January 15, 2014
January 15, 2014
House Bill 375 undersells a valuable Ohio resource and needs to be strengthened. We support legislative efforts to develop a structure more in line with the growing industry in our state.
Good afternoon Chairman Beck and members of the committee. I am Wendy Patton, Senior Project Director at Policy Matters Ohio, a not-for-profit, non-partisan research organization with a mission of contributing to a more prosperous, equitable, inclusive and sustainable Ohio. Thank you for the opportunity to testify today on House Bill 375.
We support a stronger severance tax for the oil and gas industry and we support efforts of the legislature to develop a structure more in line with the growing industry in the state. But many provisions of House Bill 375 need to be strengthened or changed. In its current form, it undersells a valuable resource. We have eight recommendations for your consideration.
Montana had a local oil and gas production tax based on net proceeds (but administered by the state). The oil and gas industry preferred the net proceeds tax as long as the Department of Revenue never audited the deductions. The Department audited the deductions more thoroughly beginning in the 1980s. The oil and gas industry then discovered that there were too many complexities and ambiguities involved in determining what deductions were allowable and too much uncertainty associated with appeals--so the law migrated to "gross value" as a simpler starting point.
A severance tax more like that of other producing states will not stop development, if the resource is here. In 2010, West Virginia, with a severance tax rate of 5 percent on oil and gas, led the country in the number of new gas wells drilled. And, despite the lack of a severance tax, Pennsylvania drilled less than half (833) the number of new wells as West Virginia (1,896). In the late 1990s, Montana lowered production tax rates and added incentives for new production while Wyoming eliminated a severance tax reduction. As a result of the policy changes, the overall tax rate on the natural gas industry was 50 percent higher in Wyoming than in Montana. Both states subsequently underwent a boom in natural gas drilling, but Wyoming has fared better. Between 2000 and 2006, Wyoming added over $10 billion in production value, while Montana only added $2 billion.
Ohio has used income tax cuts as an economic development strategy over the past eight years. Income tax rates have been reduced, or approved for reduction, of nearly 29 percent. But Ohio’s job creation has lagged that of the nation. Since the state income-tax cuts began in 2005, Ohio has ranked third worst among the states in job growth.
States and nations alike find new ways to compete through access to the internet, transportation networks, systems of higher education, and so forth. Investment takes resources. Legislators must identify and harness resources fairly and efficiently. The severance tax is a fair source for funds to build Ohio’s competitiveness for tomorrow, just as the growth industries of the twentieth century contributed to the development of the state as a powerful manufacturing region. It is a fair source to help impacted communities as well. Studies have found that communities that have funding to handle costs that rise in a natural resource boom do better in the long run, when the resource is gone, than other communities. The attachment illustrates uses of severance tax revenues in several states.
Severance taxes are needed, and the revenue they generate should support proper oversight and regulation of the industry, mitigate impacts on local communities, meet current needs of the state and build diversity in the economy for after the boom is over.
Thank you, and I will be glad to answer your questions.
Chairman Beck, Ranking Member Letson and members of the Ways & Means Committee:
Thanks again for the opportunity to testify before the committee on January 15, 2014 on House Bill 375. I am writing to respond to Rep. Cera’s request for information on state distribution of severance tax proceeds to localities. The attached table broadly summarizes severance tax rates and whether proceeds are shared with local government in the 33 states with oil and gas production included in the data tables of the Energy Information Administration.
According to the National Council of State Legislatures, “Many states dedicate severance tax revenues to specific purposes, the most common being:
Ten oil- and gas-producing states — just under a third - do not have specific distributions to local government that we could identify. Other states share severance tax revenues with localities through formula (in several cases, the highway distribution formula is used), through apportioning funds on a standard basis between the county of production and the state, through direct return of funds or, as in the case of Virginia and Pennsylvania, through local severance tax authority.
Please let me know if I can provide any additional information. Thanks for your attention.
Sincerely, Wendy PattonSenior Project Director Download response with table
 E-mail from Dan Bucks, former Director of Revenue for the state of Montana, dated 1/8/2014.
 West Virginia Budget and Policy Center, “Marshall University Natural Gas Study Proves Virtually Nothing,” Fiscal Policy Memo. 10/19/2011.
 Between June 2005, when income-tax reductions where approved, and November 2013, Ohio lost 4.1 percent of its nonfarm jobs, according to seasonally adjusted data from the U.S. Bureau of Labor Statistics survey of employers. That trailed only Michigan and Rhode Island; the U.S. average over that time period was a gain of 2.3 percent. See www.bls.gov.
  Julia Haggerty, “How to get through the gas boom,”The Philadelphia Inquirer, January 6, 2011.
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