Increase the severance tax | Arkansas Blog

Monday, November 22, 2010

Increase the severance tax

Posted By on Mon, Nov 22, 2010 at 11:41 AM

Sheffield Nelson, the former gas executive and Republican gubernatorial candidate, wrote an op-ed for the Democrat-Gazette over the weekend and has been quoted about the state's need to revisit the gas severance tax, increased at Nelson's instigation in 2008.

The increase wasn't high enough. Revenues haven't met forecasts. State roads are being torn up by drillling rigs.

Coincidentally, Nelson's op-ed follows his recent interview with Ernest Dumas, who's been working on a story for us about the shortcomings of the severance tax increase. It will run in a future issue, but in light of recent items published about Nelson, an excerpt From Dumas' article follows, beginning with a key question: Could this legislature pass a tax increase?

The reactionary political climate, put in stark relief in the general election this month, makes all of those [Blue Ribbon Commission highway tax] options remote. With a legislature dominated by freshmen, most of them pledged to vote against all taxes, the prospect of passing a tax program of any size, much less one of the magnitude the Highway Department says it needs, seems preposterous.

Could the natural-gas severance tax still be the solution?

Sheffield Nelson thinks so. Nelson, the former president of the state’s largest gas-distribution company, engineered the severance tax law in 2008 by starting a petition drive to put an initiated act on the ballot that would tax natural gas production at the rate of 7 percent of the wellhead price, the same rate as Texas, the nation’s No. 1 producer of gas. When Beebe, at the urging of the gas industry and business interests, called a special session to levy a smaller tax, Nelson dropped his initiative effort and supported the Beebe and industry bill.
But Nelson says it is time to make a stab at a real severance tax.

The state needs a big infusion of road revenues, Nelson said this month, and the need is magnified by the immense destruction of roads in the swath of counties in the shale play. Gas producers who are reaping healthy profits from shale exploration, not everyday road users, are the ones who should pay in Nelson’s estimation.

Unlike most other business taxes, a production tax cannot be passed on to consumers because it is not sold directly to the distributor. The tax has to be borne by the producer and, to a small extent, by royalty owners
But no matter if the tax wouldn’t raise consumer prices, the legislature is not apt to pass a severance tax, even one calibrated to pass with a simple majority in both houses. The General Assembly will include 44 Republican House members and 15 Republican senators, nearly all committed to vote against taxes. In that case, Nelson said, he might push again for an initiated act that would produce a better stream of revenue.

He did not regret striking a deal with Beebe to withdraw his initiative petition, and he said the governor deserved credit for passing even the anemic act that taxes gas at a rate far below that of nearly every other gas-producing state. But the state must do better, he said.

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