December 11, 2013
A new tax on horizontal wells in Ohio is an effort to provide clarity to oil producers and ensure that the rate is low enough to keep them coming to the state in the fracking boom, the bill sponsor told his colleagues yesterday.
But some Democrats questioned whether the tax rate is high enough if part of the severance tax’s estimated $1.7 billion in proceeds over the next decade is to be earmarked for income-tax reductions.
After rejecting Gov. John Kasich’s proposal this spring to institute a new severance tax on horizontal shale drilling, House GOP leaders recently worked out a new proposal with the oil and gas industry. The plan also includes a 50 percent tax cut for traditional wells, an exemption from the state commercial-activities tax for those paying the new severance tax, and an income-tax credit for mostly smaller drilling companies operating as pass-through entities.
“In order to be a modern oil-producing state, this issue needs to get resolved,” Rep. Matt Huffman, R-Lima, the bill sponsor, told the House Ways and Means Committee. “This proposal seems to be a pretty moderate way of doing that.”
House Bill 375, which Huffman hopes to see pass in early 2014, includes a 1 percent tax on gross receipts for the first five years of production. The tax rate rises to 2 percent until production drops below marginal levels, at which time it reverts to 1 percent.
Kasich’s proposal would have taxed oil and natural-gas liquids at 1.5 percent; the tax rate would have risen to 4 percent when startup costs were recovered, after one or two years of production. Kasich said it was a competitive rate.
The latest proposal is lower than the tax rates in a lot of other states, and roughly the same as in Pennsylvania, Huffman said. That would ensure that oil and gas investors want to come to Ohio, he said.
“If we overtax it, no one is going to come,” said Rep. Peter Beck, R-Mason, the committee chairman.
Rep. Mike Foley, D-Cleveland, noted that Ohio’s Utica shale appears to hold significant amounts of “wet” natural gas and high-quality oil that is more valuable than the resources in many other states. If that is the case, he argued, the state should not be concerned about charging more.
“If our stuff is more valuable, it may not be bad to have a higher rate,” Foley said. “Investors are looking for places where there is wet gas. We’ve got it. They are not coming here because of taxes — they are coming here because we have a product they can make big money on.”
Revenue from the new severance tax would be divided among oil and gas regulation, the capping of thousands of orphaned wells around the state, and an annual state income-tax cut.
Rep. Tom Letson of Warren, the top-ranking Democrat on the committee, questioned why the bill sends no money to local governments or schools. “We’re giving tax breaks to people that probably don’t need tax breaks,” he said.
Huffman said the income tax is the worst tax a government can impose. “The more that we can do to lift the burden of income tax for all Ohioans, the better off we are.”