Cash-strapped states weigh tax policy on drilling

COLUMBUS, Ohio -- For decades, one tiny county in the rolling hills of Ohio's rural reaches was a depressed farm community saddled with double-digit unemployment. Now, Carroll County boasts more active oil and gas wells than any other in the state, and the tax dollars are flowing right along with the crude and natural gas.

And in the same county, where unemployment reached 13.4 percent in 2009 amid declines in agriculture, there's now bustling activity at Carroll restaurants, car dealerships and the area's one hotel.

While the economic surge has been a welcome relief, Carroll County and others enjoying the newfound prosperity aren't all that interested in sharing the wealth. But that decision might not be theirs to make.

Ohio lawmakers and policymakers in other states are weighing how to use taxes and fees on oil and gas production to bolster state budgets and economies without alienating local communities or scaring away energy development.

In Ohio, many Carroll residents are up in arms over a proposal by Republican Gov. John Kasich to raise severance -- or taxes on high-volume drillers -- and then share the wealth from the state's oil and gas boom through an income-tax cut.

"I'm not for supporting everybody else with what we're doing, when this has been an area that's been depressed for a long time and nobody's done anything to help us along the way," said Amy Rutledge, who directs the visitors' bureau and local chamber. "Why should Appalachia Ohio support the rest of the state?"

A dozen states since 2011 have seen proposals to impose a new tax on oil and gas production, or to raise, lower or amend an existing tax, according to the National Conference of State Legislatures. Most of the proposals have died or never got off the ground, though Florida passed a measure reducing severance taxes to offset the higher cost of new technology needed to extract the hard-to-get oil remaining in those fields.

At least 36 states impose some sort of severance tax on oil, gas, coal, timber and minerals, generating more than $11 billion in revenue in 2010. Of those, 31 states levy severance taxes specifically on production of oil and gas, according to the legislative conference.

Pennsylvania is the only state that's part of the recent Marcellus and Utica boom that imposes no production tax. For now, state lawmakers have opted for an impact fee based mostly on the number of wells. Proceeds are targeted toward boosting regulation and repairing or upgrading roads and bridges around burgeoning well sites.

Of the first $202 million that Pennsylvania collected since approving the impact fees in February, the state gets $23 million off the top and $107 million is being split among 37 counties and some 1,500 municipalities hosting gas well. The remainder is ticketed for state regulatory agencies.

West Virginia also opted to increase permit fees rather than raise its severance tax.

Proponents of the production tax approach, including Kasich, argue that taxes on the extracted oil, natural gas and natural gas liquids can bring long-term benefits to state economies that impact fees can't. Once the resources are tapped and well construction is completed, wells could continue producing for half a century, according to some experts.

The Pennsylvania Budget and Policy Center, a liberal think tank, estimated the state lost $300 million between October 2009 and January by not passing a proposed tax on oil and gas production.

Kasich's tax plan is similarly stalled, as fellow Republicans who lead the Legislature grapple with the political fallout.

Though the national Americans for Tax Reform has sanctioned Kasich's plan as compatible with its anti-tax hike pledge, that doesn't mean the well-funded energy industry couldn't run ads against lawmakers who support the increase when they come up for re-election in two years.

As it stands, Ohio's production tax rates -- 20 cents a barrel on oil and 3 cents per 1,000 cubic feet of natural gas -- are among the lowest in the country. Annual collections on oil production have remained roughly flat from 2007 to 2011.

According to the Ohio Department of Taxation, tax revenue on natural gas production rose by less than 2 percent last year -- up $40,000 to $2.1 million -- despite an explosion of drilling activity that has included 391 new shale wells permitted the last 20 months. And Ohio never thought to tax natural gas liquids, a newly developing revenue area for the industry.

By contrast, total taxable sales in Carroll County rose 33 percent from 2011 to 2012, from $94.9 million from January to June of last year to $125.7 million during the same period this year. That meant more than $300,000 in additional sales tax revenue for the county -- one of about two dozen across eastern and southern Ohio benefiting from the boom in exploration mostly of the Utica Shale formation.

That uptick comes in a county that had been struggling against rising unemployment.

Dairies that once thrived in Carroll, the state's smallest county in total area, dwindled over the past 20 years as family farms struggled and shrank as it became harder to make money in the milk business. Tree and nursery farming -- a business dependent on people having extra spending money -- is now the county's largest industry.

Oil and gas taxes collected in Carroll and Ohio's 87 other counties are sent to state oil and gas regulatory programs, not to the general revenue fund, as in many other states. Texas, for example, saw $3.6 billion added to state coffers from its oil and gas severance taxes in the fiscal year that ended last month, according to the state comptroller's office.

Some states -- including Alaska, Wyoming and New Mexico -- reserve a portion of the oil and gas production taxes they collect for permanent funds. Interest from the funds can be used to help balance state budgets, providing support to government services like education, health care and environmental protection.

Oil and gas producers in Ohio oppose Kasich's plan. They argue that growth will result in the industry paying $1 billion in new taxes by 2015, even without any regulatory changes. They also point to local communities like Carroll County that are benefiting greatly from the boom.

Governments that raise taxes and increase impact fees risk driving away a lucrative new industry that could help with budget woes, said Kathryn Klaber, president of the Marcellus Shale Coalition, which represents producers.

"Businesses are looking at the return on the significant investment to explore and extract a resource and their overall costs, including what they're being asked to pay in taxes and fees," Klaber said. "Governments are looking at it from kind of the other side of that coin, which is how much can we extract revenue for government needs and position this revenue in a politically salient way. Those two perspectives often result in a real mismatch of interests."

The Kasich administration argues that if energy companies want the resources badly enough, they will have to come to Ohio to get them. The governor points to the nearly 400 new wells permitted, and 140 drilled in the Marcellus and Utica formations since December 2009.

Carroll County's Rutledge said she just wants to guarantee her county is standing strong when the boom subsides.

"It's not that we don't want to share, but we should be given more of a consideration because it's happening here," she said. "We're the ones that have to deal with all the things that come with progress: more traffic, more people, more crime. At this point, the companies have been taking great care of the roads, but who's to say what's going to happen for the next 15 years?"