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Economist Backs Arkansas Severance Tax Hike

Former natural gas industry executive Sheffield Nelson has enlisted the aid of economist Charles Venus in his campaign to raise the severance tax that Arkansas levies on natural gas production. Raising the tax to 7% would mean an additional $155 million per year for state coffers, the equivalent of less than a day and a half of profits for ExxonMobil, Venus said recently.

"What the proposed severance tax does is require that the large gas-producing companies pay about one day's profits each year to repair the Arkansas roads that they helped to damage," said Venus.

The current severance tax is capped at 5%, but it can be lower depending on the type of gas well in question. The existing tax was adopted in 2008 with the intent of generating $100 million annually. Nelson has said his measure would raise $250 million a year.

Nelson, a Republican who was a chairman of Arkla Inc. and a former gubernatorial candidate, is now leader of the Committee for a Fair Severance Tax. He has been pursuing the severance tax increase for a while in the home of the Fayetteville Shale (see Shale Daily, July 11, 2011). Polls taken earlier this year found opposition to the tax hike (see Shale Daily, April 24). Some have said a tax hike would threaten the continued development of the Fayetteville, which earlier this month a University of Arkansas and Arkansas State Chamber of Commerce credited for saving the state from the recession (see Shale Daily, June 12).

Venus said "quite a lot of natural gas is produced in Arkansas, but little or none of it is actually consumed here." All or nearly all of the gas produced in Arkansas is consumed in other states. Additionally, the state consumes some gas that was produced in Oklahoma, Texas and Louisiana, according to Venus.

"...[R]egardless of the severance tax rate in Arkansas, we [gas consumers in Arkansas] wouldn't pay any of it because we don't consume that gas," Venus said. "And you might even conclude that we are paying the severance tax levied on the Oklahoma, Texas and Louisiana gas that we do use."

By the economist's tally, 28 states have a natural gas severance tax. Alaska's is the highest at 25%; Montana's is 12.16%, and the Kansas severance tax is 8.3%. The Texas tax rate is 7.5%, while Oklahoma's is 7.1%, and Louisiana's is 4.48%, according to Venus.

"An interesting feature of some of the severance tax laws is that the product is exempt from most of the tax until all costs of the well are recovered, in other words, until the producer is making a profit," he said. "Arkansas' present severance tax law has this feature, and the proposed referendum removes it."

Venus said groups formed to fight the tax hike, such as Arkansas for Jobs and Affordable Energy, are really just fronts for companies such as BHP Billiton, Chesapeake Energy Corp. and Southwestern Energy Co. BHP acquired Chesapeake's Fayetteville assets (see Shale Daily, Nov. 17, 2011). Chesapeake had been the No. 3 acreage holder in the Fayetteville after Southwestern and ExxonMobil (see Shale Daily, Feb. 8, 2011).

"The Arkansas natural gas market is insignificant to any and all of these players, although they will surely make substantial efforts to protect their interests," Venus said. "At least Mr. Nelson cannot be accused of jousting with small fry."

The economist maintains that raising the tax will not drive away Fayetteville jobs. "Once the drilling is complete, most of the jobs will go away anyway," he said. "And it would be no bad thing if the Arkansas gas was not rushed into the existing market glut but held back until prices recover."

Sheffield has until July 6 to gather 62,507 signatures of registered voters to get the measure on the November ballot.

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