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Groups seek common severance tax in 3 states

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Public policy groups in West Virginia, Pennsylvania and Ohio are asking the governors of the three states to adopt a common rate for their severance taxes on gas and oil.

The reason, the groups say, would be to minimize competition among the states and allow them to concentrate on common concerns regarding drilling.

But one gas industry spokesman in Ohio says competition is good and West Virginia's reasons for levying severance taxes are different from those in his state.

On March 10, the three groups jointly submitted a letter proposing a common severance tax. The letter was sent to the governors of the three states. It was signed by Ted Boettner, executive director of the West Virginia Center on Budget and Policy, Sharon Ward, director of the Pennsylvania Budget and Policy Center, and Amy Hanauer, executive director of Policy Matters Ohio.

"Given our states' shared experience with natural gas and oil extraction, a common rate and structure of taxation would be a smart approach," the letter reads. "Working together, we can make sure our region benefits from new development even as we protect our communities from new costs and environmental risks."

West Virginia has a base gas severance tax rate of 5 percent of the gross value of gas collected. Ohio has a base rate of 2.5 cents per thousand cubic feet. Those are base rates that do not include tax holidays or other conditions affecting rates. Pennsylvania does not have a severance tax as such, but it charges an impact fee of $5,000 to $50,000 per well depending on the market price of gas and the length of time the well has been in production.

"Having a single tax rate across the three states would provide important long-term predictability for the industry and help provide a more promising future for Ohio, Pennsylvania and West Virginia," the letter states. "Setting a common tax no lower than the West Virginia rate, as we recommend, would bring the entire region more in line with gas-producing states in the West and in the South."

A single rate structure without holidays, exclusions and credits and with a similar tax base across all products yielded from a well would take taxes out of the competitive equation, eliminate distortions that widely varying rates might cause and help provide sustained funding for state priorities with little overall impact on the industry, the letter said.

"Interstate competition can only lead to a race to the bottom in employment, infrastructure and environmental protection. Interstate cooperation can assure that industry growth is managed in a way that maximizes benefits and minimizes costs to residents," the letter said.

Boettner said the letter was the work of a multi-state Marcellus Shale collaborative effort. The letter, he said, came from "trying to get policy makers to talk to each other instead of outmaneuver each other."

The three states have much to learn from each other, Boettner said.

"West Virginia always has been a huge energy state, where Ohio has not, traditionally," he said.

Ohio could look at what has happened with gas and oil development in Wetzel County and with coal development in McDowell County to see what has worked and what hasn't, he said.

"We can learn from Western states — more, actually — but we can learn from each other, too," Boettner said.

A position paper prepared by the Pennsylvania Budget and Policy Center last year compared Pennsylvania's impact fee with the middle-of-the-road West Virginia severance tax and the higher Texas severance tax.

"If Pennsylvania adopted the effective rate of West Virginia's severance tax — the middle rate of the three analyzed in this piece — the commonwealth could generate by 2019-20 nearly $1 billion more per year than it is likely to generate with the current impact fee. Every year, Pennsylvania is leaving hundreds of millions of dollars on the table that would be collected in other, more conservative states that use those funds to help pay for schools, infrastructure, and health care," the position paper reads.

Wendy Patton, senior project director for Policy Matters Ohio, said Ohio's severance tax is based on volume, not value. The Ohio General Assembly is considering several measures to increase the severance tax as a way of providing relief to people who pay personal income tax, she said.

Patton said in Ohio, as in West Virginia, people live near oil and gas wells, so the states need to use their severance tax revenues to pay for the needs of communities that are affected by drilling.

Ohio's oil and gas industry is doing well since it adopted widespread use of horizontal drilling and hydraulic fracturing, but the boom that had been predicted has not materialized, Patton said.

A common severance tax among the three states would allow communities to focus on their needs and would allow business conditions, not competing tax rates, to determine where wells should be drilled, she said.

But Thomas E. Stewart, executive vice president of the Ohio Oil and Gas Association, disagrees.

Yes, Ohio does have a low severance tax on natural gas, Stewart said.

"Isn't that a wonderful thing?" he asked.

Ohio has a low severance tax on oil and gas, and revenue from the tax mostly goes to oil and gas regulatory programs, Stewart said.

Unlike West Virginia, which traditionally sees its natural resources sent to other states for use, much of the natural gas in Ohio has been used in the state, Stewart said. Other states have higher severance tax rates, but that is mainly because those states don't have industries that use oil and gas close to the drilling sites, he said.

"It is Ohioans that benefit from natural gas, not people far away," he said.

Drillers in West Virginia already compete with those in Ohio and Pennsylvania for rigs, Stewart said. West Virginia is behind Pennsylvania in production, and it could end up behind Ohio if it raises its own severance tax rate, he said.

Meanwhile, Ohio Gov. John Kasich wants to increase the Ohio severance tax rate and use the new revenue to decrease the personal income tax rate, Stewart said. The gas industry sees that as placing a burden on gas producers as a way of taking a burden off others, he said.

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