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The severance tax hike risks Ohio jobs and prosperity
By Joe Nichols

President Reagan once said, “[w]hen you put a big tax on something, the people will produce less of it.” The Ohio General Assembly should heed this wisdom as they debate whether increase the severance tax on shale oil and gas production.

Of course, Ohioans should want more oil and gas wells, not less. However, the proposed tax increase creates incentives that will reduce future drilling activity in Ohio, and drive energy firms—along with their capital investments and high-paying jobs—from our state. 

Governor John Kasich proposed a number of tax reforms in his executive budget that would encourage economic growth. For example, Kasich argued for a personal income tax exemption increase because, “[y]ou want to give incentives to people who go to work, and you want them to have incentives to work even harder.” This statement correctly recognizes that when the government lowers the cost to work, workers keep more of the fruit of their labor, which fosters a greater incentive to work, which in turn means that more work will be done.

But the same principle applies to production costs for energy companies.  By raising the cost for companies to pump oil and gas in Ohio, the Governor’s tax hike will create incentives for firms to produce less oil and gas in Ohio.

Ohio producers have already responded to changing economic conditions. Energy firms like Royal Dutch Shell and British Petroleum have already abandoned the Buckeye state when their wells yielded disappointing results. Low oil and gas prices weigh heavily on the remaining companies. Revenues are down, and new oil and gas ventures have been slashed or put on hold. Raising the state’s severance tax would only add another disincentive to drill in Ohio.

Oil and gas firms have investment options.  Ohio is not the only state with valuable energy resources.  Firms will drill where they can expect the best returns on their investment.  A severance tax hike will reduce profit margins and thus make prospective Ohio wells less attractive. Higher taxes mean higher production costs.  And those higher costs could be the difference between new wells in Ohio, or new wells in Pennsylvania.

The Buckeye Institute has previously debunked the myth that oil and gas firms make Ohio poorer by removing “our resources” for only “two dimes” in taxes. First, this myth wrongly suggests that the state somehow would be better off if energy resources were left in the ground—as if that’s where they make Ohio richer. Second, it ignores all the other taxes that producers already contribute to state and local coffers.

In fact, shale development helps make all Ohioans wealthier. Shale activity has brought over $28 billion of investment into Ohio, and the Kasich administration has rightly applauded those investment dollars for spurring demand for labor and putting Ohioans to work. The Department of Job and Family Services reported that “Ohio is fortunate to have this natural resource [shale oil] that can provide good jobs for families and reinvigorate many of our communities” through an industry that helps support nearly 200,000 high-paying jobs in Ohio. The average shale job pays $71,594 per year compared to the state average of $45,532.  Workers cannot earn those above-average wages when the oil and gas stays buried in the ground.

Ohio’s oil and gas producers generate significant economic investment, pay superior wages, and help reduce energy bills for families and businesses.  Unfortunately, the severance tax hike will risk each of these economic benefits in order to maintain unsustainable tax-and-spend policies that threaten the state’s fiscal health. Ohio’s legislators should incentivize more oil and gas to be pumped up from the ground by burying the severance tax hike.

Joe Nichols is Diehl Energy and Transparency Fellow at the Buckeye Institute


 
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