Arkansas Severance Tax Hike (2008)

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The Severance Tax Hike would have increased the severance tax on oil and gas from the current rate of three-tenths of one cent per 1,000 cubic feet of gas to seven percent of the market value of the gas at the time and point of severance; however, the proposal was withdrawn after Governor of Arkansas Mike Beebe was successful in passing a severance tax hike on April 2, 2008, in a special session of the state legislature called for that purpose.

The tax is levied on producers, but owners of mineral rights receive royalty payments and must also pay a share of the tax. The tax burden is divided one-eighth to the royalty owner and seven-eighths to the producer, which is the same proportion they share the gas revenue.

Competiting proposals, some drafts rejected

Several competing severance tax hike intitiatives were being offered before the legislature approved a tax hike and made all measures moot.

In December 2007, a proposed intitiative was submitted by the Campaign for Comprehensive Legal Reform. Later that month, Arkansas Attorney General Dustin McDaniel announced that he would be unable to certify the proposed ballot title for the measure.[1] In his opinion,[2] McDaniel wrote:

This language is wholly deficient in its failure to fairly or completely summarize the effect or your proposed act, particularly with respect to changes in current law, including but not limited to distribution of proceeds.

At the time, the Campaign for Comprehensive Legal Reform said they would be resubmitting new language, but they have not done so to date.

A second proposal for an intitiative to raise the severance tax was submitted by Sheffield Nelson Jan. 18, 2008. Nelson is a former gas company executive (Arkla, Inc., since renamed as Centerpoint-Entergy, Inc.) and a former Republican gubernatorial candidate. He worked Nelson's initial language was also rejected by McDaniel Feb 1; however, he submitted new language Feb. 4. Attorney General McDaniel approved the wording of Nelson’s second draft of the proposed ballot title Feb 11, saying the language was more clear and concise.[3]

McDaniel's approval allowed Nelson to start a petition drive to get the measure on the November 2008 ballot. To make the ballot, 61,974 valid signatures would have needed to be submitted by July 7, 2008.

A third competitor in the effort to raise the severance tax was Governor of Arkansas Mike Beebe, who began pushing a propsal of his own. Beebe said he would prefer to raise the severance tax by state statute in the next special session of the legislature rather than by initiative. Gov. Beebe was working with natural gas firms on a compromise proposal that they would support, with hopes of calling a special session to consider the tax increase if he could reach an agreement with legislators and natural gas firms.[4]

Beebe started to lose faith March 3, 2008, that an agreement could be reached and began focusing on a ballot initiative. The stumbling block, Beebe said, was the length of time the industry wants for a reduced rate for new wells. He announced March 2, 2008, that he's no longer negotiating. "They know where I am," Beebe said. "They were negotiating with good faith. But if you can't reach an agreement, you can't reach an agreement. If you can't, it'll ultimately be up to the people. There is something pretty good about it getting solved in that manner."[5]

Arkansas's state Constitution requires a three-fourths favorable majority in the House and the Senate to raise the tax by statute, making it a very difficult endeavor. The Arkansas rate has been unchanged since 1957.[6]

Beebe wanted all revenue from the severance tax hike to benefit roads, while Nelson's proposal divided revenues, with 80% going to roads and 20% to higher education.

The Campaign for Comprehensive Legal Reform proposal (rejected by the Attormey General) called for 40% of revenue to be divided evenly between the state's 75 counties for roads and facilities; 10% to go to counties for general purposes; 27% for state highways; 10% for the state Department of Human Services for child protective services, foster care services, and facilities; 5% to minimize the environmental impact of natural gas exploration or extraction in Arkansas; and 8% to be held in trust for settlement of lawsuits and payment of claims when the state is subject to civil liability.

When asked about the Governor's possible competition, Nelson said having two severance tax increases on the ballot "would kill them both."[7]

"His goal is my goal, and that's to get a severance tax increase in 2008," Nelson said of the governor's efforts. "I believe he and I will be able to sit down and come up with something we'll both accept so we can both go down the road together."[8]

As Gov. Beebe began focusing more on going the intiative route, Sheffield Nelson said he still hoped he and the governor could work together. "I'll just have to see what he files," Nelson said. "I have high hopes it's not too far from what we've got and we can sit down and reach an agreement. What the industry would absolutely love is for us to go down divergent paths."[9]

All three proposals hoped to raise approximately $100 million annually.

