Columbus -- The Ohio House began deliberations Dec. 10 on legislation to revamp taxes charged on oil and gas produced in eastern Ohio's emerging shale oilfields.
House Bill 375 calls for lower taxes on existing conventional wells and increasing rates on those drilled horizontally, with excess proceeds devoted to plugging abandoned wells and potentially cutting income tax rates.
"I believe this comprehensive tax reform proposal is a fair and balanced approach that will provide oil and gas producers with more certainty," Rep. Matt Huffman (R-Lima) told members of the House Ways and Means Committee. "Certainty is an important factor to companies when weighing their tax burden and deciding whether or not to invest billions into energy exploration and development within our state."
He added, "Taxpayers, of course, will benefit from this proposal as the creation of two new offsets will impact royalty owners while additional revenues are earmarked for a reduction of the personal income tax."
The legislation is a departure from a plan pursued by Gov. John Kasich, who sought to increase severance tax rates on oil and gas produced through fracking, a process that involves pumping large volumes of water, chemicals and sand into shale formations deep underground.
Kasich wanted to use the proceeds of the tax increase to implement a corresponding decrease in the state's income tax rates.
The governor has said repeatedly that the changes are needed to ensure some economic benefit for Ohio from big profits expected by out-of-state energy companies. And he has said his rate proposal was still lower than other states.
Republicans balked at the plan, however, saying it could stifle shale oil development and prompt energy companies to focus their attention elsewhere.
House Bill 375
House Republicans' new bill, which has more than a dozen co-sponsors, calls for tax rates on non-horizontal wells to be cut in half.
Horizontal wells would be subject to a 1 percent tax on gross receipts over the first five years of production, then 2 percent thereafter as long as production remains above certain levels. The lower rate during the initial years will allow producers to recoup their costs, Huffman said.
Proceeds from the increased severance tax will first go to state regulators overseeing the fracking industry, with extra collections used to cap orphan oil and gas wells and for potential income tax rate cuts.
HB 375 also includes additional tax breaks for well owners.
House Speaker Bill Batchelder (R-Medina) is co-sponsoring the bill, calling it a "comprehensive, carefully constructed piece of legislation that incorporates many important aspects of oil and gas exploration in Ohio."
He added, "While I did not support previous proposals to institute a severance tax on the oil and gas industry, I believe that this legislation accomplishes many of the goals that needed to be addressed and can give Ohioans confidence in the process."
The governor has not yet taken a firm stance on the new legislation.
"Ohio's getting back on track because of jobs-friendly policies like the $3 billion in tax relief that the governor and the general assembly have enacted, and the governor is always interested in exploring additional ways to build on that tax relief and keep our economic recovery moving forward," Rob Nichols, Kasich's spokesman, said in a released statement. "We're glad the general assembly took this first step, we're studying the proposal in detail, and we look forward to working with the legislature closely as the bill moves through the legislative process."
Industry groups are supporting the bill.
In a released statement, Tom Stewart, executive vice president of the Ohio Oil and Gas Association, called the legislation "rational, substantive and good for Ohio."
"If passed, the package would also provide much needed clarity for oil and gas producers who have already invested heavily and plan to invest billions more to explore the state's Utica Shale formation," he said. "The ongoing debate about increasing the severance tax has created an air of uncertainty within the industry. Resolving this issue will allow oil and gas development to flourish in eastern Ohio, which will expand economic opportunity and job growth throughout the state."
Some House Democrats, however, remain opposed, saying lawmakers and the governor should push for a higher severance tax rate and use the proceeds to pay for more state inspectors to regulate the industry, plus provide a needed funding boost to schools and local governments.
"Every other state that has found this black and gray gold has benefited, whether it was school systems or whether it was making sure that people are being treated fairly at the local level," said Rep. Bob Hagan (D-Youngstown). "That's what we want to do. …This has been under our feet for over a million years in the eastern part of the state. We're the ones that should be the biggest beneficiaries of it instead of giving it as a tax break…"
Marc Kovac is the Dix Capital Bureau Chief. Email him at firstname.lastname@example.org or on Twitter at OhioCapitalBlog.