Governor Gets Support For Severance Tax Increase
Ohio Governor John Kasich’s plan to increase the severance tax is getting some support from an unlikely source Ohio Public Radio's Andy Chow reports.
"They understand the business community—they understand the value of the product and they also understand the needs in eastern Ohio.”
That’s a rare statement from Wendy Patton of Policy Matters Ohio about Gov. John Kasich’s plans to hike the tax on oil and natural gas drillers. In fact—Policy Matters has not been encouraged by any of his severance tax proposals—until now.
The severance tax is a tax on oil and gas extracted from Ohio’s shale using hydraulic fracturing—also known as fracking. Patton says Kasich’s scheme to raise the tax to 6.5% is—as she describes—a “self-respecting” rate.
“He recognizes the value of the commodity that we have just as industry is recognizing that value and he is proposing a severance tax rate that is within the range of those of major producing states,” said Patton.
The governor’s office projects this would generate about $325 million in the next two fiscal years.
The 6.5% number is pretty extreme compared to proposed rates in the past. Last year the governor’s office was looking for a 2.75% tax. The House passed its own tax increase of only 2.5%—and it died in the Senate.
Bennett: “The real issue here is the timing the industry as a whole is suffering.”
Shawn Bennett is the new executive vice president for the Ohio Oil and Gas Association. He says 6.5% is big no matter what—but it’s especially high considering the steep drop in the price at which oil and gas is being sold in the marketplace.
Bennett says drillers in Ohio are already cutting budgets, proposing layoffs and slowing down their activity. He says a higher severance tax will take it one step further in discouraging development.
“As prices decrease and taxes increase you shrink the amount of economics that are available in the play so you’re taking what was once 3,800 square miles and maybe shrinking it down to 15 because it all depends on what the economics of that well is going to be,” Bennett said.
When asked about the possibility of repressing investment, Patton referenced a response from Ohio’s budget director Tim Keen, who compared the situation to drilling in Alaska, where the severance tax rate is at least 25%.
“This has not discouraged the industry—the industry drills where the commodity is plentiful. It’s driven by prices of the commodity—it’s not driven by state and local tax rates,” explained Patton.
But Bennett says policymakers cannot do an apples-to-apples comparison when it comes to matching Ohio’s drilling economics to other states. He says—for example—the rock and production capabilities in Ohio are just some major differences to other oil and gas producing states.
In Kasich’s plan—20% of the revenue would go back to the local communities. Bennett counters by arguing that communities will end up losing more than they gain by this tax because of his claim of discouraged investment. He says they already get more from other taxes on the industry.
“Is the promise of getting 20% of whatever that severance tax may be or what they’re receiving in bed tax, increased income tax, increased sales tax as well as ad valorem tax gonna probably outweigh the benefit that they’re getting from an increased severance tax,” Bennett explained.
Patton does have her reservations with the plan as well. Policy Matters would like to see a higher percentage of that revenue going back to the local level. She also says the state could do more with that money instead of putting it towards an income tax cut.
Kasich says it’s important to continue cutting the income tax and bring it closer to a rate of 3%. However he denies that his entire plan hinges on passing this severance tax as is.
“The closer we get into the threes the better we’re gonna feel about things but there isn’t enormous amount of revenues that if they kill that the rest of its gone. No,” said Kasich.
The House finance committee is now looking over the plan. The full chamber hopes to pass a budget and send it to the Senate by the end of April.