Oil taxes tempt recession-scarred U.S. states as prices plummet

Oil taxes tempt recession-scarred U.S. states as prices plummet

MARK NIQUETTE and ROMY VARGHESE

DENVER, Colorado (Bloomberg) -- U.S. states are renewing efforts to pass taxes on oil and gas extraction and, while falling energy prices may please consumers, drillers say it’s just the wrong time to raise their costs.

At least 17 states last year considered imposing or amending so-called severance taxes, which generated more than $16 billion in 2013 in the U.S. Many are expected to introduce similar bills this year, according to the National Conference of State Legislatures in Denver.

Ohio Governor John Kasich plans to seek a higher levy on drillers to offset an income-tax cut after opposition from the industry and lawmakers in his own Republican Party frustrated past attempts. Democratic Governor-elect Tom Wolf in Pennsylvania wants a severance tax to fund education and infrastructure. Billionaire environmentalist Tom Steyer is leading a push for a California production tax to raise as much as $2 billion a year.

The price of oil dropped almost 50% in 2014 and fell to a five-year low of less than $50/bbl this week, which drillers say is prompting them to reduce spending and production plans. While the industry says higher taxes would worsen the situation, governors say energy companies can pay more for the natural resources they extract.

“This is a total and complete rip-off to the people in this state,” Kasich said during an Oct. 28 speech in Columbus.

Going Easy

States are still recovering from revenue reductions and spending cuts caused by the 18-month recession that ended in 2009, and severance taxes have been a significant revenue stream for some, said Kristy Hartman, an NCSL policy specialist.

Thirty-five states levy taxes or fees on oil and gas extraction, and while most considering bills will act with the expectation that prices will eventually rise, the short-term drop might prevent “aggressive action,” Hartman said.

Kasich proposed increasing Ohio’s tax in 2013 and 2014, holding up a pair of dimes in speeches to signify the current 20-cent-per-barrel levy on oil. The Republican led-legislature failed to enact a measure, and Kasich has said “every day they wait, it goes higher.”

The governor is committed to “modernizing” the tax as part of a broader package to be revealed in February, spokesman Jim Lynch said. Senate President Keith Faber and House Speaker Cliff Rosenberger would say only that lawmakers will study the issue.

Inverted Industry

The Ohio Oil and Gas Association said that while the industry wants a “common-sense” levy, falling prices are squeezing drillers. Energy companies including Range Resources Corp., based in Fort Worth, Texas, Denver-based PDC Energy Inc. and Rex Energy Corp. in State College, Pennsylvania, have announced decreases in 2015 spending.

“I don’t see how you raise taxes on an industry that is currently upside down,” said David Hill, the association’s president, who operates wells in Ohio and West Virginia.

The industry has been a potent lobbying force, contributing $1.8 million to Ohio officials, candidates and political parties from July 1, 2011 to June 30, 2013, according to a study by Common Cause Ohio, a government watchdog.

“They are effective at getting what they want,” said Catherine Turcer, a policy analyst for the group in Columbus.

Longer Investment

In Pennsylvania, which enacted an impact fee on drillers in 2012, Wolf proposed a 5% severance tax during his campaign that could raise as much as $881 million a year, according to the Pennsylvania Budget and Policy Center. Wolf will work with legislative leaders on it after he takes office Jan. 20, spokesman Jeffrey Sheridan said.

David Spigelmyer, president of the Marcellus Shale Coalition, a Pittsburgh trade group, said the timing is bad and the proposed tax is “short-sighted policy” that could result in less capital expenditures and fewer jobs.

The levy won’t hurt drillers despite lower prices, Sheridan said.

“It will make the industry stronger, because Pennsylvania will then have the resources to put into education and to train our future workforce,” he said.

State residents support an extraction tax, and the drop in oil doesn’t affect that view because people understand that prices are volatile, said Chris Borick, director of the Muhlenberg College Institute of Public Opinion in Allentown, Pennsylvania.

Republicans are concerned that higher taxes would burden the industry, said Stephen Miskin, a spokesman for House Majority Leader Dave Reed. In November, Senate Republicans ousted Dominic Pileggi, who supports a severance tax, as majority leader.

Negotiation Incentive

Borick said he expects the incoming Democratic governor and Republican-led legislature to work out a deal because the state faces a $2-billion shortfall. The drilling tax is considered “least politically painful” because it doesn’t affect taxpayers directly, he said.

In California, Governor Jerry Brown, a Democrat, has said he can’t support raising taxes without a vote of the people. While Steyer hasn’t indicated whether he’ll promote legislation or a 2016 ballot measure, he said in a Jan. 5 statement that the state must “stand up to the oil companies who are gaming the system and exploiting our communities for the benefit of their bottom line.”