On Feb. 11, 2015, the biennial budget bill appropriating money for 2015 and 2016 was introduced in the Ohio House of Representatives. The bill incorporates Gov. Kasich’s proposals, which were released earlier this month in his Blueprint for a New Ohio. Generally, if enacted in its current form, there would be an overall reduction in personal income tax, with an increase severance tax, commercial activity tax and sales tax. This article focuses on the severance and commercial activity tax components of the bill.

Severance tax

The structure of the severance tax would be altered to incorporate an average price — the spot price — into the calculation of tax owed for extraction of natural resources horizontal drilling techniques. In the bill, a “horizontal well” is defined as “a well that is drilled for the production of oil or gas in which the wellbore reaches a horizontal or near horizontal position in the Point Pleasant, Utica, or Marcellus formation and the well is stimulated.” The new severance tax formula for those horizontal wells would be:

Total volume extracted X “average quarterly spot price” X percent tax (see table below)

Here, the “average quarterly spot price” is equal to the average closing price of the natural resource set to be taxed, for the calendar quarter starting six months prior to the current quarter. For ease of calculation, the spot price would be posted by the tax commissioner at the end of the first month of each new quarter. The percentage of tax charged for natural resources extracted would be:

For all other wells, the severance taxes would be:

• Oil — $0.20 per barrel
• Gas — $0.03 per thousand cubic feet

In addition, wells other than horizontal wells would be exempt from the severance tax altogether if they produced less than 910,000 cubic feet per quarter or 3,640,000 cubic feet a year.

Commercial activity tax (CAT)

The most important change to the CAT is the proposed tax rate increase from 0.26 percent to 0.32 percent per dollar on gross receipts over $1 million. Additionally, the tax owed on the first $1 million for businesses whose gross receipts were less than $2 million would be reduced to $150. Currently, businesses whose gross receipts are between $1 million and $2 million pay a flat rate tax of $800 on their first million dollars of income.

These are just two of a substantial number of proposed changes to the state’s tax structure. Read more about H.B. 64 on the Porter Wright website.