Sunday, March 16, 2008

The Severance Tax and Your Wallet

Mike Beebe: Is this man bluffing?

To hear some tell it, there is a "near consensus" on what the natural gas severance tax in this state ought to be, and most critically, how it is to be spent. Hmmmm. No one asked me. Did anyone ask you? I didn't think so. The "near consensus" must be among Governor Beebe's staff, because it surely does not exist among the voters of this state. Most of them probably have not formed an opinion on what the tax should be set at, much less how it should be spent. If that is you, then please permit me to brief you....

First: The Fayetteville Shale (which is actually spread over a number of North Arkansas counties) has the potential to be an incredible economic bonanza to our state. With your permission, I'd like to make a fairy tale analogy- we are like the family that found that they had a goose which laid golden eggs. The natural gas bonanza is estimated by a University of Arkansas study to pump $17.9 billion dollars into our economy over the next five years. It should create 11,000 new jobs and pump over 1.8 billion dollars in new tax money into the state over that five year period, excluding an additional potential 150 million in increased property taxes (because we will have more property, not because the rates go up).

All that assumes that taxes on the 80 or more companies lined up to shift more resources here remains at their current super-low level. If taxes go higher, costs go higher and the companies will not follow through on quite as many projects as they did. The ones on the margin will not get done.

So Governor Beebe claims "the drilling companies" are coming to him and agreeing to his quick phase-in 5% tax out of fear it could be higher if the issue goes to a ballot initiative. What effect would raising the tax (it amounts to 3/10ths of 1% right now) to five percent have? Well that is a problem for us, because so many business decisions are made "at the margin". A five percent loss of revenue can be a disproportionate deal-killer to a businessman who has a hundred different options he can invest in. According to the same UA study, a 5% severance tax would reduce investment by 13%. That is to say the non-government economy (that is us folks) would lose $2.4 billion over the next five years. Over 2,000 jobs would be lost. My back-of-the-envelope calculations tell me that at this rate, $234 million of tax revenues would also be lost.

So why would Governor Beebe, and so many county judges and mayors, want to increase this particular tax by 1,600%? For the same reason that the family in the "Goose that laid Golden Eggs" fairy tale cut the goose open- simple greed. They wanted more and wanted it now. In the story, the family did not find any more golden eggs inside the goose, and they didn't get their one golden egg a day anymore either.

While we may loose $234 million/5 = ~ $46 million a year in taxes because of companies reducing their profile here, the tax increase will raise about $100 million a year once it is phased in according to this Jason Wiest article which I will have more to say about later on. The net difference is $54 million dollars a year for the state government to have, at a cost to our state non-government economy (you and me folks) of $2.4 billion/5 = $480,000,000 dollars a year.

What this means is that if the U of A study is close to right, Mike Beebe's tax increase will cost the rest of us almost ten dollars for every one dollar extra it gets state government. If they were way off about the negative effect it would have on the companies willingness to make new investment, say off by 100%, then Governor Beebe and the Good Ole boys will only be taking about five dollars out of our collective wallet for every extra one they get themselves. If the study was wrong by about 1,000% then we will just about break even.

Guys, I don't think much of our university system sometimes, but they are not going to be that wrong. Beebe and the Good Ole Boys want to split this goose open, or at least see how much of its blood they can drain. The gas play is rich, and we are going to get helped by it- this tax increase may not kill the goose, but it is going to make it sicker than it was. Instead of a golden egg every day, we may have to settle for one a week just so the good ole boys can get their claws in on some of it faster.

(I am waaaay long here and we have a long way to go, so it "SUNDAY" below and scroll down for the rest of it, if you care to.)


Blogger Mark Moore (Moderator) said...

Second Area of Discussion: What should the rate be?

Right now, it is at 3/10 of 1%. Because the 1957 legislature set this tax in terms of cents rather than a percent of value, the tax has not kept up with inflation. If it did, the tax would be up to 1.9% of market value. If all the legislature did was adjust the tax for inflation, I doubt it would be much of a problem. This would still be much lower than in other states (although most of them have a more developed natural gas industry).

But don't other states have a higher rate than that? In some cases they do, but those companies already have a long term presence in the states where the severance tax is, or is higher than, 5%. We are trying to get them to build an infrastructure here, it is not like we already have them.

I repeat that by raising the rate, we could be losing overall dollars. Isn't the bottom line getting the most dollars in our economy? Should it bother us that the drilling companies get to keep an extra 3% or so of their income if it means they spend an extra $2.4 billion dollars in our state? For adults, it is not about "getting the companies, but about helping our family budget!

