Former natural gas industry executive Sheffield Nelson has filed a ballot initiative in Arkansas to raise the state’s severance tax on natural gas production to 7% from the current 5% of market value.

Under Nelson’s plan, all of the proceeds would go to fund roads. If the initiative makes the ballot, Arkansas would have their say at the polls in November 2012. Nelson signaled his intentions to pursue the hike earlier this year (see Shale Daily, Jan. 4).

Two years ago state lawmakers voted to raise the rate from three-tenths of a cent per 1 Mcf to 5% of market value. However, since then receipts from the Fayetteville Shale play — the state’s gas breadbasket — have been waning.

According to Nelson, his plan would eliminate loopholes in the current tax. While 5% of the current severance tax proceeds now go to the state’s general fund, if Nelson has his way, all of the money would fund roads.

“If we don’t do a severance tax increase, there will not be a roads program,” Nelson said, as reported by Arkansas

Kelly Robbins, executive vice president of the Arkansas Independent Producers & Royalty Owners Association, pointed to the jobs created by the natural gas industry in Arkansas and cited low natural gas prices as the reason for the revenue shortfall from the existing severance tax.

“While we are all disappointed that Arkansas’ severance tax has not produced the highway revenues that were projected, this shortfall is simply a direct result of natural gas prices plunging more than 55% from 2008 to 2010,” he said. “However, implementing a flat 7% severance tax on natural gas produced here in Arkansas would give us one of the highest rates in the nation, considerably more than surrounding states with their incentives for drilling high-cost wells in competing formations.

“Now is not the time for a huge energy tax increase that will weaken our state’s ability to compete for limited natural gas drilling capital.”

Nelson, a lawyer and former politician, was the CEO of CenterPoint Energy predecessor company Arkansas Louisiana Gas Co. Three years ago he proposed raising the state’s severance tax to 7% of market value before deferring to Gov. Mike Beebe, who succeeded in April 2008 in getting lawmakers to approve the more modest increase (see Daily GPI, April 3, 2008; March 12, 2008). That marked the first hike in the tax in more than 50 years, to 5% of the market value of gas extracted from three-tenths of a cent per 1 Mcf.