Ohio Proposal for Revamped Severance Tax, New Impact Fee

new taxes aheadAs MDN reported last week, Ohio Gov. John Kasich introduced a shale gas and oil severance tax overhaul yesterday. The leaked details from last week were correct—but we now have the full proposal (embedded below). Gov. Kasich is tying a revamped severance tax to lowering income taxes for all Ohioans—by up to $1 billion over five years.

Kasich and his administration justify the higher severance taxes by comparing Ohio with other states, showing those other states all have higher rates than what is being proposed in Ohio. Neighboring state Pennsylvania is not on the comparison list because they don’t have a severance tax but instead have an impact fee, so PA was conveniently left off the list.

Kasich is also proposing an impact fee, in addition to a severance tax. Left out of the “fact sheet” below is mention of the impact fee—but it is mentioned in another fact sheet issued by the Kasich administration yesterday—one that summarizes his proposals for revamping energy policy in the state. Here is the relevant section:

Taxation: To cover impacts from drilling, oil and gas companies will pay an upfront fee of $25,000 per well to local government.  These dollars will be provided before the majority of impacts occur so local governments have the resources needed to offset impacts.  Oil and gas companies will get this money back over time.  This change is revenue neutral—it is not a tax—it is simply delivering funds to locals more quickly than the current system allows…(1)

That description is about as clear as mud. It seems to say there will be a new $25,000 impact fee paid by drillers, but then it says those drillers will get the money back “over time.” How? Will the drillers be reimbursed for the fee? That seems unlikely. Are they saying the driller is going to make a boatload of money on that well and won’t miss the relative chump change they have to pay up front? It’s also interesting the section is titled “Taxation” and underlined, and then in the description it says the impact fee “is not a tax.” Er, okay. Then why did you title this section “taxation?”

Reaction to the severance tax plan has been mixed. Those who love to dip their hands into other people’s pockets to pay for things they haven’t earned don’t think it goes far enough:

Cleveland-based Policy Matters Ohio, a liberal think tank, said the tax hike on oil and natural gas liquids within the next two years should be even higher than Kasich’s proposed 4 percent.

Meanwhile, public safety groups and advocates for the poor argued revenue from the increase shouldn’t be used for income-tax relief at all. They want to see money raised reinvested in government programs hit with recent cuts.

"They’ve cut local governments by 50 percent, and local governments are where the most essential services are provided – police, fire, emergency medical services," said Ohio Fraternal Order of Police president Jay McDonald. "And those local governments are really struggling to provide those services because of the lack of funding, and the state is directly responsible for that lack of funding."(2)

The Ohio Oil and Gas Association believes the higher rates will discourage investment in Ohio’s nascent Utica Shale:

The Ohio Oil and Gas Association noted in a statement that the tax structure for the industry was revamped just two years ago. The industry group, which says its members are poised to invest as much as $34 billion in the state over the next several years, called the current tax system "fair, competitive with neighboring states and attractive to investment."

"Though we would generally support an income-tax decrease, we do not support asking one industry to disproportionately fund it," it said. "We also believe that Ohioans who have struggled during the economic downturn would prefer to have a good-paying job now, instead of a small tax break years down the road."(2)

MDN’s best guess? The proposal will pass with flying colors—it’s just too juicy and tempting for politicians to pass up.

(1) Gov. John Kasich Energy Fact Sheet (accessed Mar 15, 2012) – Ohio’s 21st Century Energy Policy: Leading the Nation with a Comprehensive Energy Strategy (PDF)

(2) Van Wert (OH) Times Bulletin (Mar 15, 2012) – Kasich plan for tax hike, cut gets mixed reaction