John Kasich told reporters at a recent Associated Press forum in Columbus that any severance tax proposal must pass “the smell test.” The governor wants a levy that permits “the taxpayers of this state to get some fair value out of the resources that are being depleted.” The concept is nothing new, other states having long linked their levies to reflect the presence of the oil and gas industry.
Ohio appears on the verge of a boom, the industry moving into the eastern part of the state, looking to tap shale formations for oil and natural gas. Thus, for the past three years, the governor has proposed a modest increase in the severance tax. Are fellow Republicans in charge of the state legislature ready to end their resistance?
House Republicans put forward a version of a new severance tax late last year. It has been the focus of hearings and other discussions. Now, state Rep. Matt Huffman appears ready to unveil a modified version, perhaps as early as next week.
The Lima Republican told the Gongwer News Service that the new version likely would include a higher rate, closer to the level the governor proposed. He also discussed targeting a share of the revenue to communities affected by the drilling and other activity. Both are steps in the right direction. Will the revamped tax pass the smell test?
The governor’s office and others exposed flaws in the structure of the initial House proposal, especially the approach of taxing “net proceeds.” They noted that such a basis would be vulnerable to clever minds carving loopholes. Huffman has talked about narrowing the opportunities for such maneuvers. Yet he seems still favorable to the “net proceeds” way.
Better to base a severance tax along the lines of gross value. Better, also, to erase the proposed exemption from the commercial activity tax.
When lawmakers replaced the corporate franchise tax with the commercial activity tax, they touted the low rate and broad base, both making less likely the need for special relief. Yet soon enough, they started delivering exemptions. Unfortunately, Huffman appears committed to delivering another.
The problem with these and other carvings is that they reduce the revenue stream. House Republicans have acknowledged the need for money to clean up abandoned wells across the state, and now to aid affected communities. There are additional priorities, including a sufficient oversight regime and a fund to support emergency response. The governor wants the revenue to cover an additional reduction in income tax rates. Ohio has more pressing needs, starting with early education and easing the cost of college tuition.
What the governor rightly has stressed is that his proposed severance tax hardly qualifies as onerous. Ernst & Young performed an assessment for the Ohio Business Roundtable and found that even with the governor’s increase, Ohio still would have the lowest tax burden of the eight states examined, including Texas, West Virginia and Pennsylvania. Quarrel with what the governor wants to do with the revenue. The structure of his plan remains the better option for recasting the severance tax.