U.S. States Consider Gas and Oil Levies

Dow Jones Newswires

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Jun. 29, 2009

Cash-strapped states are considering raising taxes on oil production to plug yawning budget gaps, but they face strong resistance from oil companies, which warn the moves could lead to lost jobs and higher energy prices.

Lawmakers in Pennsylvania and California have proposed what are known as severance taxes on oil and natural gas produced in their states. A tax increase took effect in Arkansas at the beginning of the year, and Alaska last year raised its oil-production tax.

Some lawmakers in Louisiana want to take the opposite tack, in a bid to attract more drilling. The state House of Representatives recently approved a package of tax cuts targeted at certain high-cost forms of oil and gas production. Democratic Rep. Nickie Monica, the lead sponsor of one measure in the package, said he hopes to give Louisiana a competitive advantage at a time when other states are raising taxes. "We're bucking a national trend," he said.

Mr. Monica's bill has encountered resistance in the state Senate, however, where lawmakers are concerned about reduced tax revenue.

"Given the economy, any source of revenue is significant," said Chuck Ardo, a spokesman for Pennsylvania Gov. Ed Rendell.

Mr. Rendell has proposed a 5% tax on natural gas produced in his state, which faces a one-year, $3.2 billion budget deficit. A legislative committee this week approved the measure, which requires approval by the full House of Representatives.

In California, Democrats are pushing a 9.9% severance tax to help close the state's projected $24 billion deficit. But Gov. Arnold Schwarzenegger, who earlier this year supported adopting a severance tax, is now opposed, saying the state has raised taxes enough already.

The oil industry has already beaten back some proposed tax increases. An effort to raise Montana's severance tax died in the state legislature this year, and in November voters in Colorado voted down an oil-tax increase after a high-profile "vote no" campaign funded by the industry.

Energy interests argue that higher taxes would lead companies to shift their drilling elsewhere, leading to lost jobs and lower tax revenue. And they say reduced drilling could lead to greater dependence on imported oil and higher energy prices.

In California, where lawmakers are struggling to close a big budget gap, an industry group warns of more fiscal pain if taxes are raised. "California is a very difficult state to do business in to start with," said Joe Sparano, president of the Western States Petroleum Association. "Anything that adds to that burden logically is going to have a negative impact on economic growth."

But advocates for increased taxes argue that taxes play a smaller role in companies' drilling decisions than factors such as how much oil is present or how difficult it is to produce. A study released last fall by Headwaters Economics, a Montana-based nonprofit, found that Montana and Wyoming, despite widely differing effective tax rates, haven't seen much difference in drilling activity.

"It doesn't seem to be affecting where companies drill," said Mark Haggerty, one of the study's authors.

Mr. Haggerty said that if states want to encourage drilling and maximize revenue, they should have relatively high severance taxes but encourage companies to look for new oil fields. That is the approach taken by Alaska, which has the country's highest severance tax rate, at 25% of net income per well, but also offers subsidies for companies to invest in the state.

"We really are trying to encourage companies to take the plunge and make the investment and get established up here," said Joe Balash, Alaska Gov. Sarah Palin's top aide on energy.  

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