Governor finds renewed faith in a legislative solution

After announcing that negotiations with natural gas producers were no longer being pursued in early March, Gov. Mike Beebe's office announced March 10, 2008, that a "tentative agreement" had been reached with natural gas producers to increase the severance tax on natural gas.[10]

Beebe then focused on getting sufficient support in the state legislature for a three-forths vote in favor of the measure. Legislative approval would kill initiative efforts to hike the tax.

Beebe called a special session March 26, 2008, to convene on Matrch 31, saying that he has the necessary support lined up to pass the severance tax hike.[11]

Sheffield Nelson said Beebe has already discussed the basics of the proposal with him. "It sounds reasonable to me. I think it is sufficient and such a step forward versus what we are doing today that I can certainly endorse what he's done."

Nelson's initiative proposal called for a 7% rate with no exemptions. Nelson said he would put his effort on hold and will put aside his proposal if the Governor is successful in getting his plan through the legislature.[12]

Sheffield Nelson withdrew his Severance Tax Hike initiative immediately after Gov. Mike Beebe signed the first severance tax hike on natural gas in a half century. But Nelson warned that he will refile the measure if lawmakers try to alter the increase signed into law on April 3, 2008.[13]

The compromise plan called for a base rate of 5% on proceeds, which are defined as the money received by the producer from the sale of gas less the cost of treating and transportation. There would be a 36-month reduced rate of 1.5% for high-cost new wells and a 24-month reduced rate of 1.5% for all other new wells. Another reduced rate of 1.25% is possible indefinitely for low-producing wells, new or old.[14]

"This is a unique opportunity to improve roads in Arkansas without any additional taxes on everyday Arkansans, and most important of all, according to all the evidence, it will not increase anybody’s gas bill," Beebe said.

He estimates that the plan will increase severance-tax collections from about $600,000 a year to $57 million in 2009 and $101 million by 2014. Natural gas experts say it's unlikely to be passed on to heating bills because it won't affect the price utilities pay the production companies, because that price is largely set by national markets.

Beebe had said that he wouldn't give up on raising the severance tax, even if the Legislature rejected it. "This is not completed until it's on my desk and signed," he said. "If it's not, I think we'll take it to the people." If he has to go the initiative route, Beebe implied that the tax rate sought might be higher.

Gas industry officials helped him lobby the Legislature to pass the compromise.

"A compromise probably in this situation is better than a fight," William Walker, president of Stephens Production Co. in Fort Smith, said. He said that the compromise plan is better than the initiatives being talked about.[15]

Legislators start taking sides

Sen. Bob Johnson (D-Bigelow), the Senate president pro tempore for the 2009 session, opposed the plan. That the major producers have agreed to the compromise makes no difference to Johnson.

"They have their reasons for their positions, and I respect that," Johnson said. "I am against it. This is about jobs and taxes. It is a mistake."[16]

Rep. Johnny Key, R-Mountain Home, who is unopposed this year in his race for a state Senate seat, said that even if the industry has agreed to accept the increase, "the Legislature shouldn't be passing public policy based on what the industry agrees to when under the threat of an initiated act.[17]

The state Republican Party announced its opposition, to which Beebe responded by questioning whether one GOP opponent of the plan wanted good roads. The state Democratic Party has declared its support of the governor's compromise.[18]

Support

Versions of a severance tax hike initiative were supported by Gov. Mike Beebe, Sheffield Nelson, and the Campaign for Comprehensive Legal Reform.

Nelson has stated that royalty owners "should be willing to pay their fair share. It’s not an item they work for. [They are getting paid ] simply because they own mineral rights."[19]

Nelson proposed in February a series of debates between himself and representatives of natural gas firms. He specifically called for one with Harold Korell, president of Houston-based Southwestern Energy Company. University of Central Arkansas President Lu Hardin said his school would host a debate and planned to invite Korell. Nelson said that he might debate a "dummy" if no gas executives agree to face him.[20]

Nelson said he believed Korell's company was misleading Arkansans into believing that firms will stop drilling in the shale if an increase in the severance tax is approved.

