Ohio budget: Shale gas industry may feel hit if governor’s severance tax enacted

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COLUMBUS — Ohio Gov. John Kasich is proposing cuts in the state income tax in his next budget, but that could mean an increase in the severance tax, sales tax and cigarette taxes.

Severance tax

Ohio’s current severance tax is a volume-based tax, imposed on oil and gas at a rate of 20 cents per barrel and 3 cents per million cubic feet.

Under the 2016-2017 budget proposal unveiled Feb. 2 by Kasich, small, traditional producers would not be taxed at all.

For larger producers using hydraulic fracturing in their wells, the tax would be imposed at a rate of 6.5 percent of the price of the oil or gas sold at the wellhead, or 4.5 percent of the price paid downstream from the wellhead.

Shale counties

After providing for regulatory needs such as the Ohio Department of Natural Resources, 20 percent of the increased tax revenue would be earmarked for the shale counties, to reimburse them for infrastructure and other costs associated with new drilling.

Industry response

Shawn Bennett, executive vice president of the Ohio Oil and Gas Association, said the industry’s frustration with the severance tax proposal is its timing.

“We are in survival mode at this moment,” said Bennett.

He said the state needs to do everything it can to keep the oil and gas industry in Ohio, and not increase the burden it is already facing.

“We have companies operating here in Ohio that are cutting capital budgets, laying down rigs and drilling less in 2015 than in 2014. We don’t need to give them another burden,” said Bennett.

He added that with current commodity prices, there is little benefit to companies to process natural gas liquids, or NGLs (like butane, propane, ethane). Increasing taxes means the companies will have even less incentive to increase the use of NGLs.

“Companies are looking for the best return on their investment,” said Bennett.

He urged state leaders to remember that the decrease in shale drilling will not just mean the loss of industry jobs, but spin-off jobs as well.

“They could all be threatened in today’s market,” said Bennett.

OFBF response

Brandon Kern, director of state policy for the Ohio Farm Bureau Federation, said the OFBF stands firm on its policy voted on by members in 2013 — the farm group is against increasing the severance tax in order to lower the income tax.

However, the goal is still to make sure the state keeps operating. So, if state regulators like the ODNR are fully funded, and a portion of the proceeds goes back to the counties impacted by the shale drilling, and the measure calls for landowner protection, then the OFBF can stand behind it.

“It’s a step forward. It will be interesting to see how budget hearings go and how the counties handle it,” said Kern.

The tax changes proposed by Kasich are not limited to the severance tax or the cuts in the income tax.

Kasich is also proposing a $120 million debt relief fund to help residents repay college loans.

The income tax rate would be cut by 23 percent over the next two years under the budget. The top rate would decrease from about 5.9 percent in 2011 to 4.1 percent in 2017.

The budget plan also calls for the increase in the tax on cigarettes from $1.25 to $2.25 a pack.

Sales tax

The state sales tax rate will be increased from 5.75 percent to 6.25 percent. In addition, the tax base will be broadened by expanding it to a number of services, including cable TV subscriptions and parking.

Kern added that with 23 different tax changes proposed in the governor’s budget, the OFBF and others will need time to complete a thorough analysis of the plant.

“We are still pretty early in the budget process,” said Kern.

He said the goal will be to make sure state programs like water analysis and protection get the funding they need, no matter how the budget is funded.

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6 COMMENTS

  1. After they took our property rights and destroyed our infrastructure… Shawn Bennett, executive vice president of the Ohio Oil and Gas Association, said “the state needs to do everything it can to keep the oil and gas industry in Ohio, and not increase the burden it is already facing”

    Oil & Gas wants us to pay twice… now that they saturated the market resulting in low prices. Additionally they want ALL of the tax LOOPHOLES.

    It is time for producers to pay their fair share and provide fair funding for essential services for depleting this valuable resource.

  2. I agree Joe. Here in PA they give companies tax free business status for ten years, then they leave. Idiots in our governments screw “us” the property tax payers and give to “Big Money”. Now, they plan on exporting gas. Watch your electric and heating bills. I would charge them 10 percent tax of all products they are selling from their well heads.

  3. Taxes, schmaxes.

    He added that with current commodity prices, there is little benefit to companies to process natural gas liquids, or NGLs (like butane, propane, ethane).

    Folks: the natural gas and crude petroleum markets are being manipulated by the mega-producers to run the shale folks out of business. Txaes won’t matter much.

    The Saudis want to “kill” America’s shale industry, so they are pumping like madmen to run the “shalers” out of business. Last I heard, Saudis can break even at $25/bbl. Shale can’t do that; no way. Their profit point is like $70-$90/bbl and that just ain’t happening now.

    Indeed, there’s a whole lotta high-yield junk bonds floated by the shale producers and these bonds may crash, burning a lot of people, TBTF banks, and even some pension funds if they’ve invested in “high yield junk bonds” like this. This is what you get with “fake” free enterprise today.

    Want a good read on what happens in 2015 (and have your crying towel handy) try this:
    http://kunstler.com/forecast/forecast-2015/

    it’s called “Life in the “Broke Down Lane” by a fellow who says “peak oil” has come and gone and we are on the down slope. He may or may not be right, but read his other points where he’s 100% on-the-money.

    CHEERS!

  4. Just another example of the shortsightedness of a politician !!!!!!!!!! Companies don’t pay taxes it just downstream to the user as cost of doing business we are a bunch of sheep that keep being screwed by thinking you can do something for nothing . There is always a cost and these crooks who are in control take care of themselves.Every-time somebody takes a risk and makes something work then in come the greedy and want some only to screw the end user,this is crazy

  5. Don’t you guys realize that if you are a landowner with a lease with an Oil & Gas Company you will ultimately be paying 17%+ since many leases were written requiring the landowner to share proportionately any tax relative to his or her royalty payment. So lets assume you are a farmer with 200 acres leased to an oil/gas company and ll your acres are included in a unit with 2 producing wells on it. If your monthly royalty check is $160,000 (used $400 royalty per month per acre per well) not only will you have to pay Income Taxes (Local, State and Federal + Obamacare Tax) in excess of 50% after you receive your check but now the Governor wants to tax your royalty monies 6.5% before you even get them so your monthly check drops to $149,600 and only 20% of that added tax amount would come back to benefit your local government for infrastructure improvements, etc. while the rest goes into the state treasury to reward 99% of the folks who didn’t have to do anything to get it and you, the landowner who had to give up 10 to 15 acres for a well pad from your tillable acres gives the Governor $10,400/monthly of your income so the rest of the state who didn’t have to lift a finger for it get an income tax reduction. How can that possibly sound Fair unless you are a Socialist?

    • Dan : I agree with what you are saying. Please keep making your point because you are right about farmers taking the hit from Royalties and then CAUV. Jim

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