Severance Tax: How Much is Too Much? (Editorial)

As far as we’re concerned, the question of whether Arkansas taxes natural gas operators comparably to other states has been settled. The only question that remains is how much the severance tax should be raised in order to remain competitive with our gas-producing neighbors while covering the public costs of having the fabulous new industry in the Fayetteville Shale Play. 

Former gas utility executive and gubernatorial candidate Sheffield Nelson is sold on the idea of a severance tax that is 7 percent of the value of the gas – mainly, it seems, because that’s what Oklahoma is collecting. But, as Arkansas Business reported last week, increasing Arkansas’ rate from three-tenths of a cent per MCF to 7 percent of the gas price would push the total tax burden we levy on natural gas producers from the lowest in the region to the highest.

Unlike state Sen. Bob Johnson, we do not buy the gas companies’ warnings that any increase in the severance tax will cause them to pack up and leave one of the richest unconventional gas formations in the country. Especially not when Southwestern Energy Co. of Houston and Chesapeake Energy Corp. of Oklahoma City are bragging to their shareholders about how profitable exploration of the Fayetteville Shale has been. But there is a point at which Arkansas could price itself out of the market for new drilling, and 7 percent might be that point.

An increase to 4 percent or 5 percent would generate tens of millions of dollars per year while remaining competitive with other states. Gov. Mike Beebe is inclined toward an increase in the severance tax and to use the proceeds for building and maintaining the roads that are being pulverized by heavy drilling rigs. Nelson would prefer to see the additional $90-plus million that his 7 percent proposal would raise devoted to sending more Arkansans to college, an appealing but ultimately unrelated expense.

Sheffield Nelson is to be commended for lending his expertise and clout to the issue of fair compensation for the privilege of profiting from Arkansas’ God-given resources. By going to bat for a tax that may ultimately be higher than is prudent, he may be able to help Gov. Beebe bring the producers to the table for serious negotiation on a rate with which we all can live.

If not, we can look forward to having two potential bonanzas for higher education – the second being Lt. Gov. Bill Halter’s lottery proposal – on the 2008 ballot. Nelson’s, while imperfect, would be one we could vote for.