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Arkansas Governor: Industry Agrees to Severance Tax Increase

Representatives of the natural gas industry have agreed to an increase in Arkansas' severance tax to help pay for an ongoing state roads program, Gov. Mike Beebe said Tuesday.

Beebe said the proposed increase, which needs lawmakers' approval, could raise an estimated $57 million next year and reach the $100 million mark by 2013 without increasing natural gas rates for residential customers. Arkansas raised just $552,861 in fiscal 2006 through its current severance tax, which has stood at three-tenths of a cent/Mcf for more than 50 years and is one of the lowest in the country. Producers in the state also pay ad valorem taxes at 50 cents/Mcf and conservation taxes at nine-tenths of a cent/Mcf. Most of the natural gas produced in Arkansas is shipped out of state.

Terms of the agreement include:

Beebe said 95% of the severance tax revenue would be dedicated to Arkansas roads, utilizing the current formula of 70% to state highways, 15% to counties and 15% to cities. The remaining 5% would go to the state's general revenue fund. The proposal could go into effect Jan. 1.

Beebe said he is discussing the proposal with legislators and gauging their support before deciding whether to call a special session. Beebe has said he will not call a special session unless enough votes exist to pass the proposal.

Last year Beebe, a Democrat, said the Arkansas General Assembly should consider legislation that would raise the state's severance tax, with the revenue going toward road improvements in areas damaged by gas industry-related trucks and other equipment (see Daily GPI, Nov. 6, 2007). At about the same time Sheffield Nelson, a former Republican candidate for governor and a former CEO of Arkla Inc., the states' largest gas company, said he would lead an effort to put an initiated act before voters in 2008 calling for an increase in the severance tax to 7% of the gross price, the same as that charged by Oklahoma. The resulting revenue -- estimated at $60-100 million annually -- should be spent primarily on higher education, Nelson said.

The online Arkansas News Bureau reported Tuesday that Nelson would suspend canvassing efforts to put his proposal on the ballot until Beebe decides whether to call a special session.

The promise of increasing production from the Fayetteville Shale in northern Arkansas has prompted the state's government and others to look for a method to gather more dollars for Arkansas residents. According to the latest information from the Arkansas Oil & Gas Commission, 89.1 Tcf was produced in the Fayetteville play last year. Earlier this month Southwestern Energy, the largest producer now operating in the play, said it would produce about 148-152 Bcfe this year, with 90-95 Bcfe expected to come from the Fayetteville play in Arkansas (see Daily GPI, March 3).

Last year two advocacy groups issued separate reports calling for an increase in the state's severance tax (see Daily GPI, Jan. 8, 2007). Arkansas Advocates for Children and Families said it wanted the severance tax changed to create an Arkansas Higher Education Trust Fund, while the Arkansas Advocates group called for a market-based increase and said the money could be used to remove the sales tax on electricity for families, among other things.

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