A ballot initiative sponsored by former natural gas industry executive Sheffield Nelson to raise Arkansas' severance tax on natural gas production has passed the muster of the state attorney general and would go before voters next year if proponents can garner enough signatures.

The current severance tax was ranges from 1.25% to 5%, depending on production and cost recovery. Under Nelson's proposal -- the Natural Gas Severance Tax Act of 2012 -- a flat tax of 7% would be imposed on producers across the board, with 95% of the revenue generated going toward construction and repair of the state's highways, streets and roads.

"They're tearing the roads to pieces," Nelson, who is also a former Arkansas gubernatorial candidate, told NGI's Shale Daily on Tuesday. "The state has identified $450 million worth of damage that huge trucks have caused in the gas producing area. This is to try to make them pay for part of what they're doing to our environment and our road system. They're causing some pretty tremendous damage."

Arkansas Attorney General Dustin McDaniel approved the language of the ballot initiative on July 8. Nelson now needs to secure 62,500 valid signatures by July 2012 for the proposal to be on the ballot in November 2012. If passed, the tax act would take effect on Jan. 1, 2013.

Nelson said the state's current severance tax yielded revenues of $54.6 million between November 2009 and October 2010, and that his proposal would have brought in $250 million during the same time frame. He also said raising Arkansas' severance tax rate to 7% would bring it more in line with neighboring states.

Texas currently has a 7.5% severance tax rate and Oklahoma's is 7%. Louisiana charges 16.4 cents/Mcf, a rate Nelson said comes out to the 6% area.

"This doesn't even get into the environmental problems they are creating," Nelson said. "That will require a separate valuation."

Tim Leathers, spokesman for the Arkansas Department of Finance and Administration, told NGI's Shale Daily that most of the state's wells aren't being charged the 5% rate.

"There are a whole lot of wells that have not recovered cost and are not at the higher level of production, so they're not paying that rate," Leathers said Tuesday. "Probably the majority of them are in that 1.25% rate."

Nelson concurred. "The average for what is being taken out of the ground is around 1.5%," he said. "Very little of the gas is priced at the higher levels."

Kelly Robbins, executive vice president of Arkansas Independent Producers & Royalty Owners (AIPRO), told NGI's Shale Daily that the organization and its members were opposed to the tax increase because it would follow another made less than three years ago.

"It was a dramatic increase over what had been on the books for many years in Arkansas," Robbins said Tuesday. "If that current rate and structure were to be increased yet again, it would be an indication of an unstable tax policy here in the state, and would certainly affect where producers and operators invest millions of dollars in producing natural gas. There are many other options available to them, and we need to keep out our 'open for business' sign."

Nelson had proposed raising the state's severance tax rate in 2008 to 7% of market value before deferring to Gov. Mike Beebe, who succeeded in getting lawmakers to approve a more modest increase (see Daily GPI, April 3, 2008; March 12, 2008). That marked the first hike in the tax in more than 50 years, to 5% of the market value of gas extracted from three-tenths of a cent per Mcf.

On the issue of bringing Arkansas more in line with its neighbors' severance taxes, Robbins said, "That's not a true apples-to-apples comparison. Other states allow exemptions for certain things, and to use a percentage tax rate is not a fair comparison.

"This would make Arkansas less attractive when you have numerous other shale plays, some of which have no severance tax at all. Those who are investing millions of dollars are going to look at places where the money and operations are best invested. It would make Arkansas much less competitive."

Nelson -- a lawyer and former politician who once served as CEO of Arkansas Louisiana Gas Co., now CenterPoint Energy -- said AIPRO's resistance didn't paint a complete picture of the debate surrounding his tax proposal.

"[AIPRO] is a strange place to be getting information from because they have nothing to do with that large industry up there," Nelson said. "They represent the small producers in the state. They were just trotted out by the large companies. They are saying some of these large companies would leave Arkansas if this [tax increase] took place, and that's false.

"You won't find corporate leaders saying that sort of thing because they know they would trigger a lot of things, being publicly held companies. They wouldn't dare make a statement like that unless they can back it up."