FPS staff report
February 18, 2014
A modified version of the severance tax on horizontal oil and gas wells was presented to the Ways and Means Committee of the Ohio House of Representatives last week.
The bill, known as Substitute House Bill 375, proposes to reduce and, for certain periods of time, eliminate the severance tax on oil and gas extracted by means other than horizontal drilling.
The proposal would also impose a new, higher severance tax on oil and natural gas produced by horizontal wells based on “gross receipts” received at the first point of sale less any costs incurred prior to the first point of sale.
The bill also establishes a different mechanism for calculating the severance tax on horizontal wells. Prior to Oct. 2, 2014, oil and gas produced on horizontal wells will remain subject to the existing volume-based rates. Beginning Oct. 1, 2014, during the initial two years of production, the tax would be one percent of the gross receipts with an increase to 2.25 percent in years two through 20 and back down to one percent in subsequent years. There is no lower tax rate for low-producing, which was included in the original bill.
Proceeds from the tax would be deposited into a new oil and gas severance tax fund and be divided as follows: $18 million to the Ohio Department of Natural Resources oil and gas well fund and $3 million to the geological mapping fund, which are to be proportionately reduced if the amount in the fund totals less than $21 million. If a balance remains, 10 percent of the original amount credited to the severance tax fund is go to local government reimbursement fund. If any money then remains, it will be credited to the income tax reduction fund, which is to be used to provide temporary income tax rate reductions.
The bill specifically states the 10 percent put in the local government fund is designed specifically for return some of the money to the areas in Ohio where shale development it taking place. The money will be distributed in various portions to following “new” funds: the undivided local government fund and public library fund; severance tax infrastructure fund; matching revenue fund to match funds from federal or state grants; and a severance tax trust fund for use after 2015 to fund certain projects fostering long-term prosperity and a positive legacy.
It would also establish a nonrefundable income tax credit for certain tax payers equal to the amount of the tax paid for calendar quarters that end during the taxpayer’s taxable year. The credit would apply only to a person with a royalty interest who is liable for the tax. The credit is equal to the severance tax paid by the owner multiplied by the lesser of 12.5 percent or the portion of the tax the royalty owner-taxpayer is contractually required to pay the owner.
Finally, the bill would offer an exclusion from the commercial activity tax (CAT) for proceeds of the sale of oil and gas by persons paying the severance tax subject to the income tax.
Carroll County Commissioners are reviewing the information in the bill before making a comment.
They testified in January before the Ways and Means Committee on the original bill, which was introduced in December 2013.