The Star Beacon; Ashtabula, Ohio

World, nation, state

February 12, 2014

Revised fracking-tax bill expands income-tax cut

House Republicans hope to roll out a revised fracking-tax bill this week with a slightly higher rate, a bigger income-tax cut and money directed to areas where shale drilling is most prevalent.

Two weeks ago, Rep. Matt Huffman, R-Lima, was discouraged by Gov. John Kasich’s position on his severance-tax bill, which was written with significant industry input. Last month, Kasich said he told House GOP leaders that “puny doesn’t work,” and that he would veto any proposal that doesn’t pass “the smell test in terms of what I think is fair.”

Since then, Huffman said, “We’ve had several very productive meetings.”

Prodded by Kasich, GOP lawmakers and the industry are looking to update Ohio’s severance-tax rates as the state experiences a shale fracking boom that already has seen more than 660 wells drilled since 2010.

The proposed severance tax is expected to increase from 2 percent to 2.25 percent - bringing it closer to the higher rate that Kasich wants, Huffman said.

“Is it as high a rate as you’ll find in Western states? No,” said Tom Stewart, vice president of the Ohio Oil and Gas Association. “But we want the capital dollars to flow to us.”

While the current bill called for about half of the revenue to go toward an income-tax cut, the revised bill, Huffman said, will bump that to 80 percent. “In order to make this an (overall) tax cut, the income-tax reduction needed to be a lot bigger,” he said.

The remaining 20 percent would be divided among drilling regulation, capping orphan wells and directing some money back to the state’s top shale-drilling counties.

The revised bill also will try to address concerns about post-production costs that oil companies could deduct from their gross receipts before taxation.

Criticisms of those initial definitions were fair, Huffman said, noting that the Kasich administration called them a “black hole.” Neither the Department of Taxation nor the Legislative Service Commission were able to estimate how much revenue the bill would generate.

“I think the industry knows what it means, but that doesn’t do any good if the person collecting the tax doesn’t know what it means,” Huffman said.

Allowing drillers to deduct the cost of transporting and processing the resources makes it a fair tax on the true value of the product, Stewart said. “Everything being considered happens before you have sold the product.”

Stanley Bialczak, who served 30 years as legal counsel for the Ohio Department of Taxation, including the Energy Tax Division, said the original bill needed more precision, particularly in how it defined post-production costs.

“If not, it leads to lawsuits and confusion and a difficulty in administering the tax,” he said.

Bialczak also worries whether the state can verify the deductions with its limited staff.

While shale frackers - mostly big corporate drillers - would see a tax hike in the bill, effective taxes on traditional vertical drillers probably would be cut in half.

“The conventional producers are under great stress,” Stewart said, noting that traditional drilling is at its lowest level in Ohio since World War II. “No way do you duplicate the massive reserves established under shale.”

The revised bill would still allow landowners to claim an income-tax credit on up to 12.5 percent of the total severance tax paid on a well, but would no longer allow the credit for oil producers.

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