Taxes, not environment, sticking point in fracking bill
</element><element id="paragraph-1" type="body"><![CDATA[The issue of a new severance tax on oil and gas production lies at the heart of the standoff in Springfield over hydraulic fracturing, or fracking.
Both industry sources and lawmakers say all sides are close to an agreement on the issue of new regulations, but the biggest issue may not be environmental, but financial.
"On the regulatory part there are still things that have to be worked out, but honestly, we're not that far apart on the regulatory part," explained Brad Richards, executive vice-president of the Illinois Oil and Gas Association based in Mount Vernon.
After a fracking bill died in the legislature last week his group is now in negotiations with the House Speaker Michael J. Madigan's office.
The Senate had passed a basic fracking bill in April but on May 21, Richards said his group learned that Madigan's office was developing a more "comprehensive plan."
"It was a complete rewrite. It didn't have any similarities to the bill that passed out of the Senate. We were asked to negotiate some sort of compromise," Richards said.
On Memorial Day his group offered a counter-proposal, but it was rejected. By Thursday upstate Democrats upped the pressure by adding a two-year moratorium which caused area lawmakers to go on the defensive to successfully block the bill from consideration.
The regulations proposed weren't the major problem, Richards explained. Madigan's starting point of a 12 percent severance tax created the biggest issue.
"A 12 percent severance tax that would absolutely cripple us as an industry," he said. The proposed moratorium he said would have destroyed all the leasing activity now underway.
Now it's Richads' job to "come up with a reasonable draft proposal" that can be presented to Madigan's staff next month.
"We will present to House leadership as soon as the second week of July our idea of what the hydraulic fracturing bill should look like," Richards said. "We feel that we are fairly close."
Richards said they will be working with area Democrat lawmakers such as state Reps. Brandon Phelps of Eldorado and John Bradley of Marion when they do.
When it comes to new taxes Richards' group would rather the state wait two or three years to see if horizontal drilling brings a new oil boom.
"From my perspective, how to we develop a sound tax policy before the first well is drilled? We don't know anything about these wells," he noted.
The problem with a flat severance tax as proposed by Madigan he said would have eliminated many of the 5,000 jobs now directly employed by the current oil and gas industry in Illinois.
"The proposal that we saw started out at 12 percent and would apply to all production. The average well (in Illinois) is less that 1.5 barrels a day," Richards said. "Even a six percent (rate) would be devastating to stripper well production in Illinois. Our view is that there should be no severance tax on the current operations."
His view is matched by politicians in other states experiencing a boom in shale oil and gas exploration.
In Ohio - that has experienced the birth of a new gas boom from the Marcellus Shale formation - Gov. John Kasich, a Republican proposed last month a four percent severance tax plan that would "significantly increase severance taxes on horizontal wells and provide a tax reduction or no changes in taxes on production from other (existing) well," according to a study of the plan prepared by Ernst & Young for the Ohio Business Roundtable.
Kasich's plan did not pass muster with Ohio lawmakers but it's easy to see why higher rates might be attractive to Illinois politicians facing mounting budget pressures. Kasich wanted the higher severance tax to pay for a reduction in the state personal income tax.
According to Associated Press accounts, the tax failed to gain support of many Republican lawmakers who were opposed to tax increases of any kind as well as many eastern Ohio Democratic lawmakers who didn't want the revenue raised from their areas to lower taxes elsewhere in the state without some of that revenue going back to their counties.
The other problem with a severance tax brought up earlier this week by state Sen. John O. Jones, R-Mount Vernon, is that it hits the mineral rights holders as well as the oil companies.
In North Dakota that state has a 6.5 percent Oil Gross Production Tax on the extraction of oil from the earth rather than a severance tax. It also addresses some of the issues that Ohio lawmakers had with Kasich's proposal.
In that state 80 percent of the funds are set aside to be split according to a sliding scale between the state and local counties to deal with the impact of the rapid growth that the oil boom is causing. Tax revenues to a county are then split with 45 percent going to the county general fund, 35 percent going to school districts and 20 percent to incorporated cities.
Like Ohio as well the rates paid by the oil companies are reduced both in the start-up phase so companies can recover their development costs as well as in later phases as production falls off. Low-volume marginal stripper wells would only pay two percent.
In Illinois Richards admits that the "political realities" might force a new tax on the industry but he still maintains "that it is premature to impose a tax."
"Why we would consider jeopardizing that development is hard for me to understand," he said.
Oil companies in Illinois like all others already pay income and sales taxes. There is an industry-specific ad valorem tax paid at the county level on production but it is fairly miniscule.
The problem with any tax he noted is that "for every well it will shorten the lifespan of that well."
Because oil and gas reserves are finite and that it's a depleting resource, he said, there will come a time when the well is no longer economically viable. Taxes add to the cost of production and would make that point come sometime earlier.
Phelps said yesterday he believes new taxes on the industry were likely, somewhere between one and six percent. Describing the severance tax as "just a ploy for getting more money for the general revenue fund," he understands no industry that wants a tax.
"I'm for more rules and regulations. We've been doing this for 50 years. At the same time we want to make sure it's safe and our constituents are taking care of," Phelps said.
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Musgrave receives e-mail at jmusgrave@dailyregister.com.</li>
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