A Media Trackers analysis of data from the Ohio Department of Natural Resources (ODNR) and the Pennsylvania Department of Environmental Protection (PDEP) suggests a sharp hike in Ohio’s “severance tax,” which energy companies and landowners incur when oil or natural gas are extracted from the earth, could hamper Ohio’s nascent energy economy. Despite a rapid downturn in Pennsylvania’s drilling permit requests, Ohio legislators may soon reconsider increasing Ohio’s energy taxes to a level closer to Pennsylvania’s.
Roughly one year after energy companies began investing heavily in the Utica and Marcellus formations beneath Pennsylvania, permit data from PDEP indicate the economic growth experienced there is tailing off. Meanwhile, ODNR permit records show Ohio’s drilling activity gradually ramping up.
Although Pennsylvania does not have a severance tax, it does levy numerous expensive taxes and fees on the oil and gas industry. With the state’s relative head start in “fracking” operations, Pennsylvania’s taxes generate roughly 100 times Ohio’s tax revenues from oil and gas companies.
Ohio’s competitive advantage with regard to total tax burden has already driven some Pennsylvania energy companies to expand business in the Buckeye State, the Pittsburgh Post-Gazette has reported.
Despite Ohio’s advantage over neighboring Pennsylvania, oil and gas companies face higher taxes than many companies doing business in Ohio. In addition to the state’s income tax and a Commercial Activity Tax on gross receipts, Ohio energy companies must also pay the existing severance tax and a separate ad valorem tax on natural resources.
In recent history PDEP has issued hundreds of new drilling permits each month, but a rapid decline in new activity is evident in the data. In January 2011, 501 new Marcellus and Utica field permits were issued. In August 2012, only 218 new permits were granted.
In Ohio, the drilling permit trend is positive, but the number of permits issued far less than in Pennsylvania. In January 2011, only one drilling permit in the Marcellus and Utica fields was issued, compared to 46 new permits issued in August 2012.
In response to the oil and gas find in the Utica and Marcellus shale fields under eastern Ohio, this spring Governor John Kasich – a Republican – proposed a major increase in the severance tax rate levied against energy companies and landowners in the state. Though Kasich’s proposal met resistance in the Republican-controlled General Assembly and from conservative groups including the Ohio Liberty Coalition, Americans for Tax Reform, and the National Taxpayers Union.
Kasich has suggested that Ohio’s competitive advantage could be reduced without harming business, with the new revenue redistributed as a statewide income tax rebate. An Opportunity Ohio study based on current rig output indicates rebates would be approximately $16 per Ohioan, starting four years after the implementation of Kasich’s proposed tax hike.
While supporters of the Kasich tax hike insist hiking taxes on out-of-state corporations like Marathon Oil and small Ohio energy firms such as Artex Oil Company would have “no appreciable impact” on companies’ willingness to do business in Ohio, an annual survey of energy company executives found that Kasich’s tax proposal “make investment in Ohio much less desirable.”
Despite an annual industry survey’s findings to the contrary, Kasich spokesman Rob Nichols has insisted there is no evidence to support critics’ assertions that higher taxes on energy companies would dissuade energy companies from doing business in Ohio.
While no legislation to increase the tax rate on the energy industry has been introduced, Statehouse rumors are that the House of Representatives will take another look at Kasich’s severance tax proposal during the post-election “lame-duck” session or while debating Ohio’s next biennial budget.