Policy Matters Ohio released an analysis of a Republican-backed severance-tax bill, criticizing it for imposing too-low rates on oil and natural gas extracted from horizontal wells and for directing revenues toward tax breaks.
House Bill 375, introduced last month with the support of the Ohio Oil and Gas Association and House leadership, would tax production from horizontally fractured, or fracked, wells at a rate of 1 percent of the net value for the first five years.
After that period, the rate would increase to 2 percent for high-producing wells and drop back to 1 percent when production declines.
The revenues would fund both Ohio’s oil and gas regulatory framework and the Ohio Department of Natural Resources regulartory efforts. The rest would go toward a statewide income-tax reduction.
But Policy Matters Ohio took aim at multiple parts of the bill in a report authored by Wendy Patton, a senior project director at the independent policy- research institute.
“House Bill 375 proposes the lowest rates and most-generous provisions for the oil and gas industry of three severance-tax proposals considered in Ohio during the past year,” the report said.
One of those bills was a defeated proposal championed by Republican Gov. John Kasich that would have put the severance tax at 4 percent after one year.
The other is a bill sponsored by state Rep. Robert Hagan of Youngstown, D-58th, which would levy a 7.5 percent tax on oil and natural gas extracted by fracking. The revenue would go toward environmental funding and the establishment of a permanent severance-tax trust fund.
But most of the severance-tax revenue would go to local governments, a provision that was missing in the Republican proposal.
Hagan said the appropriations would act as a partial replacement for financial cuts to local governments that were made in the past few budgets and act as a way of preparing localities for when the shale industry is through.
“Ohio is missing the opportunity to invest in the future,” said Hagan, who characterized the competing proposal as a giveaway to the oil and gas industry.
Policy Matters Ohio also criticized the low rates in HB 375.
“They need to be higher, in line with other fracking states. If the severance-tax rate is based on value, collections fall as prices or production falls with market trends, cushioning the industry from disproportionate burden,” Policy Matters Ohio wrote in the conclusion of its analysis.
Researchers pointed to other Midwest states, which have severance taxes between 3 percent and 8 percent, more consistent with Hagan’s proposal.
But supporters of HB 375 argue that it is hard to compare severance-tax rates across states because resources and production vary with geography.
Policy Matters Ohio also criticized tax breaks in the bill that, it said, subsidize “the oil and gas industry through tax credits and exclusions.”
HB 375 would create a nonrefundable income-tax credit for the amount paid in the fracking severance tax.
“With this income-tax credit, the state boosts returns for all investors with interests in horizontal wells in Ohio,” the Policy Matters Ohio analysis said.
The focus of the severance tax, the group said, should be on investing within the state and offsetting the “public costs” of shale drilling, such as the toll on bridges and roads.
In addition to raising rates and trimming tax breaks, Policy Matters Ohio recommended that lawmakers increase revenue for oversight, knock out the income-tax reduction and base the tax on gross value, not the net.
“We must not lose the opportunity to harness the shale boom and invest in the future for all Ohioans,” Patton said in a statement.