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Ohio House GOP Nixes Governor’s Severance Tax Proposal

Republican leadership in the Ohio House of Representatives on Tuesday unveiled their version of the state's two-year operating budget, which would cut nearly all of the tax reforms proposed by Gov. John Kasich, including a 6.5% severance tax on unconventional oil and natural gas production.

Substitute HB 64 would reduce Kasich's $72.3 budget by $777 million. House majority leaders said Kasich's proposals to increase the state sales, commercial activity, cigarette and severance taxes -- floated to help fund a $5.7 billion, 23% income tax cut -- had been removed. Instead, they proposed a $1.2 billion, 6.3% income tax cut.

House Speaker Cliff Rosenberger said, however, that an oil and natural gas severance tax has not been ruled out. House Republicans are proposing that a tax commission be formed to discuss, research and make recommendations concerning the tax and other reforms.

"Overall, on tax provisions, I just want to say that I believe in what the governor is trying to do and where he is trying to go long-term with our state,” Rosenberg said. “What I want to do is continue that ability and continue what I think is a pretty good glidescope. Ohio's doing well. I don't think there's a problem to take this opportunity right now and time-out a little bit to let everybody catch-up. Most importantly, my thing is predictability and allowing companies and others to have that time to know what's coming."

House Finance Committee Chairman Ryan Smith said the commission would take a "larger more comprehensive look" at tax reform and how it may affect the state. The commission would include House and Senate lawmakers as well as Kasich's tax commissioner and budget director. Various industries would also be invited to participate in those discussions, Rosenberger said. The last time the state formed such a commission was about a decade ago under former GOP Gov. Robert Taft, who oversaw a 21% income tax reduction.

"It's high time we sit down together again in a room and start working toward that ultimate goal," Rosenberger said, referring to tax reform. "I would predict that at least by the end of this general assembly, we should be able to have strong recommendations going into the next budget. We don't want to rush this; that's our goal and our message."

The American Petroleum Institute (API) of Ohio applauded Republican's move to cut out the severance tax proposal and it welcomed the commission, saying more cooperation would result in a better solution for both the state and the oil and gas industry.

"Developing broad-based tax policy outside of the narrow confines of the biennial budget and at the appropriate time will allow for more focused analysis and greater stakeholder feedback," said API Executive Director Chris Zeigler.

Since taking office in 2011, Kasich has proposed several severance tax increases, but his latest was the largest yet (see Shale Daily, March 12, 2014; June 11, 2013; April 15, 2013). Under his plan, Kasich wanted to tax 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). That riled industry representatives, who said at the time there was little ability to absorb that kind of an increase because of sinking commodity prices.

Shale drillers set state records in the fourth quarter, producing 3.5 million bbl of oil and about 164.8 Bcf of natural gas, according to state data (see Shale Daily, Feb. 26). From 2013-2014, oil production in the state increased 200%, while unconventional natural gas production increased by 350% -- driven mainly by the Utica Shale.

Ohio Department of Taxation spokesman Gary Gudmundson said the industry has been sheltered long enough and added that Kasich's proposed increase was a fair one in line with neighboring states.

Rosenberg, however, indicated Tuesday that an increase would likely be much lower under Republican leadership in the House and Senate. He pointed to HB 375, which passed the chamber last year and called for a 2.5% severance tax on oil and natural gas from horizontal wells (see Shale Daily, May 15, 2014). That bill stalled in the Senate at the end of last year, where lawmakers were distracted with other legislation and were said to be waiting for Kasich's budget proposal (see Shale Daily, Nov. 19, 2014). Currently, all oil and gas producers in the state pay 2.5 cents/Mcf of natural gas and 10 cents/bbl of oil.

In all, the House made 200 amendments to Kasich's budget. Additional public hearings are scheduled on the substitute bill ahead of a final vote by the full House next week.

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