Cash-strapped states weigh tax policy on drilling

By Julie Carr Smyth

Associated Press

Published: Wednesday, Oct. 3 2012 10:15 a.m. MDT

As it stands, Ohio's production tax rates — 20 cents a barrel on oil and 3 cents per 1,000 cubic feet of natural gas — are among the lowest in the country. Annual collections on oil production have remained roughly flat from 2007 to 2011.

According to the Ohio Department of Taxation, tax revenue on natural gas production rose by less than 2 percent last year — up $40,000 to $2.1 million — despite an explosion of drilling activity that has included 391 new shale wells permitted the last 20 months. And Ohio never thought to tax natural gas liquids, a newly developing revenue area for the industry.

By contrast, total taxable sales in Carroll County rose 33 percent from 2011 to 2012, from $94.9 million from January to June of last year to $125.7 million during the same period this year. That meant more than $300,000 in additional sales tax revenue for the county — one of about two dozen across eastern and southern Ohio benefiting from the boom in exploration mostly of the Utica Shale formation.

That uptick comes in a county that had been struggling against rising unemployment.

Dairies that once thrived in Carroll, the state's smallest county in total area, dwindled over the past 20 years as family farms struggled and shrank as it became harder to make money in the milk business. Tree and nursery farming — a business dependent on people having extra spending money — is now the county's largest industry.

Oil and gas taxes collected in Carroll and Ohio's 87 other counties are sent to state oil and gas regulatory programs, not to the general revenue fund, as in many other states. Texas, for example, saw $3.6 billion added to state coffers from its oil and gas severance taxes in the fiscal year that ended last month, according to the state comptroller's office.

Some states — including Alaska, Wyoming and New Mexico — reserve a portion of the oil and gas production taxes they collect for permanent funds. Interest from the funds can be used to help balance state budgets, providing support to government services like education, health care and environmental protection.

Oil and gas producers in Ohio oppose Kasich's plan. They argue that growth will result in the industry paying $1 billion in new taxes by 2015, even without any regulatory changes. They also point to local communities like Carroll County that are benefiting greatly from the boom.

Kathryn Klaber, president of the Marcellus Shale Coalition, which represents producers, said governments that raise taxes and increase impact fees risk driving away a lucrative new industry that could help with budget woes.

"Businesses are looking at the return on the significant investment to explore and extract a resource and their overall costs, including what they're being asked to pay in taxes and fees," Klaber said. "Governments are looking at it from kind of the other side of that coin, which is how much can we extract revenue for government needs and position this revenue in a politically salient way. Those two perspectives often result in a real mismatch of interests."

The Kasich administration argues that if energy companies want the resources badly enough, they will have to come to Ohio to get them. The governor points to the nearly 400 new wells permitted, and 140 drilled in the Marcellus and Utica formations since December 2009.

Carroll County's Rutledge said she just wants to guarantee her county is standing strong when the boom subsides.

"It's not that we don't want to share, but we should be given more of a consideration because it's happening here," she said. "We're the ones that have to deal with all the things that come with progress: more traffic, more people, more crime. At this point, the companies have been taking great care of the roads, but who's to say what's going to happen for the next 15 years?"

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