Columbus Dispatch...
Oil, gas taxes vary widely by state
Kasich, foes of his plan will find state variances
By  Dan Gearino

Monday March 19, 2012 

Several states have used taxes on oil and natural-gas production to reduce the burden on everyone else, a club that Gov. John Kasich would like Ohio to join. 

He lists Texas, Michigan, West Virginia and North Dakota as examples of places that have higher taxes on oil and natural gas than Ohio. 

At the same time, oil-industry advocates say that the absence of such a tax — as is the case in Pennsylvania — serves to encourage investment. Legislative leaders have said they sympathize with this view, setting up a fight with the governor. 

As the debate unfolds, both sides will use examples from other states. Researchers warn that there are big challenges to comparing the vastly different approaches, and many reasons to proceed with caution in deciding how to structure a tax. 

“It’s a bag of snakes more than a can of worms,” said David Passmore, director of the Institute for Research in Training & Development at Penn State University. 

Most of the debate is about “severance” taxes, a tax on natural resources that are being “severed” from the earth. Nearly all the money collected comes from oil and natural-gas production. 

The results of implementing severance taxes vary widely, from Alaska, where the tax pays for nearly three-quarters of state government, to the dozen or so states where severance-tax receipts are zero. 

Ohio already levies a severance tax, taking in $10.6 million in 2010, which was 0.4 percent of the state’s tax receipts, according to the Census Bureau. 

Kasich is proposing a tax on a percentage of the dollar value of oil and gas sales, a change from the current system that levies the tax based on the quantity of the resource. 

He also wants a separate tax on natural-gas liquids, such as ethane and butane, which currently are taxed at the same rate as natural gas even though the liquids have a higher market value. 

The proposal has an exception for small producers, who would continue to pay 20 cents per barrel of oil. 

The new revenue would be used to pay for an income-tax cut of about $500 million in 2016, Kasich’s office has said. 

The governor’s fellow Republicans who run the legislature are signaling that the plan will have a rough road. A key committee leader said on Friday that he will consider the tax issue on its own, rather than as part of a larger budget measure. This makes it unlikely that the tax proposal would be passed soon. 

Oil and gas producers think that they are being unfairly singled out by Kasich. They point to the anticipated job growth from shale-gas drilling and say that the state normally would shower the industry with incentives to encourage creation of those jobs, rather than the opposite. 

“Just give us a fair regulatory scheme and fair tax scheme and let us do what we do best,” said David Hill, owner of David R. Hill Inc., a small oil producer in Guernsey County. 

He is a lifelong resident of southeastern Ohio, an area that has long struggled with high unemployment. He thinks it is wrong to raise a tax that narrowly affects the oil-producing parts of the state and then distribute the money across the state. 

Pennsylvania lawmakers have resisted attempts to enact a severance tax. The closest the state has come is a relatively new “impact fee” designed to pay for damage caused by the oil and gas industry. 

In 2010, Passmore and colleague Rose Baker wrote a report estimating that for every $100 million raised with a severance tax, Pennsylvania would lose between 111 and 292 jobs. But that wasn’t the whole story. If the government used the money to pay for construction projects, the spending would lead to hiring and a net gain in jobs, their report said. 

The co-authors encountered big obstacles in trying to understand the issue. For example, they had a tough time comparing states that impose a tax based on the volume of oil and gas — as Ohio does under current law — with states whose tax is based on a percentage of sales. Tax revenue for the latter group fluctuates based on the market value of the resource, which makes it less reliable as a revenue source. 

The potential volatility of the revenue that a severance tax would raise makes some economists leery of using it to fund a tax cut. Instead, the money should be “sequestered as a permanent fund, so it can be saved for future generations,” said Ned Hill, director of the school of public affairs at Cleveland State University. 

But he supports the idea of raising the severance tax. “The development of the industry is definitely a windfall, and windfalls are commonly shared,” he said. 

Ken Mayland, president of ClearView Economics in the Cleveland area, thinks the tax is a bad idea. He likened the transfer of wealth to “pickpocketing,” and he warned that it would discourage development of the oil and gas industry. 

“You need to make a case for why it should be treated differently than steel production or autos or farming,” he said. 

Industry leaders contend that the average Ohioan’s income-tax reduction, which would be less than $100, is not worth the risk.

“Do you want the jobs and economic opportunity, or do you want a $30 check?” asked Tom Stewart, executive vice president of the Ohio Oil and Gas Association. 

He points to Michigan and West Virginia as examples of states with high severance taxes where investment has diminished. 

Although the benefit to individual taxpayers might be small, it would be significant to small businesses, whose owners pay the personal income tax and would save thousands of dollars, said Kasich spokesman Rob Nichols. “That’s the direct stimulative effect on the economy,” he said. 

Like almost everything else about this subject, Nichols’ point is debatable. Hill, the Cleveland State faculty member, thinks the complexity of the subject and the strong opinions of the players will make this a particularly animated argument in the General Assembly. 

“Like any political debate, it’s going to take on the elegant form of a food fight,” he said. 

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