Dogma Crumbles as Kasich Fights Own Party to Tax Ohio’s Drillers

After ousting Ohio (STOOH1)’s Democratic governor in 2010 by promising a “business-friendly” climate, Republican John Kasich on March 14 called for higher taxes on oil and gas drillers and environmental rules that his administration says no other state requires.

As a result, Kasich, 59, a former U.S. congressman, Fox News commentator and Lehman Brothers Holdings Inc. investment banker, is fighting his own party over a plan that he says would ensure that Ohioans, not just out-of-state corporate shareholders, benefit from an energy boom.

“I’m the party line now, you know?” Kasich said in a March 29 interview in Columbus, the capital. “I’ve never been uncomfortable with traveling a lonely road. I think that’s what leaders do.”

Ideology hasn’t constrained U.S. governors even as it defines national politics. Republican presidential candidate Mitt Romney has spent months rejecting a national health-care plan similar to one he backed -- and bragged about -- as Massachusetts governor. Politicians who still head states, however, often pursue a pragmatic course.

New York (STONY1) Democrat Andrew Cuomo changed public-employee pensions despite opposition from unions and the state’s Democratic comptroller. Michigan (STOMI1) Republican Rick Snyder has said he won’t push laws curbing labor even as neighboring Republicans Scott Walker in Wisconsin and Mitch Daniels in Indiana plunged ahead.

Free to Operate

State politics is less polarized and governors can pursue initiatives outside conventional ideology, said John C. Green, a political-science professor at the University of Akron.

“Governors are not as doctrinaire in their policy proposals as their parties are,” Green said in a telephone interview.

The need for governors to balance budgets or respond to local constituencies also can cause them to buck national parties, as when Republican Jan Brewer of Arizona backed a sales-tax increase in 2010 to ease a $3 billion deficit, said Chris Whatley, deputy executive director of the Council of State Governments in Washington.

“National politics is out there as a background factor, but ultimately what it comes down to is they are making decisions based on very local constituencies and state boundaries, not national litmus tests,” Whatley said in a telephone interview.

Love for Shale

In Ohio, companies including Chesapeake Energy Corp. (CHK), Devon Energy Corp. (DVN) and Exxon Mobil Corp. (XOM) have begun drilling in the Utica Shale geological formation. The gas play will support 65,680 jobs and add $4.9 billion to the state’s economic output by 2014, according to a study released Feb. 28 by the Ohio Shale Coalition.

Under Kasich’s proposal, drillers would pay a tax as high as 4 percent on the market value of what they extract. That would fund an income-tax cut. Drillers also would face regulations such as having to disclose chemicals used in hydraulic fracturing, or fracking. The current tax is 20 cents per barrel of oil and 3 cents per 1,000 cubic feet of natural gas, according to the Taxation Department.

Kasich is promoting his proposal at public events by holding up two dimes to demonstrate the tax, and he said one energy company told him it expects to take a trillion dollars worth of natural resources out of Ohio. An income-tax cut would help individuals and small businesses, Kasich said.

“Either Ohioans get the advantage, or they ship the profits out of the state and reward their investors,” the governor told reporters March 19, referring to oil and gas companies. “It’s just that simple.”

Pushing Populism

Two days after Kasich unveiled his plan, the Republican- controlled House of Representatives tabled it. The move was backed by groups including the Ohio Liberty Council, a coalition of Tea Party organizations.

They echo complaints by the Ohio Oil and Gas Association, a group with more than 2,200 members, that Kasich’s plan would stifle nascent development.

Kasich could cut the income tax without forcing drillers to pay for it, and his “populist” regulations aren’t needed, said Jerry James, the association’s leader and president of Marietta- based Artex Oil Co.

“It’s all about good politics,” James said.

Kasich, who faces re-election in 2014, is trying to improve his image after 62 percent of Ohioans voted last November to repeal a law he championed to limit collective bargaining by public employees, said Dale Butland, a Columbus Democratic strategist.

The New Kasich

The governor’s approval rating was 42 percent in a Quinnipiac University poll released March 28, his highest mark in the Hamden, Connecticut-based university’s surveys. His low point was 30 percent, both shortly after taking office and in March 2011, a week before he signed the bill curbing union bargaining.

“He’s attempting to give himself a makeover and say, ‘Oh, I’m a nonpartisan kind of guy,’” Butland said in a telephone interview.

Kasich, who said that he fought his party as chairman of the U.S. House of Representatives Budget Committee in the 1990s, said he’s doing what any good company’s chief executive would do because “anything that stands still dies.”

Kasich rejects the argument that his plan will limit development. Nor will he call it an increase, instead saying he’s “modernizing” the severance tax. Grover Norquist, who as head of Americans for Tax Reform has persuaded politicians to sign no-new-taxes pledges, blessed the plan as “revenue neutral,” Kasich said.

Who’s This Guy?

Kasich also moved to protect the state’s environment with tougher regulations on drilling and its wastewater. Fracking involves injecting chemical-laced water underground to free gas reserves, a practice opponents say may foul drinking water.

New rules are needed because “if Ohioans lose confidence in our ability to protect public health and safety, this potential boom will fizzle,” James Zehringer, director of the Natural Resources Department, testified in a March 28 state Senate committee hearing.

The Ohio Environmental Council is “pleasantly surprised” by Kasich’s approach and is “going to keep working with this guy,” Jack Shaner, the Columbus-based group’s deputy director, said in a telephone interview.

Business groups that endorsed Kasich in 2010 haven’t taken a position on his tax plan.

Roger Geiger, executive director of the National Federation of Independent Business/Ohio in Columbus, said that while he’s “a little surprised” that Kasich is taking on the oil and gas industry, the governor is “not afraid of his shadow.”

“In the last two administrations, we had governors that were afraid to be bold and afraid to be creative and innovative,” Geiger said in a telephone interview. “No matter what you think of this governor, I don’t think you can say he’s not being bold and creative and innovative.”

To contact the reporter on this story: Mark Niquette in Columbus at mniquette@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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