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Ohio Governor Complicates Severance Tax Debate with Another Proposal

Republican Ohio Gov. John Kasich on Tuesday proposed a 2.75% oil and gas severance tax, which is slightly higher than a delicate proposal put forward by his party now being debated in the state's House of Representatives.

For years now, similar to their counterparts in Pennsylvania (see Shale Daily, Jan. 28), Ohio lawmakers have been at odds in their fight to update the state's 40-year-old severance. In December, state House Republicans put forward a bill that called for a top rate of 2% that proposed the bulk of revenues go toward oil and gas regulators (see Shale Daily, Dec. 6, 2013).

In January, the House bill was said to be gaining unprecedented traction (see Shale Daily, Jan. 9). However, a month later the GOP revised the proposal to 2.25% after Kasich threatened a veto and indicated that the increase was too small (see Shale Daily, Feb. 12).

At the Ohio Oil and Gas Association's annual winter meeting earlier this month, many attendees expressed a renewed uncertainty about the fate of any increase, with many predicting that election year politics would serve as a roadblock.

Kasich's latest proposal is markedly lower than one he put forward last year that called for a severance tax production rate of 1% on natural gas and 4.5% on oil, natural gas liquids and condensate (see Shale Daily, June 11, 2013). The administration's latest volley came as part of a mid-biennium review. Additional funds raised through an increase would go toward Kasich's goal of lowering Ohio's income tax rate by 8.5% over the next three years, as well as workforce training and education.

Under his proposal, drillers would be able to recoup start-up drilling costs with an $8 million tax exemption on gross receipts. He also called for increasing the state's Commercial Activity Tax rate from 0.26% to 0.30%, which would also affect energy operators in the state.

"If this proposal becomes law, it has the real potential to place a chilling effect on the short and long-term economic value of this shale play," American Petroleum Institute Ohio Executive Director Chris Zeigler said. "This will not only negatively impact drilling and midstream development, but it could also jeopardize downstream growth in the manufacturing, chemical and polymers industries."

Zeigler said Ohio's energy industry already pays its fair share of taxes.

"Our members pay the same taxes paid by other businesses, in addition to the severance and ad valorem taxes unique to the industry," he said. "If this proposal were passed, our members would pay 10 times more in gross receipts tax than any other Ohio industry subject to the commercial activity tax. This is simply unworkable."

Kasich, though, pointed out that his proposal would keep Ohio's severance tax among the lowest in the nation. Ohio State University economics professor Mark Partridge indicated that the tax may not impede unconventional development.

"Gov. Kasich's revised severance tax proposal would benefit Ohio's economy and the quality of life of its residents, while ensuring the state reaps the long-term benefits of the recent energy boom," Partridge said. "The proposed low tax rate would have inconsequential effects on drilling activity and its structure would bring needed reforms to the state's antiquated severance tax system."

Kasich's proposal came one day after a group of think tanks in Ohio, West Virginia and Pennsylvania sent their state governors letters calling for a uniform severance tax rate across Appalachia no lower than West Virginia's 5% rate.

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