10 things you should know about gas and oil tax proposal

By Marc Kovac | R-C capital bureau Published:

COLUMBUS -- Gov. John Kasich has made no secret about his desire to increase taxes on oil and gas produced in eastern Ohio's growing oilfields, saying the entire state should benefit from the valuable resources in underground shale formations.

But Statehouse Democrats and some Republicans remain skeptical of the governor's plan, voicing a desire to use the increased tax collections to help local governments and schools or concerns that a tax hike could hinder future fracking-related economic development.

Proponents and opponents are in the midst of a debate on the issue, via hearings on Kasich's biennial budget plan. Here are 10 things you should know about oil and gas taxes and what the governor is proposing:

1. Severance: The severance tax is so named because filers "extract, or sever, certain natural resources from the soil and waters of Ohio," according to an explanation by the Ohio Department of Taxation.

Last year, there were about 1,300 individuals or business entities that filed severance taxes, said Gary Gudmundson, spokesman for the taxation department. Of those, 984 focused solely on oil or natural gas.

2. The Rates: According to the Department of Taxation, severance taxes are levied based on the weight or volume of resources extracted from the ground.

Under current rates, filers pay 10 cents per barrel of oil and 2.5 cents per thousand cubic feet of natural gas produced. Production valued at less than $1,000 is exempt if used on the same property where it is extracted, according to the taxation department.

Upward of $10.2 million in total severance taxes were paid in the state in fiscal 2012. The total included more than $2 million in natural gas payments and about $467,000 in oil payments.

3. Where the Money Goes: According to the Ohio Department of Taxation, 90 percent of oil and gas severance taxes currently are directed to the state's unreclaimed lands fund. It's used to reclaim "land, public or private, affected by mining or controlling mining drainage," according to Ohio Revised Code.

The remaining 10 percent goes to the state's geological mapping fund for "field, laboratory and administrative tasks to map and make public reports on the geology, geologic hazards and energy and mineral resources of the state."

4. Kasich's Plan: Under the governor's proposal, rates would remain unchanged or would be reduced or eliminated for low-volume producers with vertical wells.

Increased rates would be enacted for higher-volume, horizontal wells, the focus of oilfield activities in eastern Ohio, with the expanding use of horizontal hydraulic fracturing, or fracking.

According to Tax Commissioner Joe Testa, owners of high-volume horizontal wells would be taxed at a rate of 1 percent for gas and 4 percent for oil, natural gas liquids and condensate. The latter would be taxed at a lower 1.5 percent rate during the first year of production to enable producers to recoup their drilling costs.

Additionally, "To provide immediate revenue to local governments, the owners of high-volume horizontal wells will provide a no-interest impact loan of $25,000 per well when the permit is obtained," Testa told the House's finance committee last week. "This will aid local governments during the period of drilling when there is increased stress on infrastructure."

The proceeds from collections on horizontal wells would go to the state's general revenue fund. The proceeds from conventional vertical wells would continue to be directed to unreclaimed lands and geological mapping, Gudmundson said.

5. The Return: Testa said the proposed changes would pump an additional $45 million into the state's general revenue fund in fiscal 2014, $155 million in '15, $305 million in '16 and $415 million in '17.

Testa added, " ... right now, oil companies are only able to extract about 10 percent of the shale oil and gas with current technology. As technologies advance and evolve, more oil and gas will be extracted from our shale resources for decades to come. And as long as there is money to be made, the producers and pipeline companies will be active."

6. The Pros: Kasich has said repeatedly that the severance tax rate should be increased to ensure that out-of-state energy companies don't take Ohio's oil and gas and the resulting profits from their sale entirely outside of the state's border.

The governor is quick to point out that energy companies have already invested billions of dollars in Ohio's oilfields (more than 500 horizontal well permits have been issued to date) the natural resources are here and they're valuable.

And the administration says the proposed rates are lower than Michigan, Pennsylvania, West Virginia, Arkansas, North Dakota, Oklahoma and Texas.

7. The Cons: Oil and gas industry advocates remain opposed to the tax hike, saying Ohio already is benefiting from increased production and increasing rates could stifle future investment.

As Tom Stewart, executive vice president of the Oil and Gas Association told reporters late last month, "If you want to see this play develop, what you want these producers to do ... is to take their net revenues and plow it back into the ground, just the same way that a farmer takes his net revenues and plants his field. You want these producers to take the money they make plus more and put it back in the ground to make this economic opportunity expand."

8. MBR: Kasich initially proposed the frack tax increase in 2012 in Mid-biennium Review, a massive package of policy proposals that kept lawmakers busy during what was supposed to be a slower, off-budget year. The original proposal would have used the increased collections to institute a corresponding decrease to income tax rates.

But lawmakers balked, removing the severance tax language from legislation and saying they needed more time to study the issue as part of a larger tax reform effort.

The governor reintroduced the plan as part of his two-year spending proposal, with a lower sales tax broadened to cover services and an income tax cut.

9. Democrats: Many Statehouse Democrats oppose the governor's frack tax plan, saying the proceeds should be directed to local governments and schools and/or communities whose infrastructure has been affected by drilling activities rather than rolled into an income tax cut.

"I've never seen so many lobbyists from the gas and oil industry in one place in the 26 years that I've been here," Rep. Bob Hagan, a Democrat from Youngstown and frequent critic of Kasich, said late last month. "And they're winning this. So those of us that have an obligation to stand up and fight for local governments and fight for education dollars have to do it now, and we have to confront the governor on it."

10. Republicans: Some GOP lawmakers also are questioning the severance tax increase.

"I am concerned on the 200,000 jobs that are projected to come to the state of Ohio," Rep. Cheryl Grossman, a Republican from the Columbus area, told the House's finance committee last week. "I don't want to do anything to discourage that. And I think that we are already seeing tremendous benefits as far as home building, restaurants, hotels where that activity is going on. It's really important to me that they pay their fair share...."

Rep. Dave Hall, a Republican from Millersburg, said some landowners will have to pay the severance taxes, due to the wording of leases established in earlier decades with local oil and gas companies before Ohio's shale oil deposits were discovered.

And Rep. Ron Amstutz, chairman of the powerful House finance committee, asked taxation officials this week about the constitutionality of the plan, among other questions.

Marc Kovac is the Dix Capital Bureau Chief. Email him at mkovac@dixcom.com or on Twitter at OhioCapitalBlog.Lo

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