Framing the Dialogue

C + P = PC

This is a rather simple equation that should be used whenever a group suggests that something won’t have an impact on consumers or expresses a desire to tax (or charge fees) for some industry or demonize profits from some large industry.

C = Cost to produce something

P = Profit needed by company to make it worth the risk to produce something

PC = Price to consumer

Pennsylvania’s budget crisis like many states has politicians scrambling to find areas to cut and less popularly places to charge additional fees and taxes to increase revenue. Governor Tom Corbett proposed some deep, deep cuts in funding to institutes of higher learning to help balance Pennsylvania’s budget. The Universities cried foul and began a serious lobbying and marketing campaign to pressure elected officials to not “destroy” education. Penn State officials strangely held a meeting in The Big Apple (New York City) to discuss their concerns about funding losses. In their defense I believe that the meeting was already scheduled when the budget cuts were announced and everyone knows that you cannot get good steaks in State College. Governor Corbett, although on the board declined to attend.

In an unrelated story, Pennsylvania (and a few surrounding states) have had vast reserves of natural gas discovered in deep formations. The better news is that technology has allowed for the economic removal of this resource. Politicians both of the donkey and elephant variety have been greedily trying to milk this cow without seeming too greedy. There have been many discussions about how to “fairly” tax (or charge fees) this industry and use the money for all sorts of “good” programs. Essentially though the money goes to the government for it to decide what it is used for. The promise of cheap energy for citizens and businesses is very close to getting higher.

C + P = PC

Fast forward a few months and two Penn State University professors has concluded the major Marcellus Shale natural gas severance tax or impact fee proposals will have little impact on the economic growth of the industry in Pennsylvania. I cannot help but be a little skeptical about the results of the study when many of the gas tax proposals contain money earmarked for higher education. Penn State is an institution of higher education and would directly benefit from the tax. Remember the old saying, “follow the money.” The study does, however, say that a tax will have little impact on the growth of the industry. There is so much gas there that the industry is hungry to remove it so that part is true. I am more interested in the impact on this equation;

C + P = PC

The industry will require a certain Profit (P) in order to take the risk to explore and remove the natural gas. Companies and their shareholders want/expect profit so they can continue their operations. My guess is that most people with mutual funds or retirement accounts are shareholders, so that is probably 95 percent of working or retired Americans. A drop in profit affects/impacts a company. The impact of the fee/tax will be to increase the cost to produce the product. If “P” is constant and “C” increases, “PC” has to increase. The cost to the customer will increase, therefore a tax on gas is actually a tax increase on those of us who use gas. Remember that energy is fungible so it doesn’t matter whether you directly use this gas to feel the impact of the increased price. The impact could be in the form of an increase to your home heating/cooling bill, an increased cost to the company that you work for, an increased cost to the school district your children attend, or even an increased cost to the company that delivers the food to the market you.

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