Kasich to propose fee on fracking

Governor intends proceeds to lead to reduction in Ohio income tax

Ohio Gov. John Kasich

COLUMBUS -- An Appalachian gold rush of sorts from an anticipated surge in oil and natural gas exploration in eastern Ohio could translate into an income tax cut for all taxpayers under a proposal Gov. John Kasich is expected to announce Wednesday.

The governor has been selling to Ohio business leaders a plan to essentially expand a 40-year-old state tax on oil, gas, coal, stone, and minerals to liquids that contain oil and gas extracted from shale found primarily in the eastern and southern portions of Ohio. The proceeds would be at least partly used to underwrite an unspecified cut in the personal income tax.

"We believe the income tax is an impediment to growth," Kasich spokesman Rob Nichols said. "We're always looking for ways to reduce it and make Ohio more competitive."

The oil and gas industry so far has been cool to the idea, suggesting expanded taxation could have the effect of stymieing the expected drilling boom before it can take hold.

The state severance tax produced $11 million in 2009. A recent study by a coalition that includes the Ohio Chamber of Commerce suggested that state and local tax collections could climb to $433 million a year by 2014 under the current tax structure.

"It's a complicated issue for us," said Linda Woggon, executive vice president of the Ohio Chamber of Commerce. "We understand the economic impact of reducing the income tax. We don't know what's being proposed here, but generally we also understand that when you increase taxes, that can curtail economic activity.

"We could have concerns that the timing of this could affect whether we are able to take full advantage of the economic activity," she said.

On Wednesday, Mr. Kasich will take the unusual step of revisiting his $55.8 billion, two-year budget at its midpoint and is expected to propose new policies affecting energy, Medicaid, work force development, and government efficiencies.

The energy plan will include proposed regulation of the controversial practice of hydraulic fracturing, commonly called "fracking," that uses chemicals and fluids under high pressure to fracture shale to release the gas and oil trapped within.

The administration is proposing to phase in a severance tax that would eventually reach 4 percent of sales of those liquids. The tax would be phased in with the fee set at 1.5 percent for the first year.

Companies that fail to at least break even financially could seek an extension of that rate for a second year.

Nonliquid natural gas extracted from that method of drilling technology also would be taxed at a rate of 1 percent of sales.

Oil is currently taxed at 20 cents per barrel. Natural gas is taxed at a rate of 3 cents per 1,000 cubic feet. There has been no tax on natural gas liquids, which have become a valuable commodity to the oil and gas industry.

Oil extracted by conventional means would continue to be taxed at 20 cents per barrel.

Nonliquid natural gas would be taxed at 1 percent of sales for volumes greater than 10,000 cubic feet a day. The previous tax of 3 cents per 1,000 cubic feet would be eliminated for drillers who extract less than 10,000 cubic feet a day, which applies to about 90 percent of companies in that sector.

Much of what is proposed will require legislative approval. Under current law, proceeds from the severance tax do not go into the state's general fund but rather to specific purpose funds within the Department of Natural Resources.

The Ohio Shale Coalition, which counts the Ohio Chamber of Commerce among its members, recently released a study suggesting that production of oil and gas could grow to $9.6 billion a year by 2014 and support nearly 65,680 jobs paying an average of $50,000 annually. The coalition financed the study conducted by Cleveland State University, Ohio State University, and Marietta College.

Last year, the final phase of a 21 percent, across-the-board income tax cut took effect. The tax is paid by individuals as well as many small businesses.

Nine months into this fiscal year, income tax collections are running a modest $73 million, or 1.4 percent, ahead of projections. February was a particularly robust month as Ohio brought in 20.4 percent more than expected, but Kasich Budget Director Tim Keen attributed this to the state so far having to pay out less in refunds than anticipated.

In all, state tax collections are running $187.2 million, or 1.6 percent, ahead of projections.

Contact Jim Provance at: jprovance@theblade.com or 614-221-0496