Severance Tax Modernization: One More Step In The Right Direction

Governor Kasich's proposed income tax reduction, set off by a modernization of Ohio's severance tax on the oil & gas industry, has gotten a lot of attention. Whether from the press, other elected officials, or whomever, there's no lack of opinions on the matter.

But there's one certainty in the debate: Ohio's tax climate is unfriendly to business and needs reform.

A study by the Tax Foundation found that, in 2012, Ohio ranked 39th overall in the nation for our business tax climate. The most significant driver of that ranking? Individual income tax. Ohio ranks an abysmally low 42nd in the nation for the burden state and local governments put on families via the individual income tax.

But it doesn't end there.  Such a heavy income tax burden discourages small-business owners from growing jobs and investing in this state.  Since many small businesses are pass-through entities (sole proprietorships, limited liability companies and partnerships, S-corps, etc.), these companies pay their taxes at income tax rates.

And with small businesses creating two out of every three jobs, employing 48% of Ohio's workforce and making up more than 98% of Ohio businesses, that's a demographic Ohio cannot afford to alienate.

Like it or not, that's the framework for the debate on Ohio's severance tax.  And that's exactly why we at GOHP & 3BP wholeheartedly support this proposal.

Of course, we recognized that there's disagreement, even among conservative bloggers, on the specifics of the Governor's proposal.  And with all the interests--many of them heavily funded interests, mind you--pulling folks in every direction, it's no mystery as to why there is such a difference of opinion.  The fact is, despite offering a much-needed income tax reduction, Kasich's proposal does, on its face, raise the severance tax.

But for real conservatives, this issue goes beyond the traditional "taxes are bad" mantra.  Yes, the proposal would raise the severance tax rate--but all told, the oil and gas industry in Ohio would still have the lowest tax burden in the nation among major oil/gas producing states.

That's not spin--that's cold, hard facts from an independent study conducted by accounting firm Ernst & Young:

The proposed law would increase the effective severance tax rate in Ohio from 0.5% or 0.8% (depending upon the type of well) to 2.7%.  With the increase, Ohio’s effective severance tax rate (ETR) would be 16% lower than the other states’ average for the well producing dry natural gas and natural gas liquids and 40% lower than the other states’ average for the well producing dry natural gas and oil.   

If the proposed severance tax change is adopted, Ohio would still rank lowest among the eight states in terms of overall effective tax rates, including all major state and local taxes, for both types of wells.  Ohio’s overall ETR would be 40% or 48% below the average ETR in the other states...

That last part really stands out because Ernst & Young looked at all state and local taxes, and not just the severance tax independently.  Under Kasich's proposal, not only would Ohio still have the lowest severance tax, but also the lowest overall tax burden among major oil & gas producing states.

Governor Kasich's proposal would keep Ohio's tax burden low and the oil and gas industry know it.  Why else would the CEO of BP be making a substantial investment in Ohio without mention of the severance tax?

The jobs and gas production remain a subject of speculation, Dudley said during his speech. But BP is excited about the potential of Ohio's shale gas, he said, and so is he.

"In 2009, I was skeptical of the shale revolution," said Dudley, a Chicago native and BP's first American-born CEO. "I'm now convinced the U.S. has enormous reserves of natural gas."

He said energy companies will be coming to Ohio for its natural gas liquids...

And how about Chesapeake Energy setting up an Ohio headquarters, purchasing 291 acres for development?


The industry isn't afraid of this proposal, but what they are afraid of is uncertainty.  Oil and gas companies want to know what they're getting into, rather than being blindsided with taxes and regulations years down the road.  The regulations, having passed the legislature, are already in place to give those companies that predictability.


The severance tax modernization deserves to follow.


At the end of the day, the industry knows this is a good plan for a state that's seen its population stagnate in the face of such an onerous income tax burden.  The fact is, people have been voting with their feet for decades to avoid such arduous taxation.  Businesses have done the same, taking jobs with them.


Chipping away at that burden is one way to reverse that trend.  Just ask business owners:

Ohio's tax climate needs reform and where better to start than with a severance tax that hasn't been touched in over 40 years.  It's one more step we can take to make Ohio more business-friendly and attract more job creators. Oh, and that's on top of an income tax cut for you, the individual Ohio taxpayer.  Not too shabby if you ask us. Cross-posted at GOHP Blog.