John Kasich’s budget plan hardly breaks with his mantra that low tax rates are the key to economic growth. Yet part of his plan calls for a modest increase in the state’s severance tax, levied on the oil and gas industry. The governor’s persuasive reasoning is that the state as a whole should reap some benefit from the oil and gas boom triggered by discoveries in deep shale formations.
Last year, Kasich’s fellow Republicans in the legislature succeeded in deleting a severance tax increase from a mid-biennium budget bill. The governor now has packaged the increase with tax cuts, but still faces an uphill battle, especially with representatives of the oil and gas industry. They argue that an increase in the state’s severance tax will slow development and cost high-paying jobs, rigs moving to other states.
That’s an unlikely possibility. As the governor correctly has noted, while a tax increase has been in the works, billions have been invested in Ohio, its shale formations rich in resources. More, the proposed tax rates would leave Ohio with lower rates than other states, including Pennsylvania, West Virginia, Texas and North Dakota.
Ohio’s tax on oil would rise from the current $0.20 per barrel to 1 percent in the first year, then 4 percent. For natural gas, the rate would rise for new, horizontal wells from $0.03 per thousand cubic feet to 1 percent of the price of the product each quarter. The governor’s plan also would tax natural gas liquids, now exempt, starting at 1.5 percent the first year, rising to 4 percent the next.
The debate with the oil and gas industry reflects the usual give-and-take during budget negotiations. In the end, it is unrealistic for the industry to expect to enjoy a disproportionate share of a one-time source of wealth. Although this editorial page disagrees with using a severance tax increase to offset further cuts to the income tax, the governor is right to keep up the pressure.
Correction: As originally published, the above editorial erred in describing the current tax rate on natural gas. The editorial now reflects the correction.