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Beebe, gas industry agree on 5 percent severance tax Wednesday, Mar 12, 2008 By Jason Wiest Arkansas News Bureau LITTLE ROCK - Gov. Mike Beebe said Tuesday he didn't budge in five months of negotiations with natural gas industry officials that resulted in a tentative agreement to raise the state severance tax for the first time in more than 50 years. The pact would generate about $57 million next year if the Legislature approved it in a special session the governor said he wants to call by the end of the month if lawmakers appear inclined to provide the supermajority votes in both chambers needed for approval. The governor revealed the details of an agreement struck with the representatives of at least four of the major gas production companies operating in the state during a news conference Tuesday at the Capitol. He also cautioned that a tax hike was not a done deal. "This is one step in the process," Beebe said. "It's the members of the House and the Senate who will decide whether this passes or not." The proposal would raise the severance tax, at three-tenths of one cent per 1,000 cubic feet of gas among the lowest in the nation, to 5 percent of market value at the time of extraction. It would be the first increase in the tax since 1957. Gas companies bargained for a lesser tax rate, Beebe said. "I haven't moved off 5 (percent) in months," he said. "I didn't give anything." The proposal does allow some exemptions. Gas from "high cost" wells would be taxed at 1.5 percent for the first three years of production to allow producers to recover their costs, Beebe said. Well owners who did not recover their costs within that time frame could apply for a 12-month extension. High cost wells incapable of producing more than 100 million cubic feet (mcf) of gas per day would be classified as "marginal gas wells" and be taxed at a rate of 1.25 percent, as would non-high cost wells incapable of producing more than 250 mcf per day. All other wells producing commercial quantities would be taxed at a 1.5 percent rate for the first two years of production, Beebe said. "This is comparable to, and I think favorable, to some of our sister states," Beebe said. Oklahoma charges 7 percent and Texas 7.5 percent of market value but both states allow more exemptions, according to the state Department of Finance and Administration. The tax increase would go into effect Jan. 1, 2009, and would raise $57.1 million in 2009, based on conservative estimates of gas price and production levels from both industry and government officials, Beebe said. The 2009 figure is based upon an $8 gas price assumption, although the current market value of gas is nearer to $9 "and appears to be going up all the time," Beebe said. Projections show tax proceeds peaking at $101.6 million in 2015, Beebe said. Of the revenue generated, 95 percent would go to road improvements. Of that, 70 percent would go for state highways, and counties and cities would receive 15 percent each, Beebe said. Cliff Hoofman, Beebe's first appointee to the Arkansas Highway Commission, said the state's current roads are "a little bit better than 50 percent good," and he said using proceeds from the tax increase to maintain roads would save the state from having to spend more money to repair them if they were to fall into disrepair. The remaining 5 percent would go to general revenue to replace the current tax, which amounted to $660,000 last year, and to fund environmental and conservation needs, Beebe said. The governor said he would prefer a special session to occur by the end of March, prior to campaign season, but that he would not call one unless he has sufficient commitments to ensure the proposal's passage. The state constitution requires a three-fourths vote in both the House and Senate to raise the tax. "I can tell you that it is no easy matter to get three-fourths of both houses on virtually anything," Beebe said. "I've talked to several (legislators) who have committed but we haven't started the formal roll-call process." Industry officials have also agreed to help Beebe win-over legislators. "We are committed to work with the governor and the Legislature to pass legislation that reflects the terms of the agreement announced today," Henry Hood, senior vice president for Chesapeake Energy Corp., said in a prepared statement Tuesday. "I think that will weigh heavily on me and a lot of other legislators," said House Speaker-elect Robbie Wills, D-Conway, whose district lies within the Fayetteville Shale play where drilling activity is projected to contribute $5.5 billion to the state economy by the end of the year. Wills is among legislative leaders who threw their support behind the proposal Tuesday and said they were optimistic of its passage. "It is consistent with what I have said I would support in the past and barring any major blips ... I'm pretty certain I'll still be there," he said. "I'm encouraged that the royalty owners apparently are at peace with the governor's proposal." At their request, Beebe said, royalty owners would receive the same deductions as the production companies as part of the proposal. Dwight Brown, president of the Arkansas chapter of the National Association of Royalty Owners, said Tuesday he wants to get clarification and assurance that deductions will be passed along before supporting the proposal. Sen. Bob Johnson, D-Bigelow, said Tuesday that he remained opposed to a severance tax increase, insisting it "does not send the right message." Johnson said it does not make sense for the state to give tax breaks to industries it seeks to recruit, but increase the tax on an industry that "is all pushed in, to use a poker analogy" - meaning already invested and operating in the state. However, Johnson said he would not engage in arm-twisting to get fellow senators to oppose it. Beebe also discouraged legislators from making amendments to the proposal. "I've always tried to be open-minded, but I can pretty well tell you that any modification to this would be, it would be very difficult for me to support much in the way of any modification to this proposal," he said. If legislators don't approve the proposal, or if they approve an amended version, "I think we take it to the people," said the governor, who was working on an initiated act to propose for the November general election when the deal was struck. Former gas utility executive Sheffield Nelson is poised to begin gathering signatures to place his attorney general-certified severance tax proposal on the Nov. 4 ballot, but said he would hold off on the measure pending the Legislature's decision on Beebe's proposal. If lawmakers approve the governor's proposal, Nelson said he would formally withdraw his measure, which differs from Beebe's in that it would tax companies at 7 percent of market value and distribute the proceeds differently. Beebe said Nelson's proposal helped move the timetable for increasing the tax forward when he had initially planned to attempt to raise the tax in the 2009 session. |
