March 8 (Bloomberg) -- Oil and natural-gas drillers in Ohio would pay a severance tax as high as 4 percent to fund income-tax cuts under a plan Governor John Kasich will unveil next week, according to an administration proposal obtained by Bloomberg News.
Kasich, a Republican, will call for taxing oil extracted by horizontal drilling at 1.5 percent of market value for the first year, a rate that may be extended another year if initial drilling costs aren’t recovered, documents show. After that, the rate would be 4 percent annually, according to the proposal.
The same rate structure would be applied to natural-gas liquids. The levy on gas would be held at 1 percent, according to the documents.
The changes, which may generate as much as $1.02 billion by 2016, would require legislative approval. The state’s current levy is 20 cents per barrel of oil and 3 cents per 1,000 cubic feet of natural gas, with no tax on natural-gas liquids, according to the Ohio Department of Taxation.
States including Ohio, Pennsylvania and North Dakota are confronting the costs and potential benefits of hydraulic fracturing, or fracking, which involves injecting water, sand and chemicals underground at high pressure. While the industry says fracking is safe and has allowed increased production with lower natural-gas prices, environmental groups say it can lead to water contamination.
Into the Shale
Companies including Exxon Mobil Corp., Chesapeake Energy Corp., and Devon Energy Corp. have begun drilling in Ohio’s Utica Shale, a geological formation that may hold as much as 5.5 billion barrels of oil and 15.7 trillion cubic feet of gas. Ohio drillers also are tapping into the Marcellus Shale, which stretches across Pennsylvania to New York.
For Ohio’s conventional, vertically drilled oil wells, the severance tax would not change under Kasich’s proposal. It would be eliminated for wells that produce less than 10,000 cubic feet of natural gas per day and changed to 1 percent for those that produce more, according to the documents. There would be no new tax for natural-gas liquids from conventional wells.
The changes might generate from $834.5 million to $1.02 billion from 2012-2016, depending on price assumptions, and would be returned to residents by lowering income-tax rates on individuals and small businesses, the documents show.
There would be no net increase in the tax burden under the plan by Kasich, elected in 2010 with a pledge not to raise taxes, according to the documents.
Cutting by Boosting
Kasich spokesman Scott Milburn declined to discuss the plan, saying the governor will present it next week.
“The governor has already cut taxes by more than $800 million and wants to build on that with additional income-tax cuts,” he said in a telephone interview. “The boost that that can mean for small businesses is especially important to job creation.”
Kasich has discussed the proposal with energy producers, he told reporters yesterday at CERAWeek, a Houston conference held by IHS Cambridge Energy Research Associates.
“Our plan is fair and it will create long-term stability,” Kasich said. “A lot of people, when they pay zero, they want to continue to pay zero. That’s not acceptable.”
America’s Natural Gas Alliance, a Washington-based trade group, hadn’t seen the proposal and wouldn’t comment on it, Dan Whitten, a vice president, said in an e-mail.
“Natural-gas production is a capital-intensive undertaking and we believe generally that fees should be directed to communities where we work, with careful consideration of the possible direct jobs impacts,” he wrote.
Devon Energy hadn’t reviewed the proposal, Chip Minty, a spokesman, said in a telephone interview. Chesapeake Energy referred questions to the Ohio Oil and Gas Association.
The association sees the proposal as an effort to shift the tax burden and will oppose it, Executive Vice President Thomas E. Stewart said in a telephone interview.
“It’s fundamentally unfair to ask the one industry that could bring economic renaissance to the state of the Ohio to pony up and solely bear the cost of reducing income taxes for another portion of Ohio society,” Stewart said.
The state collected $10.6 million in severance tax in fiscal 2010, the most recent data, according to the Ohio Taxation Department.
Lower Than Texas
Kasich’s increased rates still would be lower than those in neighboring states and Texas, the biggest oil and gas producer. It charges a severance tax of 4.6 percent for oil and 7.5 percent for gas. The state grants broad exemptions for some kinds of production, including shale gas.
In 2010, Ohio ranked 19th among natural-gas-producing states and 17th in oil production, yet was 25th among the 35 that collected a severance tax, according to a Dec. 19 report by Policy Matters Ohio, a Cleveland nonprofit research group.
A Feb. 2 report by Columbus-based Innovation Ohio, a nonpartisan organization promoting policies supporting the middle class and the poor, called for raising rates to those of Texas to help restore cuts to schools and local governments.
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