COLUMBUS — A lawmaker panel recommended further studies of Ohio’s tax rates on oil and gas produced via horizontal hydraulic fracturing, citing volatile commodity prices among the reasons for delayed action on a rate increase.
The informal working group of a new tax policy study commission also said any future increase in taxes on fuels produced via fracking should include triggers to account for dropping commodity prices.
“We are in a historical economic situation with the industry because of what’s going on in Saudi Arabia...,” said Rep. Jeff McClain (R-Upper Sandusky), co-chairman of the new 2020 Tax Policy Study Commission, who was also involved in the development of the severance tax report. “We want to be cautious. We want to make sure we take care of Ohio, but we want to make sure that we don’t kill the industry.”
Sen. Bob Peterson (R-Sabina), the other co-chairman of the group, added, “The industry’s in severe distress economically. Now is probably not a good time to increase the tax....”
McClain and Peterson released the severance tax report Thursday during the initial meeting of the tax policy commission, which was formed as part of the biennial budget bill earlier this year to undertake a longer-term study of Ohio’s tax laws. Implementation of a flat income tax rate is among the issues that will be considered.
The severance tax report was developed by an informal working group, created as part of the same budget bill.
Republican legislative leaders said in June that a report outlining a potential severance agreement would be issued on Oct. 1; the report released Thursday, however, recommends further consideration of the issue.
The 56-page document outlines the methods other states use to tax oil and gas produced via fracking.
“Ohio’s total tax burden on the oil and gas industry is as low or lower as any other states that have a severance tax,” Peterson said. “So we’re low.”
Lawmakers also acknowledge a need to update Ohio severance tax rates and related policies.
Thursday’s report notes the oil and gas industry is “under financial duress” due to natural market forces. As such, “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.”
The report added, “This is another reason why continuing the discussion of severance tax reform is prudent.”
The report concluded that any increased severance tax should be comparable to rates in states, and increased collections should be directed to local governments in communities where fracking activities are under way and leveraged to lower income tax or other tax rates.
Gov. John Kasich, who has been pushing for an increase in the severance tax for several years, voiced disappointment in the study late Thursday.
“The result of the commission’s report is disappointing,” the governor said in a released statement. “Our proposal is reasonable and will continue Ohio’s competitive advantage over other oil and gas states. Make no mistake, our fight to get Ohioans the income tax cut they deserve will continue.”
But the executive vice president of the Ohio Oil and Gas Association voiced support for the recommendations Thursday.
“We support the Oil and Gas Severance Tax Workgroup’s recognition of the fact that our industry is in the middle of the most severe downturn in the last 30 years and increasing the severance tax now would exacerbate an already dire situation,” Shawn Bennett said in a released statement. “OPEC continues to manipulate the market in an effort to stifle the industry’s ability to continue investing in development, and we face an increasingly unpredictable and costly regulatory system at the federal level. 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.”
State Rep. Jack Cera (D-Bellaire), who served on the working group that developed the report, voiced support for the panel’s recommendation that part of the proceeds of any severance tax increase be directed to eastern Ohio communities.
“I especially appreciate and support the recommendation that some revenue from any increase in the severance tax should go toward helping local communities in the shale region,” he said in a released statement. “These communities are directly impacted by the increase in drilling activity, and I believe a significant portion of the severance tax should go to investing in local infrastructure and basic services. ... 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.”
 
Marc Kovac is the Dix Capital Bureau Chief. Email him at mkovac@dixcom.com or on Twitter at OhioCapitalBlog.