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Ohio Governor Proposes Two-Tier Severance Tax Structure

Ohio Gov. John Kasich unveiled his proposed biennial executive budget on Monday, which includes a two-tier severance tax structure that would, for the first time, differentiate between horizontal and vertical wells drilled into the emerging Utica Shale.

Kasich's budget for fiscal year (FY) 2014 envisions total spending of $63.7 billion, followed by total spending of $66.8 billion in FY 2015.

The hallmark of the governor's 759-page budget is to cut state income taxes by 7.5% in 2013, followed by additional cuts of 7.5% in FY 2014, and 5% in FY 2015. Kasich said new severance taxes on oil, natural gas and natural gas liquids (NGL) would help pay for the cuts.

"The reforms in this budget are the next steps in moving Ohio further down the road toward solid, sustained prosperity for all of us," Kasich said. "Together, we have taken steps to get Ohio back on track, and I am confident we can continue to make Ohio a better place to work, live and raise our families."

Under Kasich's plan, natural gas from horizontal wells would be taxed at 1% of gross receipts, while NGLs, oil and condensate from horizontal wells would be taxed at 4% of gross receipts. Tax rates would also depend on four classifications for BTU content, spot prices for natural gas and NGLs, and the length of time the well has been in production.

Ohio's current severance tax rate is $0.025/Mcf for natural gas and 10 cents/bbl for oil. Revenue from severance taxes on vertical wells would continue to be credited to funds controlled by the Ohio Department of Natural Resources. Meanwhile, revenue from the new severance taxes on horizontal wells would be allocated to the state's general fund. The state began imposing an oil and gas regulatory cost recovery assessment of 10 cents/bbl for oil and $0.005/Mcf for natural gas beginning on July 1, 2010.

Two models in Kasich's proposed budget calculated that new severance taxes would bring in between $43.5 million and $45 million in additional revenue for FY 2014, and between $149.7 million and $155 million during FY 2015.

Kasich's proposal would give environmental and natural resources the largest increase in FY 2014 ($116.6 million, a 19.1% increase over FY 2013), and transportation and development would receive the biggest boost in FY 2015 ($423.9 million, a 5.8% increase).

Officials representing the oil and natural gas industry have started to deride Kasich's plan.

"While we agree with the governor that all Ohioans should benefit from development of the Utica Shale, the last thing a recovering economy needs is more taxes; and the last thing Ohio's economy needs is a hefty tax increase that will harm job growth," Robert Eshenbaugh, a legislative analyst for the Ohio Petroleum Council, said Monday. "This proposal is ill-conceived and ill-timed."

Kasich's latest severance tax plan is very different from one he made last March that was ultimately torpedoed by his fellow Republicans in the GOP-controlled House of Representatives (see Shale Daily, March 20, 2012; March 15, 2012).

Under Kasich's former plan, unconventional wells producing oil and NGLs would have been taxes at a rate of 1.5% of gross receipts for the first year. Producers that didn't recoup their investment by then could apply to extend the 1.5% rate for a second year, but otherwise they would pay a standard rate of 4% of gross receipts annually for the remainder of the life of the well.

The governor's former plan also called for taxing unconventional gas wells at 1% of gross receipts; eliminating the severance tax on conventional gas wells that produced less than 10 Mcf/d; taxing conventional wells that produced more than 10 Mcf/d by 1% on gross receipts up to a cap of 3 cents/Mcf; and implementing a $25,000/well fee to benefit local governments. Taxes for conventional wells producing oil and NGLs would not have changed.

It was unclear if Republicans would oppose Kasich's latest severance tax proposal as well. According to reports, Ohio House Speaker William Batchelder (R-Media) attended Monday's budget announcement by the governor and nodded in agreement during the press conference.

In December, Republican leaders, including Batchelder, indicated that they would consider new severance taxes on hydraulic fracturing and NGLs (see Shale Daily, Dec. 24, 2012).

"Ohio's future is bright, but our state can do even more, provided the state government does not create obstacles based on a flawed fiscal framework," Eshenbaugh said.

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