AP source says Ohio gov wants drilling tax hike

JULIE CARR SMYTH Associated Press Published:

COLUMBUS, Ohio (AP) -- Ohio Gov. John Kasich is expected to release details Wednesday of a plan that would deliver modest income-tax cuts to Ohioans in two or three years by raising taxes on drilling for oil and natural gas liquids.

The tax plan will save Ohio taxpayers a combined $500 million a year by 2016, according to a source close to the administration with knowledge of the proposal. The source requested anonymity because the information had not yet been released.

Kasich, a Republican, also plans to propose education policy changes that include better aligning college and vocational courses and state workforce development programs to meet job opportunities, and authorizing Cleveland Mayor Frank Jackson's proposal to overhaul public education in the northeast Ohio city.

Additional legislation would continue overhauling of the state Medicaid program; propose a "very austere" state construction budget containing no new community projects; and cut or revamp a series of agency programs that his Cabinet directors identified was wasteful or redundant.

During his 2010 gubernatorial campaign, Kasich pledged to phase out Ohio's income tax over time.

His sweeping second-year energy agenda begins the process by hiking the severance tax of 4 percent on oil and natural gas liquids extracted from under the state and setting aside the proceeds for income-tax relief. Tax benefits would grow as the fund did, the source said.

The severance tax on natural gas would remain at 1 percent.

The new tax rate for resources obtained through hydraulic fracturing, or fracking, falls above current Ohio rates of 2.5 cents per 1,000 feet of natural gas and 10 cents per barrel of oil. But the rate keeps Ohio competitive by coming in under the 5 percent levied in West Virginia, and the 7 percent charged in Texas and Michigan.

Neighboring Pennsylvania, which has no severance tax, recently passed legislation requiring companies drilling in the Marcellus Shale region to pay an "impact fee" to help fund various state and local government programs -- but retaining an effective tax rate that's well below what many other major natural-gas producing states require.

Kasich initially expressed public support for such impact fees in Ohio. However, the source said hiking severance taxes and cutting income taxes statewide was deemed to have a broader potential impact on Ohio's struggling economy. About 70 percent of Ohio small businesses pay their taxes through the income tax.

By exempting smaller wells, those producing less than 10,000 cubic feet of natural gas annually, the administration expects to spare 90 percent of drillers and focus the tax hike on big producers.

Hydraulic fracturing is a controversial drilling technique that involves blasting huge amounts of chemically-laced water into the earth to force oil and gas deposits from shale.

Big energy companies would pay a 1.5-percent severance tax for the first year of the plan, and could apply to extend that rate for a second year if they hadn't yet recouped their start-up costs.

Gary Gudmundson, a spokesman for the Ohio Department of Taxation, said the effective tax rates currently are 3 cents per 1,000 cubic feet of natural gas and 20 cents per barrel of oil -- higher because of fees assessed on producers for reclamation projects.

The Service Employees International Union, District 1199, which represents 35,000 health care, social service and public sector workers across Ohio, West Virginia, and Kentucky, called for Kasich to take further government cuts -- particularly those affecting local governments -- off the table in favor of a higher severance tax on oil and gas producers.

"We've tried the cut-and-see approach and it has not made Ohio's economy stronger compared to other states, and it is unlikely that any further reduction in revenue will have a different outcome," president Becky Williams said in a statement.

U.S. Bureau of Labor Statistics figures released Tuesday found Ohio gained 62,500 jobs from January 2011 to January 2012.

Like the tax proposal, Kasich's intent to to implement Jackson's plan for Cleveland schools was also already facing opposition even before it was formally introduced.

The mayor controls schools through an appointed board. He wants to overhaul failing schools and work closer with high-performing charter schools, through a plan that calls for reassigning teachers without regard to seniority.

The Ohio Education Association joined the Ohio Federation of Teachers, which represents Cleveland teachers, Tuesday to condemn Jackson's plan as a repeat of a collective bargaining overhaul Ohio voters rejected last fall.

The union called it "a renewed effort to scapegoat teachers by attacking collective bargaining rights and silencing classroom professionals."

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