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Ohio's Kasich Continues Push For Unconventional Oil/Gas Severance Tax Increase

Ohio Gov. John Kasich on Mondayrecycled a failed budget proposal to increase the state's severance tax on unconventional oil and natural gas production to 6.5%.

Kasich rolled out his last biennial budget as governor on Monday, once again seeking revenue to fund a steep cut in the state's personal income tax rates. Kasich's 2018-2019 $66.9 billion budget proposes a 17% income tax cut and asks for more education funding. Money from the severance tax and proposed increases for other consumption taxes, such as the state sales tax and those on cigarettes and alcoholic beverages would primarily be used to cover the $3.1 billion needed to cut income taxes.

Kasich, a Republican, has consistently pushed an increase in the severance tax, equating it to a give-away for producers that pay far more in other states. He has proposed several rates since he took office in 2011, ranging from 1.5% to 6.5%. His latest proposal would also tax natural gas liquids at a rate of 4.5%, mirroring a failed 2015 proposal. Republican lawmakers, which bolstered their majorities in both chambers during the general election in November, have rejected the proposals every time, something Kasich acknowledged Monday is likely to happen again.

The industry has also railed against the proposals over the years. "Once again, the administration's severance tax proposal is not in tune with the current market realities surrounding oil and gas production in Ohio," said Shawn Bennett, executive vice president of the Ohio Oil and Gas Association. "While this industry continues to struggle from a market downturn, an increase of any kind would stifle development even further. For the Ohioans working in every facet of this industry including those who were laid off during the downturn, the last thing this industry needs is an added barrier to impede them from providing for their families."

The Utica Shale has been among one of the U.S. onshore's most ascendant plays in recent years. Production is expected to be about 3.9 Bcf/d this month, according to the Energy Information Administration. Since the first commercial Utica wells came online about six years ago, the state has permitted 2,359 horizontal wells and operators have drilled 1,889 of them. The industry does, however, enjoy one of the nation's lowest severance tax rates, paying 3 cents/Mcf for natural gas and 20 cents/bbl for oil.

Kasich has been a proponent of increasing consumption taxes versus income taxes over the years to help spur the state's economy. He said taxes have been cut by about $5 billion during his time in office. "This budget builds on the ideas we have shown are working: spending restraint, tax cuts and reform, and helping Ohioans prepare for in-demand jobs," the governor said in a letter included with his budget.

He proposed in 2015 a 23% income tax cut, but lawmakers passed a 6.3% cut instead. That year, an Ohio legislative task force, charged with exploring the possibility of increasing the state's severance tax on shale production, issued a 56-page report that failed to recommend a new rate and cautioned that any hikes should be slowly phased in.

State House Speaker Cliff Rosenberger said this month that lawmakers were not going to consider a change to the state's severance tax. Kasich, however, said his proposal to increase it would generate $448 million over the next two year budget cycle, which begins in July.

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