House GOP unveils fracking plan

Bill would tax industry, drop some of Kasich’s income-tax cuts

12/7/2013

COLUMBUS — Nearly two years after Gov. John Kasich’s more ambitious plan was declared dead on arrival in the Ohio General Assembly, House Republicans have unveiled an industry-backed plan to tax growing shale oil and gas drilling occurring largely in eastern Ohio.

But unlike Mr. Kasich’s plan, the new severance tax rate would not translate into a penny-for-penny income-tax cut across the board for all Ohioans. The new proposal would pump excess revenue into income-tax cuts only after other obligations are met — the cost of regulating the industry, capping long-idle and orphaned wells, reclaiming land, helping to fund the Ohio Geological Survey, and new income and commercial activity tax breaks for well owners.

“There are some significant environmental problems with orphan wells that aren’t getting taken care of,” said the bill’s sponsor, state Rep. Matt Huffman (R., Lima). “There are some fairly significant problems in west-central Ohio. But this has a potential to be a significant income-tax cut, which has always been one of my two or three big issues.”

In all, 19 Republicans in the Ohio House of Representatives have signed onto the new proposal, including House Speaker Bill Batchelder (R., Medina).

“While I did not support previous proposals to institute a severance tax on the oil and gas industry, I believe that this legislation accomplishes many of the goals that needed to be addressed and can give Ohioans confidence in the process,” Mr. Batchelder said.

In addition to Mr. Huffman, northwest Ohio Reps. Barbara Sears (R., Monclova Township) and Lynn Wachtmann (R., Napoleon) are among co-sponsors.

The Ohio Oil and Gas Association strongly opposed Mr. Kasich’s plan. This time, the industry is on board.

“The ongoing debate about increasing the severance tax has created an air of uncertainty within the industry,” said Thomas E. Stewart, the association’s executive vice president. “Resolving this issue will allow oil and gas development to flourish in eastern Ohio, which will expand economic opportunity and job growth throughout the state.”

Rep. Bob Hagan (D., Youngstown), however, has unsuccessfully pushed bills with a higher tax rate of 7.5 percent. He said the industry should wear a big smile on its face if the GOP bill passes.

The Republicans’ proposed tax rate is expected to generate about $1.7 billion in new revenue over 10 years, after factoring out an estimated $800,000 in income and business tax breaks designed to help offset some of the cost to the industry. Mr. Kasich’s proposal was expected to raise $2.8 billion.

The higher tax would be phased in at 1 percent on the well owners’ net proceeds — gross receipts minus post-production costs — during the first five years of operation. The lower early rate is designed to allow the well operator to recoup some of its upfront costs.

After that, the rate would climb to 2 percent and stay there through a well’s productive years, dropping again to 1 percent only once production slows.

That compares to a phased-in rate of 4 percent that Mr. Kasich had proposed. The governor, however, had proposed exempting more traditional vertical wells from the new tax. Mr. Huffman’s bill would not.

“We felt the vertical wells should be contributing to the fund,” Mr. Huffman said.

Mr. Kasich originally proposed hiking the tax on the burgeoning hydraulic fracturing, or “fracking,” industry in early 2012. The technology uses chemically treated fluids at high pressure to fracture shale to release oil and natural gas trapped within. Shale attractive for such technology is largely located in the eastern portion of Ohio, along with neighboring states.

The governor reacted angrily when his fellow Republicans in the General Assembly decided the measure would not move. When he resurrected the plan in his two-year budget plan earlier this year, the GOP-controlled legislature again shelved it.

The state now charges 3 cents per 1,000 cubic feet of natural gas and 20 cents per barrel for oil.

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