Utica and marcellus shale: Ohio severance tax proposal introduced

COLUMBUS — A new version of a severance tax on gas and oil has been introduced in the Ohio House of Representatives that has the support of the oil and gas industry.

State Rep. Matt Huffman, R-Lima, introduced the new severance tax proposal, Ohio House Bill 375, Dec. 4.

New proposal

The new severance tax proposal:

• Reduces the severance tax rate on persons extracting oil and natural gas by means other than horizontal wells (traditional vertical drilling);
• Imposes a tax on the net proceeds of oil and natural gas produced through horizontal wells;
• Provides a non-refundable credit against the state income tax equal to the amount of the horizontal severance tax paid by the taxpayer (which includes the oil and gas producer with a working interest or landowner with a royalty interest); and
• Provides an exclusion from the commercial activity tax (CAT) for proceeds of the sale of oil and gas by persons paying the severance tax applicable to the use of horizontal wells.

The bill is estimated to raise $1.7 billion over 10 years.

Ohio Gov. John Kasich proposed a severance tax earlier this year as part of his biennial budget bill. Amid pressure from the oil and gas industry, House Republicans removed the proposal from the budget in April.

Lower rates

The bill proposed Dec. 4 includes an increase in the severance tax on drilling but at a lower rate than what Kasich proposed.

Some of the increased tax is offset by a new commercial activities tax, or CAT, exemption and income tax credit for those paying the new tax.

The governor’s version of the severance tax would have taxed oil and natural gas liquids at 1.5 percent of gross sales, rising to 4 percent when startup costs were recovered, after one or two years of production.

Under the newly introduced version, oil and gas is taxed at 1 percent for the first five years of production, then rising to 2 percent if the well is producing at a high level.

Industry support

The new House version has the support of the Ohio Oil and Gas Association.

Thomas E. Stewart, executive vice president of the Ohio Oil and Gas Association, described the new proposal as “rational, substantive and good for Ohio.”

“For these reasons, the state’s oil and gas industry supports it,” said Stewart in a written statement.

The package, which includes a modification of the severance tax based on actual well economics, would enhance the state’s regulatory framework, increase funding for the Ohio Geological Survey and address the issue of plugging idle and orphan wells from historical production.

If passed, the package would also provide direction for oil and gas producers who have invested heavily to explore the state’s Utica shale formation.

Additionally, the tax reform package would lower taxes for conventional oil and gas producers and eliminate the threat of higher taxes for the state’s thousands of royalty owners and landowners, which was a major point of contention with the previous tax proposal.

The package also earmarks excess revenue for a reduction in the personal income tax for all Ohioans.

Kasich response

“The governor applauds this proposal because it allows Ohio to build on that tax relief and keep our economic recovery moving forward,” said Rob Nichols, spokesman for Governor Kasich.

“We’re studying the proposal in detail and look forward to working with the General Assembly closely as the bill moves through the legislative process.”

OFBF delegates

The severance tax was also discussed at the 95th annual meeting of the Ohio Farm Bureau Federation and approved the policy during their meeting, Dec. 5-6.

OFBF delegates prioritized how oil and gas severance tax revenue should be used, and voted the funds garnered  should be for oil and gas regulatory programs, followed by local economic development and then income tax reduction.

Delegates also called for any tax credits offered on new severance taxes to proportionally benefit producers and landowners with royalty interests.