As part of an effort to considerably slash the state’s personal income tax rate, Ohio’s Republican Gov. John Kasich on Monday unveiled a two-year budget proposal that calls for a 6.5% severance tax on oil and gas produced by the state’s unconventional operators.

As development in the Utica Shale has increased markedly in the last five years, Kasich has proposed several severance tax rates since he took office in 2011. But the latest, included in his 2016-2017 budget proposal for the period that begins July 1, is by far the largest yet, catching the industry off guard at a time when oil and natural gas prices are at some of their lowest points in years.

“I think everyone assumed that the severance tax debate would come up again, but no one imagined the rate as it was introduced,” said Executive Vice President of the Ohio Oil and Gas Association Shawn Bennett. “Not only is the rate higher, but it’s significantly higher than what our neighbors in Pennsylvania and West Virginia pay. Here’s the thing, currently, there is little to no uplift from natural gas liquids (NGL) due to the fall in oil, when companies are allocating capital, they’ll probably go with dry gas and a lower tax rate.”

While Kasich’s proposal would tax oil and gas volumes at 6.5%, it would provide a lower rate of 4.5% for NGLs to reflect the additional processing costs associated with them. Kasich’s previous severance tax proposals have ranged from 1.5% to 4.5% and varied for oil, gas and NGLs (see Shale Daily, March 12, 2014; June 11, 2013; April 5, 2013). His last proposal came in March 2014, when he suggested a 2.75% severance tax on oil and gas volumes.

The governor’s $72.3 billion two-year budget aims to reduce the state’s income taxes by 23%, for a reduction of $5.7 billion by 2017. That would be offset by $5.2 billion in tax increases through raising the oil and gas severance tax, the commercial activity tax, the state’s sales tax rate and its tobacco tax rate. In the last two-year budget, proposed in February 2013, Kasich proposed a 20% income tax cut and later signed a bill that cut rates by 10%.

Currently, all oil and gas producers in the state pay 2.5 cents/Mcf and 10 cents/bbl of oil. At the rates Kasich is proposing, his administration estimates that they would raise $76.5 million in 2016 and $183.4 million in 2017. The current rate proposals would be multiplied by regional spot prices at hubs where the commodities are traded.

“It’s something we’re concerned with. If you really look at commodity prices in Ohio, they are way down from a year ago,” Bennett said. “Crude is down 57% since January 2014 and natural gas is down 67% in that time, causing companies to scale back opportunity in Ohio and across the nation as they look for anyway to stabilize this industry to employ hard working Ohioans. By putting a tax like this on the industry at this time, it will only increase the caution that operators are already putting on their operations and the capital they allocate to this state.”

While West Virginia currently has a 5% severance tax rate, Kasich is not alone in his push for a higher tax on unconventional operators. Pennsylvania’s Democratic Gov. Tom Wolf, who took office last month, campaigned on a pledge to enact a 5% severance tax on Marcellus Shale operators in that state (see Shale Daily, Jan. 16).

Kasich’s spokesman could not be reached to comment. But Ohio’s unemployment rate, which stood at 4.8% in December, is at its lowest point in the last decade and well below the national rate of 5.6%. When Kasich took office, the state’s income tax rate was 5.9%. Under his latest proposal, it would fall to 4.1%.

“The executive budget I present to the General Assembly today maintains fiscal restraint and builds on much of the work that we began in the last four years — addressing areas that are so critical to long-term economic success such as education, tax cuts to improve competitiveness and opportunities for those most in need of assistance,” Kasich said in his proposal.

Ohio Tax Commissioner Joe Testa told state news media outlets that the administration opted for a higher rate because development in the Utica Shale is more stable than it has been in the past. He also noted that the Ohio Department of Natural Resources (ODNR) has revised its projections for production and permitting higher.

According to ODNR, 1,791 horizontal Utica permits have been issued in the state and 1,391 wells have been drilled. ODNR predicted that it would issue 1,300 wells by the end of 2014, but it had surpassed that total by July. Moreover, Utica natural gas production in 3Q2014 alone surpassed all the gas produced in 2013 (see Shale Daily, Dec. 5, 2014; July 8, 2014).

Reaction to Kasich’s severance tax proposal was muted on Monday, overshadowed by praise or criticism for other budget proposals related to health care and education. Some Democrats worried that Kasich’s suggestion to increase the sales tax rate by $2.48 billion over a two-year period would put a burden on lower-income workers who already pay less in income taxes and more for the goods they buy.

But Republican lawmakers, who bolstered their majorities in both chambers in November, could pose problems for Kasich’s severance tax push. The state House of Representatives passed a bill last year with a 2.5% severance tax rate (see Shale Daily, May 15, 2014).

In a statement, Chairman of the state House Finance Committee Ryan Smith said he simply looks forward to reviewing the measures in Kasich’s budget and working on a plan that “is best for Ohio.”

Considered a moderate Republican, Kasich has also been floated as a 2016 presidential contender. More recently, he has emerged as a possible contender for the vice presidency. Quinnipiac University released a poll on Tuesday showing that Kasich was the only Republican contender that could beat possible Democratic presidential candidate Hillary Clinton in Ohio.

“Clearly he’s been determined to lower income taxes since he came into office. He sees it as a real winner,” said Paul Sracic, chairman of the Political Science Department at Youngstown State University. “It’s an issue that’s of growing importance to middle class voters. A tax on the oil and gas industry is an indirect way to raise taxes that most people won’t see. It’s a safer political move to do tax shifting.”