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Severance tax increase debate moves from sideline to front burner Sunday, Nov 11, 2007 By Jason Wiest Arkansas News Bureau LITTLE ROCK - Former utility executive and Republican gubernatorial candidate Sheffield Nelson's new push for a statewide vote next year on raising the state severance tax on natural gas illustrates the issue's move from afterthought to the front burner. Nelson's bid to put an initiated act to increase the severance tax on the 2008 general election ballot adds more immediacy to a movement that gained impetus earlier this year when first-term Gov. Mike Beebe said he would support raising the levy. For decades, there's been much talk but little action on increasing the nation's lowest state tax levy on natural gas production, primarily because of the three-fourths majority vote it would require to pass both chambers of the Legislature. Former state Sen. Cliff Hoofman of North Little Rock said raising the severance tax was talked about in every session during his 28 years in the Legislature. "Lots of members supported increasing the tax, but lots don't make 75 percent," said Hoofman, who left the Legislature in 2001 and now sits on the Arkansas Highway Commission. "There wasn't any sense beating your head up on that issue, so you worked on something that you might do something about." Now officials are rethinking the impossible, in part because technological advances and higher commodity prices in recent years have combined to make drilling for natural gas in the rugged Fayetteville Shale play economically feasible. A 2006 study by the University of Arkansas Center for Business and Economic Research predicted an economic impact of $5.5 billion by 2008, including nearly 10,000 new jobs and more than $357 million in state and local tax revenue. This summer, Beebe urged the natural gas industry to embrace an increase in the tax and to work with him and legislators to reach a consensus for the 2009 legislative session. The governor said if legislative action failed, he would support a citizen initiative to raise the tax in the 2010 general election. Nelson, who headed the state's largest natural gas utility before mounting two unsuccessful bids for governor in the 1990s, said this month he would submit a proposal by the end of November to put a severance tax increase on next year's general election ballot. Though the two disagree on how new revenues from a severance tax increase should be used - Beebe has proposed earmarking funds for highway improvements and Nelson largely for higher education - their efforts could put pressure on the natural gas industry to go along with a tax hike. A compromise would significantly increase the prospects for an increase despite industry officials' arguments that it would change their economic viewpoint of opportunities in the state, a political analyst said. "If Nelson and the governor can reach a point of agreement on the measure ... I think it has the potential of real benefit for those folks who want to get this done," said Jay Barth, a political science professor at Hendrix College in Conway. Southwestern Energy Co., the largest operator in the Fayetteville Shale play, said its lines of communication are open to both men, according to John Thaeler, spokesman for SEECO Inc., a subsidiary of Southwestern that is handling operations in the Fayetteville Shale. But increasing the tax could cause the company and others to curtail their activities in Arkansas, Thaeler said, mirroring comments made last December by the chairman of Chesapeake Energy Corp., the second-largest operator in the Fayetteville Shale. "Every dollar paid in severance tax at the very least is a dollar that won't be invested in the development of the Fayetteville Shale," he said. At three-tenths of 1 percent per 1,000 cubic feet of natural gas, Arkansas has the lowest severance tax on natural gas in the nation. Nelson has said it is "almost criminal" that the state charges such a low rate based on volume while surrounding states charge 7 percent or more of the price of the gas produced. Last fiscal year, Arkansas collected $619,417 from the severance tax, which has remained unchanged since 1957, according to the state Department of Finance and Administration. A higher severance tax would discourage exploration in new areas or drilling experimental wells in risky, unconventional plays, Thaeler said. With more money being paid in taxes, there would be less to reinvest in new areas, he said. Companies operating in the Fayetteville Shale play had earned about $400 million on a collective investment of about $1.2 billion, Larry Bengal, director of the state Oil and Gas Commission, told legislators Oct. 3. "Increasing the tax will impact what wells we can drill economically," Thaeler said. "When you increase taxes, some wells will not be drilled." Thaeler said if the tax increase comes to a vote, Arkansans should consider what their goal is "with regards to adding tax to an industry that is investing large amounts of capital on a high-risk project." Thaeler also cautioned that the tax is a complex issue and that simply raising it would not make Arkansas' severance tax structure comparable with other states. States like Oklahoma exempt gas companies from the severance tax when drilling certain types of wells or when drilling in certain locations to encourage development, Thaeler said. An exploratory well drilled two miles away from an existing well that is currently producing in Oklahoma is exempt from the severance tax for 28 months if it produces, to encourage companies to take the risk. States employ such exemptions "realizing long-term the entire state will benefit from that economic development," Thaeler said. Additionally, Arkansas legislators have long said the state earns money from natural gas production at other points of taxation. "Even though our severance tax isn't at the regional level, there still is a tax burden on gas that Arkansas has that I know some of these other states do not have," Rep. Bruce Maloch, D-Magnolia, said last month during a legislative economic and tax policy committee meeting on the tax. Arkansas charges a 6 percent residential sales tax on natural gas, something Texas, Oklahoma, Mississippi, Louisiana, Missouri and Tennessee do not charge, according to the U.S. Energy Information Administration. Nelson said his plan does not include exemptions at this point and that his inclination is not to include them. "My position on it would be the price of natural gas is so high and will be going higher, they'll be making enough money on the natural gas that they won't need an exemption," Nelson said, although saying he would consider every aspect. "Simpler is better generally," he said. Nelson's plan is to let voters decide next year whether to raise the tax to 7.1 percent, the same tax rate as Oklahoma. Beebe said he would take all arguments into consideration before formulating a plan. He said he does not know what the tax rate should be, only that it should be substantially higher. "I want our own DF&A folks and our own analysts to be able to compare all the arguments that exist about income taxes and about depreciation, about low-performing wells or new-performing wells," the governor said. Last week, Beebe said flat-out he would not support using money from a severance tax increase to fund higher education because the Legislature this year approved major increases for colleges and universities. Nelson said he feels strongly that higher education needs more funding. His plan tentatively calls for allotting 40 percent to higher education, 20 percent to state highways, 20 percent to cities and counties, and 20 percent to address inequities in the state's business taxes that may inhibit businesses from locating here. Beebe and Nelson, good friends, both said they were willing to compromise. "We're not as far apart as we may seem," Nelson said. "I would much prefer to see it funded the way I've talked and I think the governor would want to sit down and talk and see if there's any middle ground." Beebe said the two talk frequently and have a good relationship. "I suspect, before it's all over with, that the kind of guy that (Nelson) is, he will hopefully be supportive of my ideas," Beebe said. Failure to compromise would jeopardize any effort to raise the severance tax, Barth said. Voters would not likely approve Nelson's proposal next year, and also would be unlikely to approve Beebe's backup plan of an initiated act in 2010 if the Legislature did not pass an increase in 2009, he said. "If Nelson were to move forward with his proposal this year without the governor's support, then it makes it hard to get done," Barth said. "If it's unsuccessful at the polls ... then that would make it difficult for a number of years to get the increase accomplished. In Arkansas, when measures like this go to the voters, it's hard to go back to the voters (later) with a very similar proposal." |
