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2014 Year in review: Groups can't agree to raising severance tax

Raising the tax on oil and gas drillers has been a major issue in Ohio. But just when it seemed like policymakers were poised to take a big step towards a change, other issues got in the way.

Going back-and-forth on the severance tax seems to be a new annual tradition between Gov. John Kasich’s administration and the oil and gas industry. Legislators from the House and Senate are also in the mix—falling into both camps.

Raising the tax on the oil and natural gas extracted from Ohio’s shale formations has been one of Kasich’s top issues ever since taking office. This is sometimes referred to as the “fracking tax” since the resources are extracted by use of hydraulic fracturing.

This year the groups appeared on the verge—closer than ever before—on making a deal.

Kasich started the year asking for a 2.75% severance tax rate. The oil and gas industry was supporting a House bill that asked for a 2.25% tax rate. And while those numbers may seem close—Tom Stewart with the Ohio Oil and Gas Association says the rates can be deceiving.
 

“People often ask me what’s the difference between 2.0 and 2.75?,” Stewart said. “Why are you quibbling about that? We are quibbling about very, very large numbers.”

The House ended up passing a bill in May that seemed to be a compromise—meeting in the middle of both proposals at 2.5%.

When it moved to the Senate—Stewart said his association would seek an exemption to the tax on business transactions—known as the Commercial Activities Tax.
 

“In light of the fact that we would be agreeing to essentially 10 CAT taxes that they shouldn’t be piling on by adding another CAT tax because this industry has agreed to a taxing scheme that is specific to a very unique industry,”  Stewart said.

Wendy Patton with the liberal-leaning think tank Policy Matters Ohio  joined other critics who believed the rate needed to be higher and that more revenue must be directed to local governments.

“We are not raising the money from this important tax that we need to meet the cost of impacted communities, to build opportunity for the state in the future, a state that will not have these precious resources anymore and to provide for a diversified economy after the boom goes bust,” Patton said.

This year there were some problems at drilling sites such as a spill in Morgan County and a fire in Monroe County. Patton added that she feels it’s important to have a portion of tax revenue going into some type of savings fund in case communities need to recover from such issues.

“We could face that kind of emergency at any time we just need to be constantly aware, constantly vigilant and it’s prudent to have a savings fund in case there is an emergency,” Patton said.

The midterm elections and debates over other big issues like redistricting put the severance tax issue on the backburner.

The House bill stalled in the Senate and now the legislative process must start all over again with the new General Assembly. Kasich said he’s gearing up for another fight on raising the severance tax and likely won’t go back to the rate proposed by the House.

“These oil companies, out of state companies, are paying 20 cents on a hundred dollar barrel of oil,” Kasich said. “That’s unbelievable. We wanted to raise it like 4 or 4.5% - we would have the lowest severance tax in America.”

The dynamic of the severance tax debate might look a little different next year with news that Stewart is retiring as executive vice president of the Ohio Oil and Gas Association. This means he’ll no longer lead the group’s advocacy efforts at the Statehouse.

However, Stewart did have some parting words on what he thinks the 2015 debate will look like—saying things will be much different with oil and gas prices dropping.

“That is stressing out big time stressing out economics particularly in emerging shale play,” Stewart said.

Another hurdle for the Kasich administration—in 2015—is to get a higher severance tax rate through a more conservative House that now has a record number of Republicans.