Study finds severance tax bill passed by the House too small to help communities

- June 17, 2014
   
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House Bill 375, passed by the House in May, has a rate so low and a base so narrowed by deductions that revenues would not cover the needs of the state and impacted communities.

That is the key conclusion of a report on the bill that Policy Matters Ohio issued today.  While conventional, vertical wells would retain the current volume-based severance tax structure and see a 50 percent cut in severance tax rates under the bill, horizontal wells would be taxed differently, with a 2.5 percent tax based on the value of production.

“As passed, the bill contains millions of dollars in new deductions, exemptions and other tax breaks,” said Wendy Patton, report author and senior director of Policy Matters Ohio’s State Fiscal Project.  “As a result of these tax breaks and a very low rate, even the highest forecasts show that funding will fall short of needs.”

Legislators pushed the share of revenues for impacted local governments from 15 percent to 17.5 percent of collections as they passed the bill. However, forecasts of the Legislative Service Commission (LSC) show that depending on production levels, local governments might get nothing by fiscal year 2019, or they might get up to $30.4 million, primarily for infrastructure needs.  From a need for expanded water and sewer capacity to widened roads and strengthened bridges, infrastructure needed in the oil and gas region of southeastern Ohio is substantial.  The bill provides no funding for social services, housing and safety needs of impacted communities. 

Most of the revenues raised by HB 375 are supposed to fund income-tax cuts. The benefits to middle-income families would be negligible, perhaps $10 per year on average in 2019, under the highest production estimates.  Meanwhile, compared to a prior version of the bill, new deductions and tax breaks would reduce annual collections by at least $23 million a year by FY 2019.

The Policy Matters Ohio report analyzes the tax breaks in the bill and makes recommendations for improving it.

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