Zook: Raising Severance Tax Would Be ‘Dumb’

Randy Zook, president and CEO of the Arkansas State Chamber of Commerce, thinks Arkansas could be “one of the largest energy producing states in the country,” if it “doesn’t do something dumb.”

And for Zook, doing something dumb would consist of “jacking up the severance tax.”

Sheffield Nelson, a former natural gas company executive, has received ballot title approval from Arkansas Attorney General Dustin McDaniel for a referendum to raise severance tax on natural gas to 7% and exclude current loopholes. The tax could raise as much as $250 million a year, with the money dedicated for Arkansas highways.

Nelson now qualifies to collect signatures to place the measure on the 2012 general election ballot. “The Natural Gas Severance Tax Act of 2012” would need 62,507 valid voter signatures to qualify for the ballot.

Zook came out directly against the Nelson-sponsored Committee for a Fair Severance Tax movement Friday (March 30) in his keynote address at the Fort Smith Regional Chamber of Commerce 2012 Business Expo Luncheon. Zook said an increase from the current rates would “cost Arkansas jobs” and “drive natural gas production out-of-state.”

Zook told Friday’s audience that current Arkansas severance tax rates resulted in $62 million of additional in-state revenue in 2011, and the natural gas industry currently supplies “about 11,000 jobs” to the state.

Responding to criticisms that Arkansas has one of the lowest severance tax rates in the nation, Zook argued against the claim by tax increase supporters, stating that current rates were necessary for maintaining a competitive edge with neighboring states.

Zook said “for the first 36 to 48 months,” companies pay a 1.5% incentive rate, but that following the four-year mark, the tax increases to 5%. He also stated that “more than 2,000 wells are currently paying 5% with more and more headed that direction.”

The current movement from Nelson and the Arkansas Municipal League would raise the severance tax rate to a flat 7%, resulting, Zook said, in many companies paying as much as 400% more than they currently do.

Over a four-year period, the proposed tax increase would result in companies paying around $150,000 more on an average high-cost, horizontal shale well than current rates.

Zook, who heads the Arkansans for Jobs and Affordable Energy movement, notes the proposed increase would also find that same well approximately three and a half times more expensive than one in Texas over the same period of time, and that it would be about six times more expensive than one in Louisiana and nine times more expensive than one in Oklahoma.

“What the tax increase would do, essentially, is cause companies to pay an average of 21 cents per 1,000 cubic feet over the first four years. Considering that current prices are at historic lows of around $2.21 per 1,000 cubic feet, that would make us one of the most expensive areas in the United States for natural gas production.”

When asked if he believed there was a danger of companies turning off production due to the historic low rates, Zook said it would be “impossible.”

“You really can’t turn off these fractured shale wells. You can a conventional well, but when you go in there and fracture that shale, you can’t stop it. It’s going to come out. The idea you can turn it off just because the price goes down — we haven’t heard that argument from the other side, because you just can’t do it,” Zook said.

Zook continued: “The devil is in the details. You’ve got to get down in the weeds to realize how comparable we really are. Our point is not to match those (neighboring) states but to remain attractive, so companies will increase production within our borders.”

Aric Mitchell with our content partner, TheCityWire.com, is the author of this report. He can be reached by email at [email protected].