The 2014 Ohio General Assembly will be faced with a new tax on oil and natural gas extraction in the state in the form of H.B. 375, or some version of it. The bill, introduced by Rep. Matt Huffman (R – 4th District), would create a new and separate severance tax on horizontal wells as opposed to vertical wells. This new tax legislation, it is hoped, will generate new revenues for the Department of Natural Resources and for plans to continue to reduce the state income tax burden.
In the past, industry groups in Ohio have been sympathetic to state regulation and taxation of the oil and gas industry in order to avoid greater federal EPA intervention. H.B. 375 should raise alarm bells for Ohio taxpayer advocates and those who want to see increased natural gas production and competition with neighboring states like Pennsylvania.
The current language of H.B. 375 would enact a 1-percent gross proceeds tax on each horizontal well that, after a period of time, would then jump to 2-percent. The rate would then drop back to 1-percent as well production declines. H.B. 375 does make an honest attempt to address a concern that was raised during the last legislative session, that many of the entities that would pay the new severance tax aren’t the well operators but the land-owners (many of whom are Ohio farmers). A series of income tax credits are created in H.B. 375 with the aim to make the land-owners liable for the severance tax whole.
What the overall revenue impact of H.B 375 is remains to be seen. The legislation is due for an initial committee hearing this Wednesday and a fiscal note should follow. Americans for Tax Reform urges lawmakers who have signed the Taxpayer Protection Pledge to be mindful of what is shaping up to be a tax hike. While robbing Peter to pay Paul is never a sound policy, if Ohio lawmakers do move forward with H.B. 375, it would behoove them to ensure the legislation is revenue neutral by offsetting the tax increase with revenue equivalent rate reductions in the Ohio personal income tax.