Tax the fracks
12/12/2013The Republican-controlled General Assembly has repeatedly ignored Gov. John Kasich’s plea for a sensible increase in Ohio’s severance tax, as a way to ensure that all taxpayers will share in the benefits of the state’s long-promised boom in oil and natural-gas extraction. GOP lawmakers evidently are less afraid of opposing the governor of their party than they are of annoying their benefactors in Columbus’ influential oil and gas lobby.
Now, state House Republicans have introduced their own severance-tax proposal. It’s better than nothing, but — as its endorsement by the drillers’ lobby suggests — not all that much.
CLICK HERE to read more Blade editorials
Ohio’s severance-tax rates have not changed in nearly three decades and are absurdly low: just 20 cents on a barrel of crude oil — which sold on global markets for about $100 this week — and 3 cents per 1,000 cubic feet of natural gas, which sells for nearly $4. The state does not tax natural-gas liquids such as propane, ethane, and butane, which are valuable raw materials for making plastic.
Mr. Kasich has proposed a maximum 4 percent tax on oil and natural-gas liquids produced from shale wells, and a 1 percent levy on natural gas. These rates generally would be lower than those in comparable states that are big producers of oil and gas. Still, the governor estimates that his proposal would raise $2.8 billion in new state revenue.
The House GOP plan would tax net proceeds from shale oil and gas production at no more than a 2 percent rate. Sponsors project the tax increase would raise $1.7 billion over 10 years, far less than Governor Kasich’s proposal.
In some respects, the legislative plan is better than the governor’s. Mr. Kasich would apply all revenue from a higher severance tax to another unnecessary cut in the state individual income tax, which would primarily benefit the richest Ohio taxpayers. The House proposal would ensure that the tax increase, before it finances a tax cut, will pay the growing costs of necessary state safety regulation, environmental protection and cleanup, and capping of abandoned wells.
The House plan would properly tax all oil and gas wells in the state. Governor Kasich’s tax plan generally applies to wells that rely on more-modern horizontal drilling technology and the extraction technique known as hydraulic fracturing, or fracking; such wells are on top on shale formations in eastern Ohio.
But the House GOP proposal also would give unwarranted new tax credits to well owners, and other breaks to conventional oil and gas wells. Such giveaways may explain the industry’s enthusiasm for the plan, but would do little to help Ohio taxpayers generally.
Republican lawmakers warn that producers will abandon Ohio if the severance tax rate is raised too much. That’s nonsense: Energy companies are investing billions of dollars a year in drilling here, and aren’t going to desert these sunk costs. If they did, the oil and gas they covet wouldn’t leave with them.
A reasonable severance-tax rate would be higher than the governor and GOP lawmakers envision. Its proceeds should be used not to reduce taxes, but to help restore some of the massive cuts of recent years in state spending on vital services, as well as in aid to school districts, local governments, and public universities.
Oil and gas are nonrenewable resources; once they’re extracted from Ohio wells, that’s it. So while it’s reassuring that the governor and many Republican legislators finally agree on the need for a higher severance tax, they can — and must — offer better, fairer plans than they have proposed so far.