Gov. John Kasich understands that Ohio's much-anticipated oil-and-gas bonanza means that the state's ridiculously low severance tax should be increased to cover the potential environmental and public health costs of greatly expanded drilling.
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But he needs a bolder plan than the one he intends to introduce to the Ohio General Assembly on Wednesday. Failure to tax new oil and gas drilling at an appropriate level could leave the state stuck with the bill when the oil barons leave with their fistfuls of cash.
Ohio is believed to be sitting on 5.5 billion barrels of oil that have a current market value of $550 billion. The governor plans to charge new wells 1.5 percent of the market value of their oil during their first year, then increase the rate to 4 percent in subsequent years. That rate is lower than other states charge.
The same rates would apply to wells that extract highly coveted natural gas liquids. Nonliquid natural gas would be taxed at 1 percent of sales.
Two nonpartisan policy think tanks believe the governor is being too timid. Innovation Ohio says Ohio should match Texas' severance tax rates of 7.5 percent on natural gas and 4.6 percent on oil and natural gas liquids. Policy Matters urges the state to match the 5 percent tax rate of Michigan and West Virginia.
Ohio's oil and gas boom is driven by the development of a horizontal technique of hydraulic fracturing of rock known as "fracking." Vertical fracking has existed for decades, but it was unable to tap massive reserves in eastern and southern Ohio. Horizontal fracking has opened those reserves.
Ohio's current taxes are a testament to how bad the market has been until recently. Each barrel of oil, now valued at more than $100, was taxed a mere 20 cents. Each 1,000 cubic feet of nonliquid natural gas brought the state only 3 cents in taxes.
Governor Kasich's tax proposal could generate as much as $500 million a year by 2016 -- 50 times the amount collected today. He says he wants use the money to fund lower personal and corporate income taxes.
Taxpayers will get a little more spending money, but a Kasich spokesman said the motivation is to give small businesses a boost so that they will create jobs. That formula often does not yield the intended results.
A better plan would be to use the cash infusion to restore state funds to education, law enforcement, transportation, environmental protection, public health, and other essential services that were cut to balance the state budget.
Mr. Kasich is right not to gouge the drillers, but he should not be timid about demanding full value for Ohio's resources. Ohio has what oil companies covet, so they should pay for the right to enrich themselves by harvesting the state's resources.
Ohio's future economic and environmental health could depend on Mr. Kasich getting the tax on fracking right.
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