Ohio can remain competitive despite severance tax

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Kasich

By CAITLIN COOK

TheNewsOutlet.org

YOUNGSTOWN

Even with Gov. John Kasich’s proposal to increase the severance tax on gas and oil production, the Buckeye State remains one of the cheapest states for the industry to do business in, Ohio officials say.

In Pennsylvania, one well’s annual impact fees, approved under the state’s Act 13 bill, could generate from $300,000 to $600,000 over the course of 15 years.

Kasich’s severance-tax plan, however, would transition the current tax of 20 cents per barrel of extracted natural gas to a flat 4 percent tax rate.

And that has neighboring Pennsylvanians worried.

In one year alone, 2011, Pennsylvania collected $204 million in well fees on wells. That money was disbursed for bridge repairs ($18 million), parks and green space ($10 million), and state emergency, energy and environment offices ($23 million). Also, $108 million went to counties and cities, with $10 million going into a rainy-day fund.

Jim Barbour is a third-generation farmer who leases 460 acres of his family farmland in Liberty Township, Pa., near Scranton, to the natural-gas industry. He thinks that as Pennsylvanians call for greater fees and more regulation of the industry there, companies will head for Ohio to maximize profit.

“If you push them too hard, and it gets too much, and if the state gets too greedy and starts requiring too much, they’re going to find a place where the dollar fits better,” said Barbour.

Under Act 13, enacted last year in Pennsylvania, impact fees are assessed annually for 15 years. The new legislation allows counties to impose an impact fee on wells to help fund local government projects. In 2012, that fee amounted up to $50,000 per well.

The fee amount depends on the type of well — traditional or vertical and unconventional or horizontal, how long it’s been operating and the average annual price of natural gas.

In year one, the fee in Pennsylvania would be between $40,000 and $60,000. If natural-gas prices average $3 to $4.99 annually, then the impact fee would be a flat $50,000 per well. Once average annual prices exceed $5, then the fee would be $55,000. If gas climbs higher than $5.99, fees would reach $60,000 per well.

Right now, there are no projections on how much Pennsylvania will rake in. Jennifer Kocher, press secretary for Pennsylvania’s Public Utility Commission, said there are “too many variables” to predict future revenue. She did say the state hopes to have some projections by April.

Unlike Pennsylvania, Ohio’s money from the severance tax will go in the general fund to reduce personal income tax by 20 percent, said Gary Gudmundson, spokesman for the state Department of Taxation.

The severance tax is projected to earn $45 million in fiscal year 2014 and $305 million by fiscal year 2016, Gudmundson said.

The petroleum industry, however, has taken a stance on Kasich’s plan, arguing that any tax increase on drilling is counterproductive.

The proposal is “ill-conceived and ill-timed,” said Reid Porter, spokesman for the American Petroleum Institute. He would not say, however, whether the industry prefers Pennsylvania’s impact-fee model to the severance-tax plan proposed in Ohio.

State Sen. Capri Cafaro of Liberty, D-32nd, said Ohio must look at the administrative costs associated with tax collection at both the state and local level.

She previously suggested a severance tax for the oil and gas industry be distributed similar to the casino revenues.

“I think we could have applied a similar model where the communities that have the high share of activity pertaining to the oil and gas industry would receive a larger portion of the severance tax and then the remaining balance would be allocated to the other counties in the state,” Cafaro said.

Barbour thinks Ohio’s low tax, coupled with pushes for greater restrictions in his state, could dampen the boom in Pennsylvania before it even peaks.

As late as Jan. 31, the state’s Department of Environmental Protection mandated tighter restrictions on emissions from compressor stations. The agency also is looking into reducing wellhead emissions.

This latest regulation worries Barbour because a compressor station is being built next to his produce stand along state Route 29. That station will pressurize gas and move it quickly through pipelines to market.

Barbour doesn’t agree with the ongoing regulations and taxes being slapped on the industry. He said the oil and gas companies are finding out business in Pennsylvania isn’t like Texas or Louisiana.

“We were a lot less restrictive, but it keeps getting worse,” he said.

That’s why Barbour worries that Ohio might become more attractive to drillers than Pennsylvania.

Doug McLinko, a commissioner in the most-drilled area of Pennsylvania, Bradford County, shares Barbour’s concerns.

“When you start taxing prosperity and growth, I’m damn scared you’re going to chase the industry away,” McLinko said.

McLinko didn’t support Act 13 because of the enormous charitable contributions the natural-gas industry already invested in his county. He also didn’t agree with the state’s impact fee reaching back and placing fees on wells drilled in 2008 and 2009.

Bradford County has about 1,000 wells and 500 drilling units with roughly 800 miles of gathering pipeline line dispersed throughout its boundaries. The county received the most money in the state in December from the first round of impact fees with roughly $8 million. In July, McLinko expects to receive just under $7 million.

Ann Rutledge, director of the Carroll County Chamber of Commerce, Ohio’s most-drilled area, said the chamber hasn’t taken an official stance on the increase in severance tax but believes Ohio will remain competitive. Carroll County is one of a handful in Ohio that has seen a boom in tax revenue from shale exploration as sales in the county rose 33 percent from 2011 to 2012.

“I think it’s premature, personally, to raise taxes on an industry that is just trying to get started and to do something,” Rutledge added.

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