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Analysis: Higher Ohio Severance Tax Wouldn’t Slow Producers

An analysis conducted by Ernst & Young LLP (EY) on behalf of a trade group representing top executives from Ohio's leading businesses has concluded that a proposed severance tax increase would leave its effective rate the lowest among the nation's leading oil and gas producing states.

The study, commissioned by the Ohio Business Roundtable, comes in response to a proposal put forward by Republican Gov. John Kasich in March that called for a 2.75% oil and gas severance tax rate (see Shale Daily, March 12), which is slightly higher than two proposals put forward by Ohio House Republicans earlier this year.

EY, a global tax and consulting services firm, concluded in its analysis that the state and local tax burden, coupled with an increase in the severance tax, would still keep Ohio's effective tax rate for oil and gas producers well below what is paid by operators in Michigan, Pennsylvania, West Virginia, Arkansas, North Dakota, Oklahoma and Texas, all of which were classified to be in competition for capital investment with Ohio.

For more than two years now, similar to their counterparts in Pennsylvania (see Shale Daily, Jan. 28), Ohio lawmakers have been at odds in their fight to update the state's 40-year-old severance tax.

Since December, when state House Republicans put forward a proposal that called for a top rate of 2% (see Shale Daily, Dec. 6, 2013), a new severance tax has seemed to languish under the weight of another proposal that came in February, recommending a 2.25% increase (see Shale Daily, Feb. 12), Kasich's budget review proposal and election year politics. 

EY's analysis compared state and local tax burdens on operators, including severance taxes; corporate income taxes; business-level taxes; sales taxes and property taxes to determine the effective tax rates of each state. It used a series of benchmarks, applying the same hypothetical cost structure, production rates and output prices to isolate the differences in state and local tax features.

The firm assumed a typical horizontal well costs $8 million to drill and complete, with first-year production at 730 MMcf of natural gas, 72,000 bbl of natural gas liquids and 35,500 bbl of oil at a cost of $3.50/Mcf, $41/bbl and $86/bbl, respectively. The firm also assumed that a well's output would decline by 75% after five years of production.

The analysis found that Ohio's current effective tax rate on sales is 82% below what producers pay on a horizontal well in the other seven states. Under the proposed 2.75%  increase, the state's effective tax rate on sales from horizontal wells would still remain 63% under the average of the other states.

"Indeed, Ernst & Young's analysis confirms our belief that Gov. Kasich's severance tax proposals constitute strong and responsible tax policy that recognizes the bounty of our natural resources and will keep our state growing," the roundtable said. "We hope this continued fact-based analysis...will be useful to lawmakers in their deliberations and, accordingly, we urge the General Assembly's adoption of the severance tax provisions of the governor's 2014 mid-biennium budget review."

The roundtable also concluded that, given EY's findings on Kasich’s proposed severance tax increase, "there is no reason to believe that it will prevent or slow development of the oil and gas industry in Ohio."

That assertion stands in direct contrast to some of the state's leading oil and gas trade groups, such as the Ohio Oil and Gas Association and the American Petroleum Institute of Ohio, which have argued that Kasich's proposal could generate a chilling effect on the pace of unconventional development in the Utica Shale.

When Republicans announced their 2% proposal, OOGA supported it, but as time has passed the organization has pointed to the uncertainty operators face due to the indecision of lawmakers. On the left, some state Democrats have said they wouldn't vote for any of the current proposals because they believe the increases are too small.

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