By Maggie Thurber | Special to Ohio Watchdog
COLUMBUS — Gov. John Kasich wants to increase the severance taxes on the oil and gas industry in Ohio. He originally included a proposal to do so in his mid-biennium budget review bill, but Republicans in the General Assembly removed it.
Kasich on Friday committed to pushing forward on the idea, emphasizing his promise to use the additional revenue to offset income taxes paid by Ohioans.
A severance tax usually is imposed to cover the costs of regulation and monitoring necessary for a government to oversee a particular industry. In Ohio, the severance tax is 20 cents on a barrel of oil and 3 cents on a thousand cubic foot unit of natural gas. There is no separate tax on natural gas liquids.
Kasich’s plan would eliminate the severance tax on vertical natural gas wells producing less than 10 MCF per day. Ninety percent, or 44,500, of Ohio’s conventional natural gas wells would no longer be subject to the severance tax, according to a document that used to be available on the Internet but has since been removed.
High-volume horizontal wells — like those using the hydraulic fracturing process in the Utica and Marcellus shale formations — will have an initial severance tax rate of 1.5 percent on gross revenue for the first year and a 4 percent rate thereafter.
Carlo Loparo, spokesman for Ohio Department of Natural Resources, said operators can request an additional year at the 1.5 percent rate to recoup the initial startup costs of their wells.
Kasich has stated that reducing Ohio’s income tax burden is essential to creating the jobs-friendly climate that will help get Ohio back on track. He wants the additional severance tax revenue for an across-the-board income tax reduction for all Ohio tax brackets. He estimates the amount of the tax break will be between $900 million and $1 billion over the next five years. Upon reaching peak production, his proposal estimates yearly income tax cuts of as much as $500 million.
Ohio had 5,375,281 individual income tax filers, according to a 2010 annual report from the state Department of Taxation. If the estimated $900 million severance tax revenue were divided equally, each filer could expect an income tax cut of about $33.50 each year.
The oil and gas industry opposes the tax plan. They point to statistics showing that states with increased severance taxes see a decline in drilling activity — something they say Ohio cannot afford at this early stage in development.
A fact sheet from the Ohio Oil and Gas Association states that in addition to the severance tax, oil and gas producers pay income tax, commercial activity tax, or CAT, sales tax and an ad valorem tax, which is a property tax based on the value of unproduced minerals in the ground.
They claim that a 4 percent severance tax would be equivalent to a 40 percent income tax for some producers who, because of their business status, file as individuals. It also would be 16 times more than the CAT, which is the gross receipts tax charged to all Ohio businesses, they state.
OOGA points to a Kleinhenz & Associates study of expected tax revenue, which concluded that development of the Utica shale formation would result in a $1.05 billion increase in tax revenue for state and local governments in 2015, without any additional taxes.
“Instead of imposing an additional severance tax to provide income tax relief, why not use this expected additional revenue for the same purpose?” asked Jerry James, president of the OOGA.
He said that of the $1.05 billion, $638 million will go directly into the state’s general fund, with the balance going to the regulatory agency and local governments.
“The increased tax revenue that will be generated under the existing system is greater than what the governor is offering through his severance-tax-increase,” James said. “And it won’t jeopardize Ohio’s economic opportunity” to fund the governor’s income tax cuts this way.
In a news conference Friday, Kasich addressed the concern that his tax would hurt potential development.
“There’s not one of those companies, … if you talk to their executive, that this would in any way discourage anybody from coming to Ohio,” he said. “And since we’ve been talking about it, we’ve seen billions of dollars invested in Ohio, and you know why? Because there’s gold in them there hills.”
In response, Thomas Stewart, OOGA executive vice president, said that despite the governor’s comments about a tax increase not hurting investment, a recent survey of energy executives shows the state has dropped from No. 2 to No. 14 in desirability for future investment.
The Ohio Legislature has not yet scheduled the proposal, though it may see action after the November election in a lame-duck session.
NOTE: This story was updated June 11 to reflect the 3-cent severance is on a thousand cubic foot of natural gas.