Ohio Gov. John Kasich will reportedly unveil a proposal next week to restructure state taxes on oil and gas drilling -- including implementing new taxes on hydraulic fracturing (fracking) and natural gas liquids (NGLs) -- then pass the savings along to Ohioans in the form of a personal income tax cut.

According to various media reports, Kasich's plan calls for maintaining what is essentially a severance tax rate of 20 cents/bbl for oil, but the rate would only apply toward conventional wells. Oil produced through fracking would be subject to a 1.5% tax on gross receipts during the first year of a well's operation, increasing to 4% for the second and every subsequent year.

Meanwhile companies that produce less than 10,000 cf/d of natural gas through conventional drilling would no longer pay a tax. Companies that produce more than 10,000 cf/d would pay a 1% tax on gross receipts, and unconventional wells would be subject to an additional 1% tax on gross receipts, regardless of the amount of natural gas produced.

The Republican governor's plan would also implement a new tax on NGLs to follow the same rate as oil from fracking: 1.5% on gross receipts during year one of a well's operation, followed by 4% for the second and every subsequent year.

Although Kasich purportedly wants to save Ohioans some money on their income taxes, his plan would also apparently divert about $17 million of tax revenue to help pay for regulation of the oil and gas industry.

Kasich spokesman Rob Nichols told NGI's Shale Daily that media reports of the governor's plans were accurate.

"We're looking for ways to reduce the income tax," Nichols said Monday. "We're looking for ways that all Ohioans can benefit from natural gas. We'll have more to say about this next week as part of our mid-biennial review."

Ohio currently has the lowest tax rate among states with shale gas potential: 10 cents/bbl for oil and $0.02.5/Mcf for natural gas, although the state began imposing an Oil and Gas Regulatory Cost Recovery Assessment of 10 cents/bbl for oil and $0.00.5/Mcf for natural gas beginning on July 1, 2010. The state brought in an estimated $2.53 million in severance taxes during the 2010 fiscal year -- about $2.06 million for natural gas and $474,886 for oil -- plus another $613,000 in combined oil and gas assessment costs.

Mike Dittoe, spokesman for House Speaker William Batchelder (R-Medina), told NGI's Shale Daily that the speaker and other members of the Ohio House of Representatives Republican Caucus have been in discussions with Kasich and were awaiting his official proposals. But he indicated that higher taxes might be a nonstarter with some members of the Republican-controlled General Assembly.

"The speaker and other legislative leaders are certainly open to hear what the governor has to say about the matter," Dittoe said Monday. "Nobody has taken a public position on this issue yet because we simply don't have language in front of us to review. There are a lot of ideas that come up in concept, [but] when they're formally introduced it's a different issue and there are different numbers involved.

"The discussions with the governor have been thoughtful, but anything that does cause a tax increase on anyone or any entity typically would be a concern for most members of the House Republican caucus. For the last year, our caucus has been promoting the fact that we unanimously [acted to close] an $8 billion budget deficit without raising taxes on any Ohioans. Obviously the caucus is very proud that we were able to do that while still maintaining vital services in this state.

"At this point, since we do not actually have a bill before us, it's premature to determine what exactly the final outcome will be, if any, on any sort of bill like this."

Tom Stewart, executive vice president of the Ohio Oil and Gas Association, and Trent Dougherty, an attorney for the Ohio Environmental Council, could not be reached for comment Monday.

Last week two Democratic members of the Ohio General Assembly announced they were drafting a bill that would raise the state's severance tax on oil and gas drilling to 7% of a well's gross receipts (see Shale Daily, March 1). Rumors that Kasich was considering implementing a new tax on NGLs -- as well as raising oil and gas severance taxes -- first surfaced in early February (see Shale Daily, Feb. 3).