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Governors in Ohio, Pennsylvania Touting Energy Industry Tax Reform Plans

Ohio's Republican Gov. John Kasich continued his push for a 6.5% severance tax on oil and natural gas produced by the state's shale drillers, calling current rates "unconscionable" and outdated during his State of the State Address on Tuesday.

"Look, no tax is great, but some are worse than others. I don't know if you've ever studied that some taxes have a greater drag on economic growth than other taxes," Kasich said during an address delivered in southwest Ohio. "So, if we're going to raise taxes -- or if we're going to have taxes -- let's have the taxes that have the least negative impact on the private economy so we can create jobs."

Earlier this month, as part of an effort to considerably slash the state's personal income tax rate, Kasich unveiled a plan to tax unconventional oil and gas volumes at 6.5% and provide a lower rate of 4.5% for natural gas liquids to reflect the additional processing costs associated with them (see Shale Daily, Feb. 3). His $72.3 billion two-year budget aims to reduce the state's income taxes by 23%, for a reduction of $5.7 billion by 2017. That would be offset by $5.2 billion in tax increases through raising the oil and gas severance tax, the commercial activity tax, the state's sales tax rate and its tobacco tax rate.

Currently, all oil and gas producers in Ohio pay 2.5 cents/Mcf and 20 cents/bbl of oil. Kasich said he doesn't "know anybody who lives in Ohio who would not like to sign up" for his severance tax plan given how low the state's current rates are.

"Ohio's being made poorer as a result of the depletion of our resources. It's like oil and gas itself. Much of the wealth the shale boom is generating is being shipped out of our state, being shipped out of Ohio," Kasich said. "We need to change that while at the same time making sure that Ohio's long-time small drillers -- the ones who have been around for years and make very little little money -- we want to just get rid of their income taxes altogether. But we also want to make sure that local governments are supported when their calls for first responders and infrastructure or other essential services are forced to go up because of the oil and gas activity."

Kasich has proposed several severance tax increases, ranging from 1.5% to 4.5%, since he took office in 2011 (see Shale Daily, March 12, 2014; June 11, 2013; April 5, 2013). His latest is by far the largest and has been widely criticized by industry.

"I'm disappointed by those who say the severance tax reform will kill the industry," Kasich said. "That's a joke. That's a big fat joke because I've talked to them in private. And I'll tell you what, our severance tax will still be competitive with [other] energy-rich states. And you know what? Let's reform the severance tax so all Ohioans can have lower income taxes and we all benefit from this whole industry. That's what it should be all about."

American Petroleum Institute Ohio Executive Director Chris Zeigler said after the speech that Ohio's economic prosperity is currently tied in part to the oil and gas industry. He said "policy decisions must take into consideration long-term and broad-based economic benefits and opportunities that advance both the state's economy and growth of our industry.” Zeigler said Kasich's proposal falls short on those considerations.

In Pennsylvania, Democratic Gov. Tom Wolf, who took office in January, is pushing for a 5% flat tax rate based on the market value of natural gas, plus a 4.7 cent/Mcf volumetric fee (see Shale Daily, Feb. 11). Under Wolf's plan, the impact fee, which currently charges a flat fee for all wells in the state no matter how much gas is produced for allocation to local communities and state agencies, would be rolled into the severance tax.

On Wednesday, ahead of his first budget address next week, Wolf appeared to soften the blow by outlining reforms he will include in his 2015-2016 budget aimed at attracting business and stimulating the state's economy.

Wolf said a tax relief package would include a proposal to reduce the state's nearly 10% corporate net income tax -- one of the highest in the country -- by half within two years to 4.99%. Oil and gas trade groups in the state have expressed concern about Wolf's severance tax proposal because they claim it would add to operator's existing state tax burden (see Shale Daily, Dec. 17, 2014). Pennsylvania shale producers have paid more than $2 billion in taxes, including corporate net income tax, since 2012 on top of the more than $630 million paid in impact fees (see Shale Daily, April 4, 2014).

Wolf is also proposing that the state's capital stock and franchise tax, which lawmakers have been working to phase out in recent years, be eliminated "once and for all."

"We need to rebuild the middle class, and we can do that by creating jobs right here in Pennsylvania," Wolf said. "For too long, the commonwealth of Pennsylvania hasn't been a place where businesses want to come, invest and grow. Country-leading high corporate tax rates have slowed existing businesses from expanding and entrepreneurs from growing new ideas here." Wolf is expected to highlight his first budget on Tuesday during an address before the General Assembly.

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