The 5 Percent Tax Solution (Editorial)

Once again, Gov. Mike Beebe showed his remarkable ability to bring opposing sides together in a compromise that will benefit the state.

After it looked like all hope was lost for an agreement with the natural gas companies on the issue of raising the severance tax, it suddenly came together.

We would be remiss in not acknowledging Sheffield Nelson’s role in forcing the companies’ hand. Quite simply, the agreement would not have happened without Nelson’s moving ahead with an initiated act that would have raised the severance tax to 7 percent of market value with no exemptions.

Nelson has said that if the General Assembly approves the agreement worked out with the companies for a tax of 5 percent of market value, then he will withdraw his act.

As Arkansas Business and the Northwest Arkansas Business Journal have noted in past articles and commentary, 5 percent strikes us as about right. Nelson’s 7 percent was a bit too high. Arkansas Advocates for Children & Families also recommended the 5 percent solution back in 2006.

Arkansas’ current rate, the lowest of any gas-producing state, is three-tenths of a cent per 1,000 cubic feet of gas, which in recent months has been about 0.16 percent to 0.18 percent of the value. It brings in a bit more than $650,000 a year.

If the Legislature approves the agreement, the 5 percent solution will bring in about $57 million the first year and possibly $100 million a year by 2013. The compromise calls for 95 percent of that money to go to Arkansas’ roads and the remaining 5 percent to go into the general revenue fund.

In addition to the 5 percent base rate, the compromise includes several exemptions favorable to the gas companies and royalty owners.

There’s a reduced rate of 1.5 percent for the first 36 months of production on high-cost wells. If the well owner does not recover the cost within 36 months, he may apply for an additional 12-month exemption. There’s also a reduced rate of 1.5 percent for the first 24 months of production on other wells. And there’s a reduced rate of 1.25 percent for marginal gas wells that do not meet minimum production thresholds.

Much work remains to be done. The governor must get three-quarters of the 100-member House of Representatives and the 35-member Senate to agree to the deal. If he cannot get that assurance, there’s no use calling a special session later this month.

While it’s hard to imagine any legislator opposing the agreement when it would mean more money for roads in his or her district, when the word “tax” comes up, there’s no accounting for the logic of some. However, with the industry in agreement and lobbying for the measure, we think it will pass.