Report: Severance tax hike will hurt gas industry

Opponents of an increase in the state’s natural gas severance tax say a new study shows that raising the tax would be detrimental to the gas industry in Arkansas.

The study, sponsored by the Arkansas Independent Producers & Royalty Owners (AIPRO), shows that a flat rate of 7% would be significantly higher than neighboring states due to incentives that lower tax rates based on production.

The proposed Natural Gas Severance Tax Act of 2012 (NGSTA) does not provide for exceptions to the severance tax rate. The potential ballot measure, which still must collect more than 62,500 valid voter signatures to qualify for the November ballot, is being pushed by former natural gas executive Sheffield Nelson and the Arkansas Municipal League.

The proposal would raise Arkansas’ severance tax on natural gas to a flat 7% rate and could bring in an estimated $250 million annually. Twenty million dollars of the tax would be steered to municipalities for road repairs and construction. After that, the remaining balance would be divided 70% to the state, 15% to counties and 15% to cities.

The AIPRO study — conducted by Ryan LLC, a Houston-based global tax services firm — applied the hypothetical 7% rate to incentive and conventional wells in Arkansas from 2009 through 2011. Based on projections, the results looked at gross revenues generated and percentage of taxes paid and compared the Arkansas wells to other states’ current rates.

From the report:
• Assuming the NGSTA was in effect for Arkansas for the time period indicated, the Arkansas high cost gas well model reflected a tax burden equal to 7% of gross revenues generated. When compared to the other states’ incentive wells, Arkansas had a tax burden that was significantly greater. The respective severance tax burdens were: Oklahoma horizontal well (0.41%), Louisiana horizontal well (0.93%), and the Texas high cost gas well (3.26%).

• Under the same assumptions, an analysis of the severance tax burden applicable to conventional production reveals different results. Texas comes in with the highest severance tax rate at 7.2% of value (after allowing the marketing cost deduction), followed by Arkansas at 7%, Oklahoma at 6.72% (again allowing for a marketing cost deduction), and finally Louisiana, with a volumetric tax rate that converts to 6.26% of value for the period analyzed, with no marketing cost deduction.

• The calculation for Arkansas wells under NGSTA is simply a flat tax assessed at a rate of 7% of gross revenues. There are no applicable incentives or deductions of any type allowed. This is in stark contrast to that the tax codes provided in Texas, Louisiana and Oklahoma. Both Texas and Oklahoma allow for gross revenues to be reduced by allowable deductions (Louisiana does not), and further all three provide for specific incentives on qualifying production.

Arkansans for Jobs and Affordable Energy, a group opposing the severance tax hike, said the report verifies the negative impact raising the rate would have on Arkansas natural gas production.

“This study is just the latest evidence that the proposed severance tax increase would keep us from being able to compete with surrounding states,” said the group’s chairman Randy Zook. “It would not only put thousands of existing Arkansas jobs in jeopardy, it would also prevent us from being able to bring in a lot of new jobs.”

Last week, Sheffield Nelson rolled out a study conducted by economist Dr. Charles Venus.

Venus’ economic assumptions and calculations said the severance tax increase would amount to “a pittance” of the production companies portfolios. Venus said that the added cost to natural gas companies from a higher severance tax would amount to “less than one day’s profit per year.”