The severance tax

Incoming Senate Pro Tem Bob Johnson and I will be featured on AETN's Unconventional Wisdom with David Sanders today discussing the state's severance tax as it pertains to natural gas (codified at Ark. Code Ann. § 26-58-111). I'm in support of a redistribution of our tax structure that would include a moderate increase in the severance tax and a repeal of the tax on necessities like food and food ingredients. Bob opposes an increase and makes a strong argument against one. Here are my talking points, most of which I was able to make during the brief 15 minute segment:

• I'm not advocating higher taxes or an increase in state revenue -- I'm in support of a redistribution of the tax structure where we don't rely as much on working Arkansans to pay taxes on necessities like groceries and energy consumption.

• If we were to start from scratch, would we:

(a) choose to levy a moderate severance tax on out of state companies that extract nonrenewable resources from beneath our surface, or
(b) levy a sales tax on working Arkansans for necessities like food, food ingredients, and residential electricity and natural gas usage?

• At three-tenths of 1 cent per 1,000 cubic feet (MCF), we're giving away the store. Arkansas has one of the lowest severance tax rates in the country for the gas-producing states that levy such a tax. 1,000 cubic feet is about the size of a standard trailer on an 18-wheeler. While we charge 3/10 of one cent (basically nothing), Texas charges nearly 60 cents for the same amount.

• Companies are not going to pull up their stakes and move out from a moderate increase in the severance tax. Texas has a severance tax 200 times the level of ours, and Louisiana's has been close to 100 times that of ours, and production companies haven't pulled out of those states. Over 50% of Alaska's total state tax collections comes from its severance tax.

• Arkansas generated about $600,000 in natural gas severance taxes in the last fiscal year. An increase of 1/10 of a cent will generate an additional $200,000 annually. If we increased our severance tax to equal that of Texas, it would generate approximately $120 million annually. Ironically, that is the same amount generated by the 3 cent grocery tax, which could be instantly repealed.

• Arkansas is loaded with natural resources. We're the Natural State! Once these resources are extracted from beneath our surface, they can never be replaced. The state should get a revenue boost from the increased activity while giving a break to the regular taxpayer. The product is shipped out of state, so an increase from one of the many gas producing states will not affect the end user. The legislature can statutorily protect the royalty owner from having the tax passed on to them from the producer.

• Arkansas taxes the volume of natural gas extracted, whereas most other states, particularly the larger gas-producing states, base their severance tax on the market value of gas extracted at the wellhead (currently ~$6.96 per 1,000 cubic feet). This is more fair to both the producer and the royalty owner. The current statute needs to be revised anyway to correct this aspect.