance tax or to establish a tax on smokeless tobacco, he said.

"We are very supportive of the goal of increased use and availability of natural gas to consumers. But we think the industry itself should foot the bill for that," Patton said.

In general, the fact that Republicans would support such tax credits in principle raises questions, he said.

Nine bills in total, the Marcellus Works package has been working toward the finish line in the state House this month. Other bills include grants, loans and other provisions designed to encourage the fuel's use in transportation.

The tax credit bills made it there last week as the leading edge of the package in the approvals process.

The first, House Bill 301, sponsored by state House Majority Whip Stan Saylor, R-York County, would give tax credits to firms to convert fleet vehicles to natural gas.

The second, House Bill 305, sponsored by state Rep. Gordon Denlinger, R-Lancaster County, would give credits to companies for establishing fueling stations in highway corridors.

The third one, House Bill 309, sponsored by state Rep. Seth Grove, R-York County, would give tax credits for purchasing large natural-gas-fueled vehicles.

The Commonwealth Foundation does not support the use of such tax credits, said Elizabeth Stelle, policy analyst with the Harrisburg-based free market think tank.

The best way to bring about prosperity is through low taxes and streamlined regulations across the board — not policies that pick winners and losers, she said.

All industries should be on a level playing field instead of creating special rules for favored industries, Stelle said.

Natural gas is now cheap with the help of companies finding and accessing it in plentiful supply in the Marcellus Shale geologic formation deep under Pennsylvania and neighboring states.

And if local economies aren't taking advantage of the resource, it will flow overseas through exports and other countries will reap the benefits, Grove said.

It is important for the strength of the overall American economy to capitalize on the gas at home by creating new markets for it, he said.

Where companies continue to struggle in buying NGVs is in having enough upfront capital to make the switch to a more expensive natural gas vehicle, Grove said.

"It's that initial investment that companies are struggling to come up with the capital to do," Grove said.

His bill also sets a short period of just a few years for phasing in and phasing out the tax credit, Grove said.

The three tax credit bills would cumulatively allocate up to $60 million annually, and all of them have sunset provisions terminating the programs after several years.

Denlinger's proposal — $5 million in tax credits sunsetting at the end of 2018 — is modest by Harrisburg standards and aims to tackle the "chicken and egg" problem with natural-gas transportation infrastructure, he said.

People are slow to buy vehicles without fueling stations, and firms are slow to build fueling stations if not enough vehicles are out there, Denlinger said.

The future is natural gas, and major industries are already becoming participants in the natural-gas-fueled vehicle sector, he said.

But Denlinger said he wants to see the day sooner rather than later when consumers can make purchases of such vehicles knowing the stations will be available for fueling. The tax credits will help get to that day more quickly.

State Rep. Glen Grell, R-Cumberland County, voted in favor of Denlinger's bill but opposed the other two tax credit measures.

The private sector likely would not jump on the opportunity to build fueling stations without some sort of incentive, and the price tag is relatively modest, Grell said.

By comparison, the other two bills called for more money per year when the budget is already tight, he said. And the free market and strong payback periods for natural-gas vehicles will help to encourage conversion without the government's involvement.

The size of the total incentives package is raising some concern elsewhere.

While Pennsylvania does not tax companies based on the amount of gas produced, it does now impose an impact fee per well.

The fee brought in a little more than $200 million in the first collection cycle that is earmarked for use for everything from parks projects to environmental enforcement.

Beyond that, the state Department of Revenue puts the increase in taxes paid to the state by overall oil and gas companies, including employer withholdings, in 2012 at about $110 million more than 2008.

Based on that figure, sending such a large portion of the direct state benefits of gas drilling back out the door doesn't make much sense, said Michael Wood, research director at the Pennsylvania Budget and Policy Center.

Marcellus Works would spend about $70 million annually to start out the package's life, with the amount dropping off over time, according to the center's estimates.

"If it made financial sense for them to have fueling stations to dispense natural gas, they'd probably figure out how to do that on their own," Wood said. "It is hard to see how the state benefits from that."

At the same time, it sets a bad precedent, Wood said.

Pennsylvania's food manufacturing industry, for example, is viewed as important for the commonwealth's well-being.

So what if one of the big players saw this as a precedent and wanted subsidies on this scale to create a new market for itself? Wood asked.

There are clear places where government should make investments, such as education, and tax incentives can make sense in certain circumstances, Wood said.

"Creating new markets for well-capitalized companies? That's not so clear," he said.

Are incentives needed?

How much the natural-gas-vehicle industry needs tax credits or other incentives is a complicated question, said Stephe Yborra, director of market development for trade group NGVAmerica, based in Washington, D.C.

Yborra also is director of market analysis, education and communications for the Clean Vehicle Education Foundation.

For some businesses, the numbers are clearly in favor of converting to natural gas without incentives, he said.

If a vehicle consumes a lot of fuel compared with a passenger car, such as a delivery or other type of truck, and puts on a lot of miles in a year, then it has a favorable payback period for buying a more expensive vehicle versus fuel cost savings, Yborra said.

Buses used in mass transit systems also are among vehicles with the most favorable payback periods, he said.

Where it might get more complicated is with service trucks that operate in a finite territory, for example, thus limiting their miles driven per year and making the payoff period longer, Yborra said.

Then again, no matter the industry, businesses buying natural-gas vehicles for the first time might need extra incentive to do what already makes economic sense on its own, he said.

And it’s important to make sure incentives last long enough to bring certainty and a meaningful effect, but not so long that they become a crutch or condition people to make only purchases if and when incentives are available.

Brent Burkey

Brent Burkey

Brent Burkey covers York County, agribusiness, energy and environment, and workforce issues. Have a tip or question for him? Email him at brentb@cpbj.com. Follow him on Twitter, @brentburkey.

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