By Jon Cassidy | Ohio Watchdog
COLUMBUS — Gov. John Kasich says that a severance tax on oil and gas production could raise up to $1 billion by 2016, and that the money could be used to fund an across-the-board income tax cut.
A review of severance tax revenues in all 50 states suggests they’re not quite so lucrative. Most of the states rich in coal, oil, and natural gas have severance tax revenues measured in the hundreds of millions.
Just 12 states have annual severance tax revenues of more than $100 million, and just three are in the $1 billion club: Alaska, Texas and North Dakota.
A severance tax is imposed for removing nonrenewable resources, such as crude oil.
Alaska is a unique case, with $3.4 billion in severance taxes for the 2009 fiscal year, as recorded in The Book of the States 2012 almanac.
Texas, with all its free-flowing wells, had $1.7 billion. North Dakota, which has turned into Texas of the North in the past few years, had $1.1 billion.
Other resource-rich states had severance taxes in the 5 percent to 8 percent range, and fell way short of a $1 billion in revenues.
For example, West Virginia had $417 million from all severance taxes, Oklahoma had $744 million, Montana had $254 million, and Louisiana had $758 million.
Texas, for example, taxes oil at 4.6 percent and gas at 7 percent, but slashes gas taxes for shale production, which is more difficult and less profitable than traditional production.
Pennsylvania imposes no severance tax.
Even without a severance tax, Ohio governments are expecting to get paid from oil and gas development.
The leading study on the issue, done by the Ohio Shale Commission, finds that tax revenues will see a big boost under current law. State and local taxes due to shale development will go form an estimated $16.5 million in 2011 to $434 million in 2014.
Annual wealth creation by related industries is projected to go from $162 million to $4.9 billion in the same time.
Kasich’s plan would impose an effective 2.7 percent tax on revenue from oil and gas sales.
According to an eight-state comparison by Ernst & Young that supports the tax, “With the increase, Ohio’s effective severance tax rate (ETR) would be 16 (percent) lower than the other states’ average for the well producing dry natural gas and natural gas liquids and 40 (percent) lower than the other states’ average for the well producing dry natural gas and oil.”
The eight states in the study all have important shale formations, which matters because shale oil and gas are less economical than other types of production.
The Ohio Oil and Gas Association argues that “a 4 (percent) severance tax on oil and gas would be equivalent to a 40 (percent) income tax and 16 times more than the commercial activities tax.”
An association fact sheet points out:
• West Virginia and Michigan, which have higher severance-tax rates than Ohio, have both experienced decreased oil and gas drilling during the past five years.
• Pennsylvania, which has no severance tax, has experienced a 600 percent increase in drilling activity during the same five years.
• In 2008, Arkansas, which has a shale play, instituted a severance tax similar to what Ohio is considering — drilling activity dropped by 50 percent in three years and is still declining.