Republicans in the Ohio House of Representatives have revised an oil and natural gas severance tax proposal and are calling for a slightly higher rate, which many believe may have a better chance of passing the Democratic-controlled state senate.

Republican Gov. John Kasich said recently "puny doesn't work" regarding the severance tax. He recently threatened to veto proposed House Bill (HB) 375 if it made it to his desk. Some Democratic lawmakers, meanwhile, were critical of the legislation, which initially called for a top severance tax rate of 2%, with the bulk of the revenue set aside for regulators charged with overseeing the industry.

A revised bill, expected to be introduced in the coming days, proposes to increase the top severance tax rate to 2.25% from 2%. It would also dedicate more than half of the revenue to reducing Ohio income taxes and address the costs operators incur.

When the original bill was introduced in December by Republican Speaker William B. Batchelder and Republican Speaker Pro Tempore Matt Huffman the Ohio Oil and Gas Association (OOGA) supported it (see Shale Daily, Dec. 6, 2013). But OOGA Executive Vice President Thomas Stewart told NGI's Shale Daily that the latest rate increase is significantly larger than it appears on paper and the organization plans to keep negotiating for a lower rate.

"You know a 2.25% gross receipts tax is a heck of a big bite out of a business' revenues," Stewart said. "Did we believe as an association that we would not have to negotiate on this? Of course not. But politics is the art of the impossible, and we felt the original proposal was founded on the sound principals of oil and gas production, not some 300,000 b/d of oil production in Ohio. It wasn't based on fantasy."

Under current rates, operators pay 10-cents/bbl of oil and more than 2 cents/Mcf of natural gas. Last year, Kasich's proposal to tax natural gas at a rate of 1% and oil and natural gas liquids at a rate of 4.5% failed (see Shale Daily, June 11, 2013).

Senate Minority Leader Joe Schiavoni (D-Youngstown) said he was concerned about the industry's early support when Republicans introduced HB 375.

"My general impression is that the proposal is too low," he said. "When you look at other states, they have a 4-7% severance tax rate. When the oil and gas industry is a proponent of a bill it moves quickly, but people on both sides of the aisle want to see a higher rate -- not so high it would cause concern -- but there needs to be further discussion about this."

Mike Dittoe, spokesman for the Ohio House Republican caucus, said Batchelder and Huffman have been working closely with Kasich's policy team, Democrats and the industry to achieve a broad agreement on the bill.

"I think it's been an evolving process. Speaker Batchelder and Rep. Huffman have been working closely with a number of stakeholders to see if we can't reach a broad agreement," he said. "This is still a work in progress, but I believe you'll see passage in the House in the very near future."

The revised bill would clarifly concerns about the costs incurred before oil and gas reaches the market.

"Every state that imposes some kind of gross receipt tax recognizes that there's a cost incurred before a product achieves it true value in the marketplace," Stewart said. "Pipelines charge fees, processors charge fees [and] everyone has to recognize this, and we want a fair tax based on these costs. This has been one of the most difficult issues to work through with the legislature. They are starting to understand, though, that a fair tax is one based on the first point of sale and not the wellhead."