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Ohio House Passes 2.5% Oil & Gas Severance Tax Bill

The Ohio House of Representatives on Wednesday voted 55-35 in favor of a bill that would levy a 2.5% severance tax on oil and natural gas produced from horizontal wells, most of which target the Marcellus and Utica shales.

Substitute House Bill 375 now heads to the state Senate for consideration. The bill's passage in the House by a roll call vote of 55-35 appeared to mostly follow party lines. Republicans control both chambers of the General Assembly.

Under the bill, all of the severance tax revenue, which would be based on gross wellhead receipts, would be credited to an oil and gas severance tax fund controlled by the state treasury. By June 25 of each year, $15 million would be allocated toward an oil and gas well fund, $3 million would be given to a well plugging fund and $3 million would be for a geological mapping fund. Local governments would then receive 17.5% through a reimbursement fund. Any remaining money would then go to the state's income tax reduction fund.

Before the bill's final passage, lawmakers passed an amendment boosting the percentage of severance tax revenue that would be awarded to local governments, from 15% to 17.5%. Some localities and Democrats were hoping to get 25%.

Democrats railed against the bill before its passage.

"I am shocked that we have not learned our lesson from those that have been doing this for years," said Rep. Robert Hagan (D-Youngstown). "Major shale states such as Oklahoma, Texas and North Dakota have severance tax ranges from 7% to 11.5%. They collect anywhere from hundreds of millions to billions of dollars in revenue each year…What have we done? We've thumbed our nose at the opportunity to take care of local governments [and] schools."

Rob Nichols, press secretary to Republican Gov. John Kasich, said the bill didn't meet the governor's expectations but he did not indicate a veto was imminent, assuming the bill passes the Senate.

"The governor is committed to continuing to reduce Ohio's income taxes," Nichols told NGI's Shale Daily on Wednesday. "Unfortunately, their new plan still falls short of what the governor believes is needed."

Kasich has proposed three different severance tax ideas over the past 13 months. Last March, he proposed a 2.75% oil and gas severance tax -- with the proceeds going toward his goal to reduce the state's income tax rate by 8.5% over the next three years -- and an $8 million tax exemption on gross receipts, which would allow operators to recoup start-up drilling costs (see Shale Daily, March 12). He also called for increasing the state's Commercial Activity Tax (CAT) from 0.26% to 0.30%.

In April 2013, Kasich proposed a 1.5% severance tax on crude oil and natural gas liquids (NGL) during the first year of production from horizontal wells, increasing to 4% in the second and subsequent years of production (see Shale Daily, April 5, 2013). He also proposed a 1% severance tax on gas produced from unconventional wells and proposed eliminating the severance tax on gas from conventional wells that produce less than 10 Mcf/d; conventional wells that produced more than 10 Mcf/d would have been taxed at 1%, up to a cap of 3 cents/Mcf.

Two months later, Kasich modified his proposal and called for a 4.5% severance tax on crude oil and NGL from horizontal wells during the second and subsequent years of production (see Shale Daily, June 11, 2013).

Under current rates, operators pay 10 cents/bbl of oil and more than 2 cents/Mcf of natural gas produced. More than $10.2 million in severance taxes was paid during fiscal 2012, most of which came from natural gas production.

Chris Zeigler, executive director of API Ohio, a division of the American Petroleum Institute (API), told the Ohio House Ways and Means Committee that the proposed tax structure under HB 375 was comparable to those enacted in other oil and gas producing states, but there remained an issue over CAT -- specifically, the amount levied on C corporations versus other taxable entities.

"The new severance tax structure in [HB 375] is essentially an Ohio business tax only on C corporations that are the severers of oil and gas extracted through horizontal shale wells," Zeigler said Monday, according to written testimony. "This new severance tax, imposed upon 'wellhead gross receipts,' will essentially duplicate the CAT, but at a rate nearly 10 times higher than most other Ohio manufacturers pay.

"Companies that are organized as C corporations should not be double-taxed on the very same gross receipts. Not only does this run counter to fundamental tax principles, but also provides an economic disincentive for further commercial activity by the industry in Ohio. There is precedent in the Ohio tax code for certain business segments that pay some other general business tax to not pay the CAT.

"By providing relief from double taxation for C corporations developing Ohio's shale resources, Ohio will remain consistent with existing commercial activity tax policies."

The House Ways and Means Committee passed HB 375 by a 11-10 vote on Tuesday.

HB 375 was introduced by Speaker Pro Tempore Matt Huffman (R-Lima) last December (see Shale Daily, Dec. 6, 2013). House Speaker William Batchelder (R-Medina) and 17 other House members, all Republicans, signed on as co-sponsors.

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