Nelson asked the Arkansas Ethics Commission for a ruling on whether the law requiring individuals and groups to file with the commission if they spend $500 or more to support or oppoose a ballot measure applied to corporations, expressing concern that gas companies would pour a lot of money into opposing his intitiative without having to report. The commission released a ruling Feb. 15 stating that the rule did apply to corporations.[21]

Opposition

Southwestern Energy executive Harold Korell said a severance tax hike will mean reduced royalties, less local business income, fewer jobs, and less income and sales taxes paid. "If we pay more in severance tax," Korell told a Conway Area Chamber of Commerce gathering Feb. 7, "the equation is simple, we’ll drill less wells."[22]

The National Association of Royalty Owners has said the group is willing to work to "revise" the severance tax but say a hike would hurt people on "family farms" who own mineral rights.

Dwight Brown, president of the National Association of Royalty Owners, Arkansas chapter, released a letter criticizing Nelson's statements saying that royalty owners should willingly pay more taxes, since they have done no work to earn that money except own the mineral rights.

"Does Mr. Nelson understand private mineral ownership?" Brown wrote. "This is where a citizen actually owns the minerals under the surface. This is because they paid for them with real U.S. currency or a family member paid for them in the past and they have inherited them."[23]

Asa Hutchinson, a former congressman from Arkansas' 3rd district and the Republican gubernatorial candidate in 2006, published a guest opinion in the Feb. 19, 2008, issue of the Arkansas Democrat-Gazette expressing his opposition to the tax hike.[24] Hutchinson favors a different plan to fund road improvements: dedicating half of the sales tax on auto parts and service, which he says would provide more funding than the severance tax hike would provide.

See also

References

  1. Arkansas Democrat-Gazette: "Official quashes plan to raise tax"
  2. The Morning News: "McDaniel Rejects Proposed Severance Tax Initiative" Dec. 14, 2007
  3. Arkansas Democrat-Gazette: "Severance-tax draft accepted, petition-ready" Feb. 12, 2008
  4. CNN.com: "Former Utility Executive Wants to Debate"
  5. Arkansas Democrat-Gazette: "Beebe looking at putting tax on natural gas up for vote," March 4, 2008
  6. Arkansas Democrat-Gazette: "Official quashes plan to raise tax"
  7. Arkansas Democrat-Gazette: "Severance-tax draft accepted, petition-ready" Feb. 12, 2008
  8. CNN.com: "Former Utility Executive Wants to Debate"
  9. Arkansas Democrat-Gazette: "Beebe looking at putting tax on natural gas up for vote," March 4, 2008
  10. Arkansas Democrat-Gazette: "Severance tax deal reached, Beebe says," March 11, 2008
  11. Arkansas Democrat-Gazette: "Beebe calls lawmakers into session to raise tax," March 27, 2008
  12. Arkansas Democrat-Gazette: "Severance tax deal reached, Beebe says," March 11, 2008
  13. Pine Bluff Commercial: "Nelson: Will try Ark. ballot campaign if lawmakers change tax," April 3, 2008
  14. Arkansas Democrat-Gazette: "Beebe facing hard sell on tax," March 12, 2008
  15. Arkansas Democrat-Gazette: "Beebe facing hard sell on tax," March 12, 2008
  16. Arkansas Democrat-Gazette: "GOP on severance tax: Choose good jobs first," March 13, 2008
  17. Arkansas Democrat-Gazette: "GOP on severance tax: Choose good jobs first," March 13, 2008
  18. Arkansas Democrat-Gazette: "Beebe facing hard sell on tax," March 12, 2008
  19. Arkansas Democrat-Gazette: "Severance-tax draft accepted, petition-ready" Feb. 12, 2008
  20. KTHV-TV, Little Rock: "Nelson Proposes Series Of Debates With Natural Gas Firms"
  21. Arkansas Democrat-Gazette: "Firms told to disclose legislation spending"
  22. Arkansas Democrat-Gazette: "Nelson: Willing to debate gas execs"
  23. Arkansas Democrat-Gazette: "Nelson: Willing to debate gas execs"
  24. Arkansas Democrat-Gazette, Guest Writer: "A better way"