Severance Tax

June 2012

Issue: Governor Kasich has introduced a proposal that would make significant changes in the Ohio severance tax system that applies to oil and natural gas wells in exchange for lowering Ohio’s income tax. The proposal would increase taxes on horizontal wells and provide a tax reduction or no change in taxes on production from vertical or conventional wells. In addition, the proposal calls for the new tax revenue generated from horizontal wells to pay for reductions in income tax rates.  

This document reviews the framework of the Governor’s proposal, answers some common questions, provides the positions of various stakeholders on this issue and suggests items that may be considered during current policy deliberations.

Background: Previously, oil and gas wells in Ohio were vertical wells; the well was drilled in a vertical direction only. Oil and gas drilling in the shale formations use a horizontal drilling method. When it is extracted from the ground, natural gas is “wet;” it contains a number of additional liquids, such as butane, ethane, propane and natural gasoline, that have to be removed before the gas is marketable. These liquids are known as “condensate.” Natural gas from which these liquids have been removed is known as “dry” gas.

Because the amount of gas in most vertical wells in Ohio is not great, these additional liquids have not typically been commercially significant to the producer. However, it is believed that the natural gas reserves in the shale formation are so extensive and a horizontal well makes accessing the gas comparatively easier that these liquids will become commercially important.



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