Thursday, January 1, 2009
Drop in gas price makes severance-tax payoff uncertain
As tax on natural gas kicks in, intake unclear
BY SETH BLOMELEY
Posted on Thursday, January 1, 2009
Arkansas' increased severance tax on natural gas, approved in April after much debate, takes effect today amid questions about how many dollars it will produce for the state and what those dollars will do.
The tax is based on the price of natural gas, which has plummeted since the state last produced revenue estimates.
That means projections of $57 million to be collected in 2009 are uncertain.
The bulk of the revenue is to be spent on roads, but fluctuations in the price of oil have created more uncertainty on exactly how it will be used, said Cliff Hoofman of North Little Rock, a member of the Arkansas Highway Commission.
"We have talked about setting aside [severance tax revenue] for some identifiable project, but our discussions a few months ago was that we should put that on hold because we were experiencing a real calamity in the reduction in department revenue," Hoofman said. "Now, we don't know what's going to happen. We're sort of in a holding pattern."
Much of Highway Department revenue from the state is based on a gasoline tax of 22.5 cents per gallon. Fuel tax receipts for the department from July through October were $73.4 million, down from $77.9 million in the same period in 2007, said Randy Ort, department spokesman.
Highway off icials have blamed the decrease on the fact that people bought less gasoline because of the high prices earlier in 2008. But now that the price of gasoline has dropped from $4 a gallon to $1.50 a gallon, officials say it's unclear whether fuel tax revenue will go up.
Hoofman said the severance tax money may end up simply making up for the loss in the fuel tax revenue. He said it "would be irresponsible" to start new projects with the money until the department has a better idea of the amount of tax col- lections.
The severance tax was increased after a surge in drilling in the Fayetteville Shale natural gas deposits in north-central Arkansas.
The previous rate was 1 cent per 1,000 cubic feet of gas, which was set in 1957 and was based on volume so it hadn't increased since then. The tax raised about $600,000 a year.
Gov. Mike Beebe and the Legislature increased the tax to 5 percent of proceeds from the sale of gas by the producer less the cost of treating and transportation.
The state projects revenue to increase to about $100 million by 2013.
The proceeds are to be divided four ways, with 5 percent going into state general revenue. Of the remaining 95 percent, 70 percent is to go to state highways, 15 percent to counties and 15 percent to cities.
Beebe called a special legislative session to raise the tax after negotiating with natural-gas production companies on an increase. That led to consensus in the Legislature to approve it.
Little Rock attorney Sheffield Nelson had called for an initiated act to raise the tax by an even greater amount, if the Legislature and the governor failed to act.
Nelson said some have argued that Beebe's agreement with the gas companies is too soft and contains too many exemptions.
"But it's 100 times more than what the state has been getting up until this time," Nelson said. "It's quite an accomplishment."
Nelson, a former Republican gubernatorial nominee and former natural gas utility executive, said "time has proven" that he and his supporters were correct to back off pursuing a ballot initiative to raise the tax.
He said he thinks that the economic downturn could have made it harder to raise any tax.
"Had we fought a very tough battle from that time until November, even if we had won, there would have been negative consequences," Nelson said. "No one would come down with a good taste in their mouth. I think we would have won but we would have burned so many bridges."
For example, he said had a ballot initiative been successful he doubted that natural gas producer Southwestern Energy of Houston would have decided to build a $25 million regional headquarters in Conway, which was announced Dec. 18.
At the time of the severance tax's passage in April, the price of natural gas traded on the New York Mercantile Exchange was $10 per 1,000 cubic feet. Now, it's $6.
"That's probably artificially low," Nelson said. "It's tagged to a certain degree of what's happening with oil. It will go back up."
Oil is a major ingredient in asphalt. So even though the Highway Department would have gotten more severance tax money when the price of natural gas was high, roads were more expensive to build and fix because of the increased price for asphalt, Hoofman said.
Hoofman said it's unclear whether the price for asphalt will decline with the reduction in oil prices the past couple of months. He said there should be some indication of that next week when project bids are opened.
Beebe spokesman Matt De-Cample said the governor expected uncertainty in the price of natural gas.
"We'll just take it as it comes," he said.
State revenue estimates were based on $8 natural gas. Richard Weiss, director of the Department of Finance and Administration, said the state hasn't updated it's revenue estimates for the severance tax.
Beebe said in 2008 that he wanted the severance tax money to be spent at the Highway Department based on "money following the cars," meaning in areas of high traffic and in places where it could help economic development.
DeCample said that's Beebe's general philosophy on highway revenue but that the governor has no specific plan on spending the severance tax money.
"We accepted the adjustment of the Arkansas severance tax," said Danny Games, spokesman for Chesapeake Energy Corp. of Oklahoma City. "We and our royalty owners pay similar types of taxes in most of the other states where we operate."
A Southwestern Energy spokesman didn't return a message.
Also taking effect today are two proposals approved by the people at the Nov. 4 election:
An initiated act that bars unmarried people living together from adopting children or being foster parents. The American Civil Liberties Union has filed a lawsuit challenging the law in Pulaski County Circuit Court.
A constitutional amendment calling for annual sessions of the Legislature, which now meets in regular session every odd-numbered year. So the first additional session under the terms of the amendment would be in 2010.
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