Policy Matters Blog
Boom and bust highlights need for stronger fracking tax
March 3rd, 2016
Prices at the pump have plummeted and some oil- and gas-producing regions are seeing their economies slow, but Ohio’s Utica region saw growing production in 2015. Fiscal problems of other areas show that Ohio should establish an adequate severance tax, to pay for the costs of rapid industrial development in Ohio’s rural, drilling communities, and to cushion the bust that follows a boom.
Natural gas production in Ohio rose by 200 percent in fiscal year 2015 compared to the prior year, and oil production by 130 percent (Figure 1).
The slump in fossil fuel prices will not last forever. The Energy Information Administration expects prices for natural gas and oil to rebound in 2017 and rise more in the long run. This is why drilling continues during downturns. The industry expects to profit in the long-term.
Ohio’s severance tax on oil and gas remains one of the lowest among producing states. The fiscal woes of North Dakota are a cautionary tale for Ohio. The slowdown has hammered governments across North Dakota, forcing some to cut spending or dip into reserves. Williston, the city at the heart of the boom, will see 23 percent less tax revenues this year, compared with two years ago. Fortunately, the state foresaw the possible downturn and prepared. The state of North Dakota will address its billion-dollar budget shortfall with rainy day fund savings, which an 11.5 percent severance tax helped to create.
Natural resource economies are subject to boom and bust. If Ohio fails to create an adequate severance tax, Ohioans in the shale region could be left with bills for infrastructure built for the boom and emptied in a bust. Without an adequate tax, everyone else is left with the bill for investments made to support the industry in the good times.
Community needs are high. Testimony offered in 2014 by officials from eastern Ohio described needs of more than $170 million – in just that year – to attract state and federal funds for wider roads, stronger bridges, better traffic control, increased sewer and water capacity, enhanced emergency response, and road maintenance. Drilling has also created problems with housing, public health, safety and social services.
Production has doubled since then. Needs are rising. Yet Ohio’s oil and gas industry continues to fight a severance tax.
Some have suggested severance taxes of up to 7.5 percent. Policy Matters Ohio proposes a 5 percent severance tax on both oil and gas, and an additional 2.5 percent fee, imposed during strong market conditions, for a permanent fund to cushion hard times and build a more robust economic future.
A severance tax of just 5 percent on production could have provided almost $142 million in fiscal year 2015 (Table 1). An additional $71 million could have been set aside in a permanent fund for long-term improvements , which exist in other major oil- and gas-producing states.
Gov. Kasich has proposed an increased severance tax, too. That’s a great idea. But the governor would use much of the revenue for more income tax cuts. This ignores the volatility of the tax source and the diminishing supply of natural resources over time. Moreover, severance taxes are levied on something of great value that is being taken from the state and should be used to build new value to replace that loss.
The industry threatens to leave if a severance tax is imposed. But the differences between state tax policies are not enough to shift industry activity significantly from state to state. Geology, available technology and price drive oil and gas drilling activity. Ohio has significant oil and gas resources and geology tailored to today’s technology.
The industry pays attention to market conditions in the short and long run. Ohio’s leadership needs to do the same. We’ve given the oil and gas industry five years with virtually no severance tax. It’s time to think about the long-term well-being of the region and state.
Wendy is Policy Matters Ohio senior project director.