Ohio Gov. John Kasich’s mid-biennium review plan calls for an increase in Ohio oil and gas severance taxes, as proposed in House Bill 472. These increased taxes would fund certain local governmental initiatives and the Ohio Department of Natural Resources. They also would help offset personal income tax cuts outlined in the mid-biennium plan.

The current production-based severance tax scheme does not distinguish between production generated by conventional oil and gas wells and production generated by horizontal wells. The current severance tax under R.C. § 5749.02 is levied at a rate of $0.10 per barrel of oil and $0.025 per thousand cubic feet (MCF) of natural gas.

For conventional oil and gas wells, the tax under H.B. 472 would remain a volume-based tax but the rates would increase to $0.20 per barrel of oil and $0.03 per MCF of natural gas. The tax would be imposed on the “severer,” defined for conventional wells as the person who actually removes the oil or gas from the ground. Other changes to the state’s regulatory scheme are intended to militate against this tax increase, however, resulting in no economic change to the costs of production for conventional wells.1 Moreover, low-producing conventional wells would be completely exempt from the severance tax.

For horizontally fracked wells, the severance tax under H.B. 472 would be based on a gross receipts concept without deduction for certain costs and expenses (a concept that is somewhat consistent with the Ohio commercial activity tax and the new Ohio petroleum activity tax). The tax would be imposed on the “severer,” defined for horizontal wells as the person who has the right to sell the oil or gas from the horizontal well. For any given well, the severer could be different people — such as the driller, the landowner or a royalty owner, for example — for different portions of the extracted minerals. Under an amended R.C. § 5749.02(B), the tax would be levied at the rate of 2.75% of such gross receipts. The tax would be phased in for each horizontal well because a declining exemption, totaling $8 million, would be provided to gross receipts during the first 12 quarters of production. H.B. 472 also proposes an increase in the commercial activity tax from .26% to .30% of gross receipts.

During the past three weeks, critics of Gov. Kasich’s proposed severance tax bill argue it could suffocate Ohio’s nascent shale oil and gas play. The oil and gas industry, including the Ohio Oil and Gas Association, continue to support an amended version of House Bill 375, which was first proposed Dec. 4, 2013 by Rep. Matt Huffman (R-Lima). The House Ways and Means Committee was reportedly still considering amendments to the bill as late as Feb. 12, 2014, though a substitute bill has not yet been released.

H.B. 375 is, in essence, an alternative to Gov. Kasich’s bill; it proposes a modest severance tax increase on production from horizontal wells based on net proceeds from production. The H.B. 375 also would reduce the severance tax burden for conventional well owners and it provides horizontal well owners with credits and exclusions to eliminate other taxation through the commercial activity tax and income taxes. It remains unclear whether some version of H.B. 375, Gov. Kasich’s H.B. 472, or neither, will ultimately prevail.

Meanwhile, both bills have drawn sharp criticism from certain environmental and policy groups regarding how the revenue from increased severance taxes — as well as proposed tax hikes on tobacco/nicotine products — would be spent, and how personal income tax cuts would be dispersed across Ohio’s nine income tax brackets. Generally speaking, environmental policy groups favor much higher taxation on the oil and gas industry than either bill currently proposes.