Friday, October 23, 2015

Oil And Gas Severance Tax Working Group Issues Findings, Says Increase Should Be Based On Market Conditions

Initial findings of a General Assembly workgroup on oil and gas severance taxes include recommending a market-based "trigger" or slow phase-in of a tax increase depending on economic trends with an eye toward maintaining growth in the industry.  The guidance document, presented Thursday to the legislature's 2020 Tax Policy Study Commission, also recommends uses of any potential revenue gains, such as assisting local governments with infrastructure needs and lowering income taxes.  But it stops short of issuing recommendations on whether and how much to increase the state's oil and gas severance tax - a cautious approach applauded by the industry.
"We are in a historical economic situation with the industry," 2020 co-chair and workgroup member Rep. Jeff McClain (R-Upper Sandusky) said. "So because of that we've basically given a recommendation of caution.... We want to make sure we take care of Ohio, but make sure we don't kill the industry as well."

The document was made public at the commission's inaugural meeting where it was briefly discussed as input the commission will consider as it works toward a final report in late 2017. (See separate story)

A synopsis of the workgroup's findings and recommendations is as follows:

Stock, commodity, and capital markets affecting the oil and gas industry have fluctuated widely in the recent past. There are few, if any, businesses in the state of Ohio that are not in some way exposed to one or all of these natural market forces, but the oil and gas industry is especially sensitive to these fluctuations and is under financial duress.

Given the current market conditions, the legislative members of the informal working group suggest consideration of a trigger or a slow phase-in of a reformed severance tax. Given those provisions, Ohio should not expect to see a new revenue stream materialize overnight until market conditions improve. This is another reason why continuing the discussion of severance tax reform is prudent.
Factors such as market capitalization, price, production, and "expected ultimate recoverables" should be taken into consideration when determining the appropriate severance tax rate, such that adequate funding is provided for the state's regulatory, administrative, and oversight aspects of the oil and gas industry, while focusing additional resources back to infrastructure and other industry-supported initiatives that will foster more exploration and extraction of oil and gas.
We reiterate the guiding principles stated at the beginning of these findings: to update Ohio's severance tax to make it comparative with other shale play states across the nation. Ohio's total tax burden on the oil and gas industry is lower than or as low as every other state with a severance tax.
The workgroup said new revenues generated should be used to:

Assist local governments in shale play counties to improve infrastructure, equipment, and services that will accommodate the oil and gas industry and also benefit the citizens within their counties.
Facilitate making adjustments to Ohio's income tax or possibly other taxes in an effort to make Ohio more competitive in the national and international marketplace.
Invest in asset-building opportunities that will grow Ohio's economy and improve the quality of life of all Ohioans.

The legislative members of the informal working group recommend that the Ohio 2020 Tax Policy Study Commission accept this information as a foundation for continuing review in its larger analysis of Ohio's tax structure and utilize these principles as a framework for that continuing review.
American Petroleum Institute Executive Director Chris Zeigler said in an interview that he appreciates lawmakers' cautious approach to the idea of an increase.  He also praised indications from the commission that the severance tax issue will not be tackled separately but will instead be included in a comprehensive report of several issues the commission is tasked with reviewing leading up to its deadline.  "We've seen recent announcements by companies who are pulling back development in Ohio," Mr. Zeigler said. "So I certainly wouldn't understand why, given our current tax structure (under which) companies are already making the necessary decisions either to scale back operations or actually move on entirely from the state, why you would want to make it easier for companies to make those decisions through adding higher costs or higher taxations. So I think the report, from what I've seen, is a fair assessment of where the industry is right now."

In a statement, Ohio Oil and Gas Association Executive Vice President Shawn Bennett said the group likewise appreciates that lawmakers aren't hurrying to enact an increase.  "Increasing regulations or taxes at this time would have a significant negative impact on the workers, landowners, businesses and industries throughout the state related to oil and gas development," Mr. Bennett said. "I commend the workgroup for taking these variables into consideration, and ensuring we can preserve the oil and gas jobs remaining in the state, and continue to provide low cost energy for each and every Ohioan."

Rep. Jack Cera - a member of both the working group and the commission - praised the workgroup for its work but disagreed with the report's recommendation that new severance tax revenue go toward an income tax cut.  "Due to the instability of severance tax revenue, it is a mistake to allocate that money in the state budget to pay for an income tax cut that won't benefit the middle and working class," Rep. Cera said. "Any increase in severance tax revenue should be used to support the shale communities and build infrastructure that can help the oil and gas and related industries in Eastern Ohio continue to grow."

The challenge of compiling the report, said 2020 co-chair and workgroup member Sen. Bob Peterson, was gathering information to compare Ohio's tax climate against states, including Arkansas, Colorado, Louisiana, North Dakota, Oklahoma, Pennsylvania, Texas and West Virginia.  "It's very hard to do," Sen. Peterson said of the comparison. "I think the thing you find in this report is that we've pulled together information so you can compare very different tax structures...and try to get more of a total tax burden on the industry."

In a statement, Renew Ohio Executive Director Michael McGuire praised lawmakers for prioritizing tax reform, urging the commission to build on prior tax cuts and to not hike the severance tax.  "The commission should summarily discard the proposal to increase the severance tax on oil and natural gas producers, which would only dissuade new producers from relocating to Ohio and unfairly penalize the ones that already made the decision to do business here," Mr. McGuire said.

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