The plan to cut your income taxes by increased taxes on gas and oil producers won't work, says a veteran industry spokesman, and it will force drillers out of Ohio.
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The rush to drill shale gas wells like this one developed for Chesapeake Energy in Carrol County in 2013 is slowing down because producers are making less and less money on the sale of Ohio gas. A glut of regional supply has driven down prices well below national published prices, making it difficult for some companies to cover their expenses. COLUMBUS, Ohio -- The Kasich Administration's plan to impose a 6.5 percent tax on the state's shale oil and gas producers is "unconscionable" and will drive out companies that are already laying workers off and pulling rigs out of the state, the Ohio industry's long-time spokesman said Thursday.
"We all know you don't impose new taxation at the bottom of the business cycle," Tom Stewart, the outgoing executive vice president of the Ohio Oil and Gas Association, said in a luncheon address to the Ohio Petroleum Engineers. "The Ohio industry is essentially in a recession," he said.
The luncheon was just one of the events held this week during the association's three-day annual meeting. About 1,200 are attending. Members of the Ohio General Assembly are among the many speakers.
The Kasich administration has tried to get a tax increase through the legislature for several years, and still hopes to be able to lower the state's income tax rates by increasing oil and gas taxes that would fall on out-of-state producers who are drilling horizontal wells in Ohio's Utica shale.
The industry and the administration have battled repeatedly over the size of a new tax, known as a "severance tax" to reflect that it taxes the production of minerals being extracted from the earth.
The administration's 6.5 percent tax rate for gas sold at the well and 4.5 percent for natural gas or related natural gas "liquids" such as ethane that have been processed, is the highest yet proposed. For two years, the administration tried to get a 2.75 percent rate through the legislature. The industry had proposed 2 percent but then accepted a legislative initiative of 2.5 percent.
Robert Nichols, Kasich's press secretary, dismissed Stewart's remarks as just another example of "endless excuses" from the industry.
"We don't pay much attention to the endless excuses from big oil lobbyists -- especially retired big oil lobbyists -- as to why big oil should continue to benefit from low taxes in Ohio, but Ohio's families and businesses should keep paying high taxes" he said.
The current gas and oil taxes, dating back years when small local producers drilled vertical wells into sandstone formations to tap gas and oil pockets, is 20 cents a barrel of oil produced, and 3 cents per every 1,000 cubic feet of gas. The tax revenues traditionally have gone to support the Ohio Department of Natural Resources, a practice the industry supported.
Conventional drillers in the state would continue to pay these same rates under the administration's plan.
Stewart, stressing he was speaking for himself and not the oil and gas association, said the idea of funding a general income tax cut by "discriminating" against one industry is just plain bad public policy, and proof "that Ohio is not open for business," a line parodying an administration slogan.
And it's poor policy for another, more basic reason, he said -- production in Ohio is not yet at the level of shale production in Texas or North Dakota.
The administration "would create tax policy that was based on the foibles of the porosity of Utica shale," Stewart said of the uncertainty underlying Utica shale production. "Going forward, the policy is stunning."
Also, the administration's tax plan would not allow producers to deduct the expenses they incurred drilling the well, or to deduct the expenses getting the oil and gas from the well into a pipeline or processing plant. These expenses are typically deductible, said Stewart, in the severance tax proposed by most states and foreign countries.
"This tax is just a gross receipts tax," he declared. "You pay whether you are making money or not."
Finally, the biggest thorn in the industry's side associated with the proposed tax is that the administration seems intent on applying the tax on calculated receipts rather than actual sales receipts.
In other words, the state would ignore the price of gas and oil in the region -- which is 25 percent lower than national prices because of a glut -- and instead calculate industry tax bills as if they had been able to sell the gas and oil at nationally advertised prices, said Stewart.
"The government will be telling you how much you should have made," Stewart said.
Shawn Bennett, the new executive vice president of the Ohio Oil and Gas Association, testified two weeks ago before the Ohio House Ways and Means Committee, explaining in detail how the lower prices here have convinced many drillers to leave.
"In December 2014, Ohio had a record of 59 rigs operating in the Utica," he said. "Today, a third of those have simply left the state, leaving only 37," he said.
"Our industry is entering a recession and the recession is evidenced by the reduction of capital expenditures, falling rig rates and shrinking economic development of the Utica play - particularly when compared to other areas," he testified in prepared remarks.
As for the administration's plan to ignore regional prices when assessing each company's tax bill, Bennett said, "In essence, this proposal would give the [tax] commissioner free reign to tax the industry for a price we didn't actually receive."