States weigh tax policy on drilling

Cash-strapped governments consider fees on gas, oil production

Rural Carroll County in Ohio boasts more active natural-gas and oil wells than any other county in Ohio, and the tax dollars are flowing right along with the crude, which has attracted the unwanted interest of neighboring counties. Enlarge photo

Tony Dejak/Associated Press

Rural Carroll County in Ohio boasts more active natural-gas and oil wells than any other county in Ohio, and the tax dollars are flowing right along with the crude, which has attracted the unwanted interest of neighboring counties.

COLUMBUS, Ohio – For decades, one tiny county in the rolling hills of Ohio’s rural reaches was a depressed farm community saddled with double-digit unemployment. Now, Carroll County boasts more active natural-gas and oil wells than any other in the state, and the tax dollars are flowing right along with the crude and natural gas.

And in the same county, where unemployment reached 13.4 percent in 2009 amid declines in agriculture, there’s now bustling activity at Carroll restaurants, car dealerships and the area’s one hotel.

While the economic surge has been a welcome relief, Carroll County and others enjoying the newfound prosperity aren’t all that interested in sharing the wealth. But that decision might not be theirs to make.

Ohio lawmakers and policymakers in other states are weighing how to use taxes and fees on natural-gas and oil production to bolster state budgets and economies without alienating local communities or scaring away energy development.

In Ohio, many Carroll residents are up in arms about a proposal by Republican Gov. John Kasich to raise severance – or taxes on high-volume drillers – and then share the wealth from the state’s drilling boom through an income-tax cut.

“I’m not for supporting everybody else with what we’re doing, when this has been an area that’s been depressed for a long time and nobody’s done anything to help us along the way,” said Amy Rutledge, who directs the visitors’ bureau and local chamber. “Why should Appalachia Ohio support the rest of the state?”

A dozen states since 2011 have seen proposals to impose a new tax on natural-gas and oil production, or to raise, lower or amend an existing tax, according to the National Conference of State Legislatures. Most of the proposals have died or never started, though Florida passed a measure reducing severance taxes to offset the higher cost of new technology needed to extract the oil remaining in those fields.

At least 36 states impose some sort of severance tax on natural gas, oil, coal, timber and minerals, generating more than $11 billion in revenue in 2010. Of those, 31 states levy severance taxes specifically on production of natural gas and oil, according to the legislative conference.

Pennsylvania is the only state that’s part of the recent Marcellus and Utica boom that imposes no production tax. For now, state lawmakers have opted for an impact fee based mostly on the number of wells. Proceeds are targeted toward boosting regulation and repairing or upgrading roads and bridges around burgeoning well sites.

Of the first $202 million that Pennsylvania collected since approving the impact fees in February, the state gets $23 million off the top and $107 million is being split among 37 counties and 1,500 municipalities hosting gas wells. The remainder is ticketed for state regulatory agencies.

West Virginia also opted to increase permit fees rather than raise its severance tax.

Proponents of the production-tax approach, including Kasich, argue that taxes on the extracted natural gas, natural-gas liquids and oil can bring long-term benefits to state economies that impact fees can’t. Once the resources are tapped and well construction is completed, wells could continue producing for half a century, according to some experts.

The Pennsylvania Budget and Policy Center, a liberal think tank, estimated the state lost $300 million between October 2009 and January by not passing a proposed tax on gas and oil production.

Kasich’s tax plan similarly is stalled, as fellow Republicans who lead the Legislature grapple with the political fallout.

Though the national Americans for Tax Reform has sanctioned Kasich’s plan as compatible with its anti-tax hike pledge, that doesn’t mean the well-funded energy industry couldn’t run ads against lawmakers who support the increase when they come up for re-election in two years.

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 mostly 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 in 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 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 during the last 20 years as family farms struggled and shrank when became harder to make money in the milk business. Tree and nursery farming – a business dependent on people having extra spending money – now is the county’s largest industry.

Natural-gas and oil taxes collected in Carroll and Ohio’s 87 other counties are sent to state gas and oil 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 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 natural-gas and oil production taxes they collect for permanent funds. Interest from the funds can be used to help balance state budgets, providing support to government services such as education, health care and environmental protection.

Gas and oil 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.