New and lower severance tax for drilling bodes well for state
For more than three years now, Ohio Gov. John Kasich, state legislators, mineral drillers, environmentalists and others with a stake in the state’s burgeoning oil and gas drilling industry have debated an increase in the tax on removing or severing rich natural resources from the Buckeye State’s soil and water.
Today, compromise on a severance tax for oil and gas producers appears within reach. With some minor tinkering to move some of the revenue produced from the new tax to the strained coffers of Ohio’s local governments, the proposal — outlined in House Bill 375 in the General Assembly — emerges as a fair and constructive resolution to the debate.
The major difference in the new proposal lies in its direct and less adverse impact on the state’s drilling companies. A proposal that gained strong traction last year from Kasich sought a 4 percent severance tax on producers. The new proposal significantly lessens that tax burden to a 1 percent tax on the gross value of oil and gas from horizontally drilled wells in the first five years of production. After that period, the rate would increase to 2 percent for high-producing wells and drop back to 1 percent when production declines 1 percent.
As Thomas Stewart, executive vice president of the Ohio Oil and Gas Association, pointed out in a meeting with The Vindicator Editorial Board earlier this week, the assets of the new proposal are simply matters of dollars and sense.
It would make little economic sense to discourage growth of the state’s most promising growth industry by scaring potential developers away to any of the other 29 active shale plays across the nation, many of which have lower tax rates.
Beyond its lower costs to producers, HB 375 also boasts safety and environmental benefits that should satisfy the concerns and lessen the fears of opponents of hydraulic fracturing. A healthy chunk of severance-tax proceeds will be funneled into drilling regulatory and monitoring programs under the auspices of the Ohio Department of Natural Resources. It will add sharp teeth to the enforcement provisions of Ohio Senate Bill 365, which made Ohio one of the toughest states in drilling-safety regulation.
Another chunk of the funding will be used to cap hundreds of abandoned and orphan oil and gas wells, which pose significant health and safety risks to our state’s residents.
REDIRECT INCOME-TAX RELIEF
As currently written, however, the remaining revenue from the severance tax would be channeled into a reduction in the income tax for all working Ohioans. On the surface, that sounds like a populist win-win scenario for industry growth and personal tax relief. On closer inspection, however, the amount of relief would be negligible.
That annual income-tax reduction would amount to about $25 to $50 per person, estimates State Rep. Sean O’Brien of Brookfield, D-63rd. He, state Sen. Joe Schiavoni of Boardman, D-33rd, and others would prefer to channel those dollars to cash-strapped communities directly affected by the drilling. Even though drilling companies have routinely formalized agreements with county engineers to protect roads, bridges and other infrastructure, the added revenue to local governments for dealing with the costs of drilling would provide an additional cushion and needed insurance.
As HB 375 begins its long and winding path through the chambers of the legislative process, now is the time for township, city and county officials to urge state representatives and senators to redirect a portion of the proposed severance-tax proceeds back to their communities. Doing so will ensure the new tax provides the biggest bang for the buck for the drilling industry, for its regulation and oversight and for its positive impact on the state’s environment and economy.