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The severance
tax hike risks Ohio jobs and prosperity
By Joe Nichols
President Reagan once said, “[w]hen you put a big tax on something, the
people will produce less of it.” The Ohio General Assembly should heed
this wisdom as they debate whether increase the severance tax on shale
oil and gas production.
Of course, Ohioans should want more oil and gas wells, not less.
However, the proposed tax increase creates incentives that will reduce
future drilling activity in Ohio, and drive energy firms—along with
their capital investments and high-paying jobs—from our state.
Governor John Kasich proposed a number of tax reforms in his executive
budget that would encourage economic growth. For example, Kasich argued
for a personal income tax exemption increase because, “[y]ou want to
give incentives to people who go to work, and you want them to have
incentives to work even harder.” This statement correctly recognizes
that when the government lowers the cost to work, workers keep more of
the fruit of their labor, which fosters a greater incentive to work,
which in turn means that more work will be done.
But the same principle applies to production costs for energy
companies. By raising the cost for companies to pump oil and gas
in Ohio, the Governor’s tax hike will create incentives for firms to
produce less oil and gas in Ohio.
Ohio producers have already responded to changing economic conditions.
Energy firms like Royal Dutch Shell and British Petroleum have already
abandoned the Buckeye state when their wells yielded disappointing
results. Low oil and gas prices weigh heavily on the remaining
companies. Revenues are down, and new oil and gas ventures have been
slashed or put on hold. Raising the state’s severance tax would only
add another disincentive to drill in Ohio.
Oil and gas firms have investment options. Ohio is not the only
state with valuable energy resources. Firms will drill where they
can expect the best returns on their investment. A severance tax
hike will reduce profit margins and thus make prospective Ohio wells
less attractive. Higher taxes mean higher production costs. And
those higher costs could be the difference between new wells in Ohio,
or new wells in Pennsylvania.
The Buckeye Institute has previously debunked the myth that oil and gas
firms make Ohio poorer by removing “our resources” for only “two dimes”
in taxes. First, this myth wrongly suggests that the state somehow
would be better off if energy resources were left in the ground—as if
that’s where they make Ohio richer. Second, it ignores all the other
taxes that producers already contribute to state and local coffers.
In fact, shale development helps make all Ohioans wealthier. Shale
activity has brought over $28 billion of investment into Ohio, and the
Kasich administration has rightly applauded those investment dollars
for spurring demand for labor and putting Ohioans to work. The
Department of Job and Family Services reported that “Ohio is fortunate
to have this natural resource [shale oil] that can provide good jobs
for families and reinvigorate many of our communities” through an
industry that helps support nearly 200,000 high-paying jobs in Ohio.
The average shale job pays $71,594 per year compared to the state
average of $45,532. Workers cannot earn those above-average wages
when the oil and gas stays buried in the ground.
Ohio’s oil and gas producers generate significant economic investment,
pay superior wages, and help reduce energy bills for families and
businesses. Unfortunately, the severance tax hike will risk each
of these economic benefits in order to maintain unsustainable
tax-and-spend policies that threaten the state’s fiscal health. Ohio’s
legislators should incentivize more oil and gas to be pumped up from
the ground by burying the severance tax hike.
Joe Nichols is Diehl Energy and Transparency Fellow at the Buckeye
Institute
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