Kasich vetoes bill with oil, gas property tax exemption expansion

This story was updated on Dec. 30.

Ohio Gov. John R. Kasich vetoed a state senate bill that included an expansion of the state’s exemption from the sales tax of tangible personal property tax directly used in the production of oil and gas that was retroactive to 2010. The Ohio Oil & Gas Association strenuously disagreed with the premise that the governor has line item veto authority within the bill.

The exemption outlined in Item No. 2 in Kasich’s Dec. 22 veto message concerning Substitute Senate Bill 235 goes well beyond the existing direct use exemption “and would result in a situation where oil and gas companies would be exempt from sales tax on almost everything they purchase,” the governor said.

“This new, broadened exemption from the sales tax would create future annual revenue losses to the state, counties, and transit authorities in the tens of millions of dollars,” Kasich said. The fact that it would be retroactive to 2010 would have resulted in $264 million of lost revenue and refunds, the governor noted.

The broadened sales tax exemption is not necessary for the oil and gas industry to flourish in Ohio, where it already enjoys “a very favorable tax climate,” Kasich said. “This is true not only of the severance tax, which is only 20¢/bbl of oil and 3¢/Mcf of natural gas, but also with respect to the commercial activity tax and the property tax.”

Oil and gas production has continued to expand in Ohio despite declines in oil and gas prices, which is further evidence that the tax climate there is not a barrier to exploration or production, the governor argued. Ohio’s more than 1.5 million b/d of crude production in September ranked it 14th among US states and its more than 1 tcf of gas production ranked it 9th, according to the US Energy Information Administration.

“Moreover, the expanded exemption would create a more favorable tax treatment for the oil and gas industry over other industries,” Kasich said. “History shows that the creation of an uneven playing field often leads to other industries pursuing special tax exemptions.”

‘Comparatively lightly taxed’

Kasich suggested that the General Assembly likely did not intend to sacrifice a significant amount of state revenue to provide even more favorable tax treatment to an industry which he said is “comparatively lightly taxed.” The lawmakers’ compressed end-of-the-year schedule did not allow full consideration of the provision’s drawbacks and consequences, Kasich said.

“In summary, the expanded sales tax exemption in this item that was made retroactive to 2010 would create a current revenue loss estimated at $264 million, enough to significantly impair both state and local ability to provide government services, for an industry that needs no additional tax breaks and continues to thrive in Ohio even under a difficult pricing environment,” he said.

OOGA Executive Vice-Pres. Shawn Bennett said the sales tax clarification was needed because Ohio’s Taxation Department “is using aggressive and legally questionable audit practices which unfairly burdens oil and gas producers in the state to help remedy a shortfall in the state’s operating budget.”

Bennett said, “Despite the assertions otherwise, there were, unequivocally, no new tax breaks or incentives in this bill pertaining to the oil and gas industry.”

OOGA commends the legislature for recognizing mistreatment of the industry by the Taxation Department and pursuing a legislative remedy, Bennett said. “They have demonstrated a greater understanding of the issue and recognize that this was not a tax break, but rather a clarification reaffirming normal business exemptions that have been afforded to the oil and gas industry for decades,” he said.

No business in Ohio would be content with having tax provisions reinterpreted without its knowledge just so the state could add a few dollars to its coffers, Bennett said. OOGA calls on the Taxation Department to follow the law, and will continue to challenge its overreach and assess all available options in the meantime, he stated.

Sens. Bill Beagle (R-Tipp City) and Bill Coley (R-Liberty Township) originally introduced S.B. 235 on Oct. 27, 2015. The Senate approved it on May 4, 2016, and referred it to the House where it was introduced five days later. The House reported a substitute with amendments on Dec. 8 during a lame duck session, which the Senate and House each approved that day.

Contact Nick Snow at nicks@pennwell.com.

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