An Ohio legislative task force, charged with exploring the possibility of increasing the state's severance tax on unconventional oil and natural gas production, issued a 56-page report on Thursday that failed to recommend a new rate and instead cautioned that any hikes should be slowly phased in.
The report acknowledged that the oil and gas industry is "under financial duress," with lawmakers asserting that exploration and production companies can ill afford new taxes at a time when oil and gas prices show no signs of a rebound. The report included roughly one page of recommendations and suggested establishing benchmarks, or triggers, that would have to be met before any rate hikes could be implemented. It stopped short of detailing the triggers, though.
The task force's work is part of Ohio's 2020 Tax Policy Study Commission, which is also exploring a flat income tax and examining tax credits and exemptions, among other things. The commission was created with a provision in the state's latest biennial budget. Over the summer, after lawmakers failed to reach a compromise on the severance tax for inclusion in the budget, Republican leaders from the Ohio House and Senate said the task force would be created to generate more information for the general assembly to use in passing a higher rate (see Shale Daily, June 16).
Its report was due Oct. 1, but the budget provision establishing the commission did not take effect until late last month, which delayed the work. State Sen. Bob Peterson, a member of the task force and a co-chairman of the broader commission, told news media the group would not recommend a higher rate unless it was delayed and phased in.
Republican Gov. John Kasich, who since taking office in 2011 has proposed increasing the severance tax on several occasions by anywhere from 1.5-6.5% to help offset income taxes, called the task force's work "disappointing" and said in a statement he would continue to push for an increase (see Shale Daily, Feb. 3). Ohio currently has one of the lowest severance taxes in the country, charging 20 cents/bbl for oil and 3 cents/Mcf for natural gas.
In its report the study group did say, however, that "Ohio's total tax burden on the oil and gas industry is lower than or as low as every other state with a severance tax."
But it cautioned against increasing the rate anytime soon, stressing in its report that the state "should not expect to see a new revenue stream materialize overnight until market conditions improve." It added that any new revenue from an increased tax should be redirected to impacted communities; used to offset income taxes and to stimulate the state economy.
Shawn Bennett, executive vice president of the Ohio Oil and Gas Association, commended the task force's findings and said his organization supports its recognition of the downturn in the industry.
"OPEC continues to manipulate the market in an effort to stifle the industry's ability to continue investing in development, and we face an increasingly unpredictable and costly regulatory system at the federal level," Bennett said. "Increasing regulations or taxes at this time would have a significant negative impact on the workers, landowners, businesses and industries throughout the state related to oil and gas development."
The report is now expected to be considered by the broader tax policy commission as it works on its own recommendations for the state legislature.