The Ohio Senate plans on releasing a revised budget any day now, and it might include an increase to the state tax on freshly-drilled oil and natural gas. And the Senate budget could be Governor John Kasich’s best shot so far at increasing the severance tax.
Right now the rate is at 20¢ per barrel of oil and 3¢ per 1,000 cubic feet, or MCF, of natural gas. Kasich says that’s way too low for a state with a booming shale natural gas industry.
“These oil companies, out of state companies, are paying 20 cents on a hundred dollar barrel of oil. That’s unbelievable. We wanted to raise it like 4 or 4.5 perecnt - we would have the lowest severance tax in America.”
His fight to raise the severance tax officially began in 2012 when he proposed, in his budget update, hiking the rate to 1.5 percent of the value of the well in the first year then 4 percent every year after that.
For Kasich’s 2013 budget proposal he stayed consistent, asking for a straight 4 percent severance tax rate. Then, in last year’s budget update, Kasich sought a more modest rate of 2.75 percent.
The House ended up passing an increase at 2.5 percent, with some breaks attached, a proposal with which Kasich was not happy.
“The House passed version on oil and gas is a joke, ok, it’s a joke. It’s an insult to Ohioans,” says Kasich.
The governor came back with a much bigger swing of the bat in this year’s budget, pitching a rate of 6.5 perecnt. Of course industry leaders do not like this, including Ohio Oil and Gas Association Executive Vice President Shawn Bennett.
“This is not a proposal that would foster growth.”
According to Bennett, the oil and gas industry is going through a recession and companies are seeing very low prices for their product.
“We would be charged a rate—a tax rate on a price that we as an industry don’t actually get for our product.”
In other words, Bennett says the state’s tax commissioner will appraise the gas at the well and tax the drilling company at that value. But Bennett says the product will actually sell at a lower cost on the market.
Wendy Patton with the liberal-leaning think tank Policy Matters Ohio says it’s important to remember why we have a severance tax.
“It’s a way of recompensing the people of the state of a nation for the loss of that valuable natural resource that can only be taken out of the ground once.”
She agrees with Kasich and says the state’s current severance tax is an antiquated rate based on a business that peaked in 1896, that is until this recent boom.
“People need to understand that Ohio has a ridiculously low severance tax and very high needs.”
There are other elements to this debate as well. Patton agrees with Kasich’s proposed rate but she doesn’t like the revenue going towards tax cuts. Policy Matters - and Democratic state lawmakers - would rather see more money go back to helping local communities for economic development.
As for Bennett and the oil and gas association, besides not liking the hike, they have another problem.
“There is not a single individual in the industry that feels comfortable dealing with this issue in the budget,” Bennett says.
Bennett adds the severance tax is a very complicated issue and while he trusts Kasich and his administration, he doesn’t want to see it passed in a budget where the governor has the power to line item veto.
“Any quick little removal of a word could have serious implications on this industry.”
And the fight doesn’t end with the Senate. Even if the upper chamber decided to increase the rate, the proposal would go back to the House where its members have a history of being less keen on raising the severance tax.