Kasich Administration’s Severance Tax Proposal is Inadequate and a Gift to Big Oil

wellhead2On Monday, Gov. John Kasich introduced his second operating budget which included sweeping reforms to Ohio’s tax structure. Included in those changes were modifications to how the state wants to tax oil and gas developers who are planning to extract vast quantities of resources in eastern Ohio via hydraulic fracturing. Unfortunately, these changes are inadequate and cause the state to rely upon other more regressive taxes that harm poor and middle income families.

The governor’s severance tax proposal this week was similar to legislation that he called for but failed to get through the Ohio General Assembly in 2012.  This proposal increases severance tax rates that producers pay depending on the type of hydrocarbon they extract. Producers will pay 1 percent on the value of gas they extract, 4 percent on both natural gas and natural gas liquids with the caveat that producers only need to pay 1.5 percent during the first year to recover well production costs. According to the administration, these changes will collect an additional $200 million in tax revenue over the next two-year budget cycle and a total of $920.9 million by the end of fiscal year 2017.

While $200 million in new revenue is indeed a significant increase above what the severance tax has collected in the past, the changes to this tax still leave significant revenue on the table. Indeed, the rates proposed by Kasich will continue to make Ohio’s severance tax system one of the lowest in terms of tax rates among all oil and gas producing states. In their own proposal, the administration references a recent study that shows that if these changes were to become law, Ohio’s severance tax will continue to be well below other oil and gas producing states.

The effect of this proposal is twofold. First, the administration is admitting that they have no intentions on fighting the oil and gas lobby in Ohio on trying to develop a fair severance tax rate. The oil and gas industry was against the governor’s proposal in 2012 to raise the severance tax and they are already on record that they will oppose this effort as well. Industry opposition should not cow the governor. Kasich never misses an opportunity to remind us of his business acumen – he ought to use it and do what is best for the state and fight for a fairer severance rate.

In reality, what these changes represent are a huge multi-million dollar give away to the oil and gas industry. The oil and gas in Ohio that the industry is going to extract is currently valued in excess of $500 billion. These companies are going to realize untold profits by extracting these resources over the coming decade and lawmakers need to make sure that Ohioans don’t undervalue our severance taxes in relation to the market being established in other states. These resources aren’t going anywhere – let’s not give away the store.

Second, because the new rates will collect such little tax revenue, Ohio will have to rely on more regressive taxes like the sales tax to make up the difference for the governor’s proposed state income tax cut.  Under the proposed budget sales tax revenue will grow over $3 billion through June of 2015. This growing reliance on the sales tax will mean that it will make up the largest portion of state revenue in the budget where traditionally income tax revenue always made up the largest portion.

Because of this, Governor Kasich’s budget shifts the state’s reliance on progressive taxes like the income tax to regressive taxes like the sales tax. This will cause poor and middle class families to pay more in taxes at the end of the day, while hundreds of million are left on the table for the oil and gas industry.