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House Republicans say the bill would provide tax relief for landowners and small producers.
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Huffman
YOUNGSTOWN
House Republicans have introduced a bill they say would increase the severance tax on oil and gas produced in the state, and provide tax relief for landowners and small producers.
Although the legislation earlier this month quickly won the support of the Ohio Oil and Gas Association, it also has been criticized as too modest and unfair to parts of Northeast Ohio where most natural-gas drilling is concentrated.
House Bill 375 proposes a 1 percent tax on the gross value of oil and gas from horizontally drilled wells in the first five years of production. After that period, the rate would increase to 2 percent for high-producing wells and drop back to 1 percent when production declines.
The bill’s sponsor, state Rep. Matt Huffman of Lima, R-4th, said the bill makes the state more competitive in the region and addresses uncertainty in the state’s shale industry.
“The potential severance tax was a looming issue,” he said. “As a state policy, we need to get this issue resolved so oil and gas can take off.”
The bill represents a shift from a volume-based severance tax to a value-based one. According to the Ohio Department of Taxation, operators currently pay 10 cents per barrel of oil and 2.5 cents per thousand cubic feet of natural gas produced.
Backed by Republican House leadership, H.B. 375 was introduced Dec. 4 and won the endorsement of the Ohio Oil and Gas Association on the same day.
In a statement, OOGA praised the bill as a “rational, substantive” tax-reform package that balances regulatory and environmental concerns.
The revenue collected from the tax would fund Ohio’s oil and gas regulatory framework, the Ohio Department of Natural Resources and income-tax reductions for residents across the state.
According to Huffman, the plan would generate $1.7 billion in net revenue over the next 10 years.
But local lawmakers expressed concern that the bill did not allocate any funds specifically to local governments in areas where the bulk of drilling occurs.
“We need the communities affected by the drilling to receive a bigger share,” said state Rep. Sean O’Brien of Brookfield, D-63rd.
The income-tax reduction, O’Brien said, would amount to between $25 and $50 per person.
“It’s something that’s not going to have a major economic impact,” he said.
State Sen. Joe Schiavoni of Boardman, D-33rd, said that while an increase in the severance tax is necessary, the revenue should not be allocated for a statewide tax cut.
“I don’t think that is the most effective way to use those dollars, and I don’t think it’s the fair way,” he said. “In the current form, I’m not sure this is a bill that I would support.”
The bill’s proponents argued that counties in Northeast Ohio already have seen an increase in sales tax and other revenue as a result of shale drilling.
Additionally, Huffman said, the region’s landowners and producers of natural gas would benefit from an income-tax credit equal to the amount they pay in severance tax.
Policy Matters Ohio criticized the proposed severance-tax rate for being far too low.
“What is proposed in Ohio is much, much lower than major producing states and lower than most states in the region,” the nonprofit research organization said in a statement. “We fear this proposal undersells a valuable resource that can be taken from the land just once.”
According to the National Conference of State Legislatures, West Virginia taxes the gross values of natural gas and oil at 5 percent, and 10 percent of the tax revenue is distributed to local governments.
Pennsylvania does not have a severance tax on the books, but it has several bills pending. The state Legislature last year passed an impact fee, which imposes a fee on producers using horizontal wells and allows for distribution to state and local governments for specific purposes in order to offset the impact of drilling.
But Penny Seipel, vice president of public affairs for OOGA, said state-to-state comparisons can be misleading.
“Whenever we look at rates, it’s very difficult to compare across states because you have to look at what is being produced,” she said. “What Ohio wants to do is to encourage development of our resources.”
Very few voices within the industry have taken a stance on the severance-tax proposal, but it is generally seen as a positive first step. H.B. 375 was assigned to the House Ways and Means Committee, where Huffman said he has been in talks with members about clearing up allocations to ODNR and other issues, and he said there was room to address questions about the bill.