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Ohio's Kasich Vetoes Tax Break for Oil/Gas Producers; Ends Renewables Freeze

Ohio Gov. John Kasich on Tuesday vetoed legislation that would have expanded a sales tax exemption for oil and natural gas producers, saying it would have cost the state too much and unfairly favored the industry.

Using his line-item veto power, the Republican governor struck down the provision in SB 235, lame-duck legislation that also changes unemployment compensation law, among other things. The veto stops the Republican-controlled legislature's efforts to expand a sales tax exemption on equipment used "directly" in producing oil and gas to cover all production-related purchases.

"The exemption in this item goes well beyond the direct use exemption for exploration and production and would result in a situation where oil and gas companies would be exempt from sales tax on almost everything they purchase," Kasich said in his veto message. "This new, broadened exemption from the sales tax would create future annual revenue losses to the state, counties and transit authorities in the tens of millions of dollars."

The provision would have been retroactive to June 30, 2010 and the Ohio Department of Taxation estimated that it would cost the state and local governments $264 million in refunds at a time when income and sales taxes have lagged projections over the last year. Kasich, who has supported an increase in the state's oil and gas severance tax in recent years, said the industry "already has a very favorable tax climate" in the state, and the provision would have created a "more favorable tax treatment for the oil and gas industry than for other industries."

The Ohio Oil and Gas Association had argued that the $264 million was never paid, saying the provision in SB 235 would not have led to refunds and was needed to clarify language in state law to define exactly what exploration and production is.

Also on Tuesday, Kasich vetoed another piece of legislation that could have essentially extended a freeze on mandates that require utilities to sell more power from renewable energy sources for another two years. The bill would have made renewable energy standards voluntary in 2017 and 2018. In 2014, the state froze for two years mandates passed in 2008 that require utilities to meet annual benchmarks, sell 25% of their electricity from renewable sources and eliminate energy waste among consumers by 22% by 2025.

In a nod to renewable energy, Kasich credited the industry with aiding the state's economic resurgence in recent years and said the bill would have undermined "energy generation options, particularly the very options most prized by the companies poised to create many jobs in Ohio in the coming years." The legislation would have "set back efforts that are succeeding in helping businesses and homeowners reduce their energy costs through increased efficiency."

The American Council for an Energy Efficient Economy called Kasich's veto "courageous in the face of opposition from legislators of his own party" and said energy efficiency programs in the state have saved Ohioans hundreds of millions of dollars and supported 78,000 jobs in the state over the last decade.

A two-year debate unfolded before the standards were frozen in 2014. The oil and gas industry was not involved in those discussions and sources said at the time that the freeze would be unlikely to boost natural gas demand. Coal-to-gas switching was already well underway across the country and a robust build-out of gas-fired power plants is underway in Ohio and across the Appalachian Basin, where dozens of facilities are either under construction or review. 

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