Ohio Gov. John Kasich proposes changes to oil, gas severance tax
WBOY - March 13, 2012
Ohio Gov. John Kasich announced March 14 changes that would increase severance tax payments on oil and gas and an offsetting income tax cut of $1 billion by the latter part of the decade.
For wells that are hydraulically fractured, the Republican governor proposed to tax oil and natural gas liquids at 1.5 percent of gross sales initially, rising to 4 percent when start-up costs have been recovered, after either one or two years of production
Natural gas from all wells, conventional or hydraulically fractured, would be taxed at 1 percent, a decrease from 3 percent. Conventional wells producing less than 10 thousand cubic feet per day would not be taxed.
It is the first change to Ohio’s oil and gas severance tax structure in decades, Kasich said.
Ohio currently levies taxes of 20 cents per barrel on crude oil produced in the state and 3 cents per 1,000 cubic feet for natural gas, with no tax on natural gas liquids. This is the same for all types of wells — conventional vertical wells as well as unconventional, horizontally drilled and hydraulically fractured wells.
But with unconventional production ramping up in the Utica shale, which contains both methane and natural gas liquids at the eastern edge of the state and crude oil in the central part, Kasich proposes a modernization.
Revenues will be used to offset an income tax cut.
Kasich cited estimates approaching $1 billion for the income taxes that would be offset in about five years, with increased production from shale.
The nonprofit policy research organization Policy Matters Ohio agrees that the state’s severance tax needs to be updated, but takes issue with the level of the tax and its use for income tax reduction.
“This is inappropriate at a time when funding for our schools has been cut by $2 billion and for local governments by $1 billion,” said Senior Policy Director Wendy Patton.
“And we’d like to see 5 percent on everything that comes out of the hole, so that we’d be the same as West Virginia and Michigan; we think that our states are vulnerable to the industry playing the states off of each other if rates differ,” Patton added.
She expressed concern about the incentive financing offered through the lower tax rate on oil and natural gas liquids produced in the first 12 to 24 months.
“In western states there’s been some suspicion that this might cause drillers to maximize pressures when they (hydraulically fracture) the wells,” she said, adding that this might not be a good idea in a state where deep well injection caused earthquakes last year and where infrastructure is dense in some places.
Kasich also proposes other new regulations for the oil and gas industry, some of which would require legislative action. Among them, he wants to require oil and gas producers to disclose chemicals used in hydraulic fracturing, to modernize standards for well construction and to update regulations for natural gas gathering lines.