Severance tax headcount | Arkansas Blog

Tuesday, March 18, 2008

Severance tax headcount

Posted By on Tue, Mar 18, 2008 at 11:03 AM

I keep hearing that Gov. Mike Beebe is near a 75-vote count in the House for his severance tax proposal, if you count leaners. I know. This isn't horseshoes.

But this is something. (Link fixed.) A letter from lawmakers in the heart of the Fayetteville Shale belt endorsing the tax proposal. It's going out to all House members.

Naysayer Republican Rep. Aaron Burkes on the jump.


Why Taxes Matter


State Representative Aaron Burkes

As an opponent of raising taxes, including the severance tax, it is time to respond. I recently sent out a letter with several arguments against raising the state’s severance tax. A state newspaper has taken one sentence from that letter, added their own misunderstandings (along with a few ad hominem attacks), and tried to summarize my position on a complex economic issue. Unfortunately, the pros and cons of tax policy cannot be adequately explained in a single isolated sentence taken out of context.
People who support higher taxes do not understand the dynamic nature of tax policy. They say “if we raise taxes by X percent on current production, Y dollars of revenue will be generated for the state.” They do not analyze how that tax increase will affect production in the future. High tax proponents argue that since the gas companies have aggressive expansion plans in their annual reports then clearly production will increase and there isn’t any risk of taxes affecting production decisions. This is preposterous! When analyzing the effects of tax policy, economists like to use the ceteris paribus assumption. This translates roughly from Latin to mean “all else equal.” What this assumption allows us to do is to analyze a highly complex and dynamic situation one variable at a time. The ceteris paribus assumption is particularly helpful in analyzing the severance tax in Arkansas. To isolate the impact of severance taxes, we have to analytically hold all other variables constant.   Many variables will impact production decisions in the Fayetteville shale play: the market price of natural gas, the regulatory environment, the costs of extraction, the discovery of other reserves, the market price of other forms of energy, the taxes or subsidies on other forms of energy, and yes, the severance taxes that must be included as a cost of production. The apparently large quantity of natural gas in the Fayetteville shale play coupled with historically high energy prices nearly insures that there will be substantial development.
But to say that tax policy doesn’t matter to production or prices because energy companies are going to invest in Arkansas and create jobs for Arkansans anyway is to miss the point of the argument. Yes, there will be huge investment, job creation, and natural gas production in Arkansas --- even with a much larger severance tax. But the question to ask is how much more investment, job creation, and natural gas production would there be if a major cost of production, i.e., severance taxes, were kept low. It would be difficult to forecast the scale of that impact without a substantial study, but considering the operating margins of most businesses, it is certainly reasonable to assume that a five percent increase in costs for a producer (in a competitive market where not all of the cost increase can be passed on to consumers) will have a large impact. And if we don’t think it will have an impact, why not raise the rate to 7 percent or maybe 10 percent. Or let’s be a little absurd for the sake of demonstrating the point, why not raise the rate to 30 percent? Would such a high tax rate impact production decisions in the state of Arkansas? It most certainly would --- at all of those levels.
Now let’s look at the flip side of taxation: subsidies. Unfortunately, the political leaders of Arkansas believe that nothing good can possibly happen without the hand of government to coax it along. We in government take the old Soviet-style approach to economic development. We decide what should be produced and what should be consumed. We assume that markets don’t work and businesses cannot exist without the helping hand of government. Arkansas government chooses who the winners and who the losers are going to be. Take our commitment to recruiting a “superproject” as a case in point. We have authorized huge incentives to any business willing to make a certain capital and employment commitment in Arkansas. We’ve even given our Governor special powers to offer incentives for a “quick closing” to attract industry. But what do we do when a business on its own decides to make huge capital investments and employ huge numbers of Arkansans? We raise their taxes! We tax successful businesses that employ people, make investments, take risks, and make profit. Then we turn around and use that money to subsidize a business that ostensibly cannot make it without help from the government. Does that make sense? What we should be doing is creating a business-friendly environment (lower taxes, less regulation) and they will come. No need to rely on politicians to dole out money to their favored businesses.
And if we can see that incentives impact decisions, why can’t we see that their opposite, taxes, also impact decisions. And this brings me back to the original point. Taxes matter. They impact the decisions that we all make. Neglecting this fact is something that we as a state do at our own peril.


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