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A revised severance-tax bill, introduced last month by Republicans in the Ohio House of Representatives, proposed a higher tax rate and shortened the period before it would take effect, riling a top oil and gas industry representative.
Tom Stewart, president of the Ohio Oil and Gas Association, which represents drillers throughout the state, took exception to the substitute bill, which would raise the top tax rate on the net value of natural gas produced from horizontally fractured wells from 2 percent to 2.25 percent.
But the most-significant change, he said, was a provision that would enforce that rate after two years of production, instead of five.
“That’s a huge issue,” he said in an interview.
The shorter window would give producers less time to recover the cost of drilling and overburden them with tax obligations, he said.
“On average, five years probably gives level playing ground across the state of Ohio,” Stewart said. A two-year window before the higher rate kicks in “is not reality.”
The initial severance-tax bill, introduced in December and sponsored by House Speaker Pro Tempore Matt Huffman of Lima, R-4th, proposed a 1 percent tax on the gross value of oil and natural gas from fracked wells for the first five years of production. After that, the rate would have risen to 2 percent for high-producing wells and then dropped back to 1 percent when production declined.
The OOGA was heavily involved in the crafting of that proposal, and the industry group publicly endorsed the bill on the day it was introduced with the backing of House leadership.
Since then, the severance tax has had six hearings in the House Ways and Means committee, and the governor’s office has lobbied for a rate of 2.75 percent.
Last year, Republican Governor John Kasich proposed a rate of 4 percent, but that bill was shut down by Republicans in the Legislature.
The new, slightly higher rate is coupled with a provision in the substitute severance-tax bill that would no longer exclude producers from paying a 0.26 percent commercial-activities tax.
The CAT is an annual fee businesses pay for the privilege of operating in the state of Ohio.
Though it sounds nominal, Stewart said that the increased rate represented a tax, in and of itself. He argued that it is unfair to force producers to pay the additional fee when they are already paying taxes that apply only to the oil and gas industry.
“[Producers] are adding tax value in Ohio,” he said. “Because they have industry-specific taxation, they deserve an exemption from the CAT to avoid double taxation.”
Still, state Rep. Sean O’Brien of Brookfield, D-63rd, said the revised severance-tax bill did not go far enough for many Democrats, who want a higher rate and more money going back to support local governments.
“We don’t want to tax them out of business, but we want to be fair and equitable,” he said. “We’re not getting our fair share.”
Unlike the initial bill, the revised version directs some funds to support governments in areas bearing the infrastructural brunt of drilling, but the bulk of the revenue goes toward a state-wide income-tax cut.
“I’m not against tax breaks, but when we could use that money to create jobs, it just seems like a better use,” O’Brien said.
Stewart said he expects to see another substitute bill emerge in the House, but there is no room to negotiate a higher severance-tax rate.