Raise the severance tax


Gov. John Kasich’s ambitious tax plan is running into opposition in the General Assembly, including resistance from some of Mr. Kasich’s fellow Republicans. Parts of the proposal, such as his call for an unnecessary, regressive income-tax cut, would be bad public policy and should not become law. But one element that surely merits enactment is the increase the governor advocates in the state severance tax on large-scale oil and natural-gas extraction.

Ohio’s current severance tax rates are ludicrously low: just 20 cents on a barrel of oil that sells for nearly $100, and no more than 3 cents per million cubic feet of natural gas. According to the State Department of Taxation, the futures-market price of natural gas at the end of January was roughly $3.23 per 1,000 cubic feet of gas. The state levies no tax on natural gas liquids — such as propane, ethane, and butane — that are valuable raw materials for making plastics. These tax rates have not changed in nearly three decades, and reflect a time when Ohio’s oil and gas production was low-volume and local.

Today, though, breakthroughs in horizontal drilling technology and the extraction technique called hydraulic fracturing (fracking for short) promise to unlock massive oil and gas deposits from Ohio shale formations. The obsolete severance taxes are allowing giant, mostly out-of-state energy corporations to reap windfall profits from non-renewable Ohio resources — revenues that will grow as the state’s industry expands.

Mr. Kasich seeks to raise the severance tax on crude oil and natural gas liquids produced from shale wells to 1.5 percent in the first year and 4 percent thereafter. The tax on natural gas from fracked wells would increase to 1 percent. Taxes on conventional oil and gas wells would be generally unchanged.

If anything, the rates the governor proposes are too low: The crude-oil tax would be smaller than the rates levied in big-producing states such as Texas and North Dakota, as well as adjacent ones such as Michigan and West Virginia. Ohio’s natural-gas rate would be lower than in all these states and Pennsylvania as well.

But the tax plan would enable Ohio to share fairly in the exploitation of the state’s natural assets. It would raise revenue that would enable state government to regulate properly the environmental and safety aspects of drilling — a duty it dare not shirk — and to meet the added infrastructure costs, such as road building and repair, of the fracking boom.

Mr. Kasich wants to use proceeds from the severance tax increase to help pay for his proposed cuts in state income taxes — 20 percent for individuals and nearly 50 percent for small businesses — over the next three years. The governor’s proposed expansion of the state sales tax to a broad range of services, coupled with a cut in the sales tax rate, also would finance the income tax reductions.

A better use of that money would be to start to restore the massive, damaging cuts in state aid to schools, local governments, and human services in the current budget. But that debate cannot proceed unless lawmakers approve the new severance tax rates.

Assertions that oil and gas drillers will desert Ohio if the tax is raised ring hollow. Energy companies have invested more than $3 billion in Ohio in the past year alone; they are unlikely to walk away from those sunk costs. And if they leave, the oil and gas they want so badly won’t follow them.

Given the prominence of Columbus’ oil and gas lobby as a reliable source of campaign money, it’s not surprising that many lawmakers are balking at the severance tax plan. But it’s to be hoped that most legislators would place the interests of the state and its citizens ahead of those of a special interest, however powerful.