So the answer to "what should the rate be" is "as low as possible". It is true that the extra traffic will do more damage to our roads, but the extra economic activity will also generate more tax revenues to fix those roads, even without a rate increase. If the legislature wants to adjust for inflation without being greedier than the 1957 legislature, change the rate to 1.9%, but a better idea might be to leave the goose alone while it is laying golden eggs!

That brings me to our third topic: What should the money from a tax increase be spent on? Roads? Education?

Three second drum roll please: It should be spent on reducing the burden of other taxes! Arkansas has one of the highest tax burdens in the nation, when viewed as a percentage of total income. Our families need money worse than our roads do, worse than our schools do. The people of this state are hurting, and raising taxes on somebody else, especially if that somebody else then spends less money here, is not going to help Arkansas families.

I will be specific. Any money raised by a change in the severance tax should be given back to taxpayers by means of a personal exemption on our Arkansas income taxes. Let's see how enthusiastic the good ole' boys are about raising someones taxes, anyone's taxes, when the money goes to the taxpayers instead of to their pet projects.

Right now, Arkansas' income tax burden is not very high, about the middle of the pack when compared to other states. But the combination of sales and income taxes make us one of the most heavily taxed states in the nation for a family of four making, say $40,000 a year.

Right now we have a $22 a person tax credit for our state income taxes and NO personal exemption. Our combination of personal credits and exemptions is pitiful compared to other states. Some states don't even have income taxes, but among those who do, only five states have punier personal tax credits and exemptions than Arkansas. And in all five of those states, the total tax burden for a family of four making $40,000 a year is already less than the burden in Arkansas.

Why is it that legislators keep saying that we need to get our gas severance tax up to 5-7% because that is competitive with other states, but when it comes to getting families tax exemptions being "competitive with other states" is no longer a consideration?

The fact is these states that have the higher severance taxes almost all have lower taxes on incomes and/or sales. Our legislators seem to want to use the higher severance taxes of some of our neighbors as an excuse to raise our severance taxes, but ignore the fact that those higher severance taxes enable other aspects of taxation to be lower in those states.

Any tax increase should be revenue-neutral at the least. It should be offset by reductions in other taxes. It is appalling that Governor Beebe, who walked into office with the largest budget surplus in Arkansas history not two years ago, is now looking to increase taxes on ANYBODY unless the proposal is offset by tax decreases in other areas.

A $1,500 personal income tax exemption would save a family of four about $420 a year. It would be great if we could find a way to do that. Even half that amount would help some. That would be much better than running off a significant slice of the natural gas industry so that government could have more money while families have less.

As an aside, while using the money to completely eliminate the grocery tax is tempting, we should remember that Governor Beebe has already made a commitment to do that even before the severance tax discussions occurred. That has already been promised. This money should be used to help taxpayers in an additional way, not to do something that is already supposed to be done under the previous situation.

8:25 PM, March 16, 2008  
Blogger Mark Moore (Moderator) said...

Flotsam and Jetsom:

"But our roads need the money"

Ummm Hmmm. Governor Beebe and his associates should have thought of that when they let Mike Huckabee push through his big plan to borrow the next 25 years worth of highway money to go on an orgy of spending. Since he threw enough their way, they kept quiet when they should have spoken up.

Huckabee's plan was ill-advised. Sure it makes him look good when all those shiny new roads were finished, but now we are looking at the next 20 years without federal highway money. Mike Beebe could have stopped it, and he should have. He didn't, and now he wants you to pay for his lack of foresight. I repeat: Our families are hurting, and we need the money more than the roads do.

"But the drilling companies have already agreed to this"

Sounds like the Guv used the same method we used to use to sign treaties with the Indians. Since they had no formal leaders, we would find a few pliable ones and get them drunk, then have them sign a treaty on behalf of the whole tribe binding them to outrageous conditions. The companies he spoke with don't speak for the whole industry. To make sure, I called up an old friend who works for a small independent outfit. He sounded confident that the big boys were looking out for the industry and that no substantial increase would be coming. I'd say he is now surprised to find otherwise. The only reason they want this deal is duress, not because it is going to help them maximize their presence in the state.

"So you are sticking up for the evil drilling companies?"

No. I am sticking up for the taxpaying families in this state who are being ripped-off again by the good ole boys down at the Capitol. The drilling companies may know drilling, but when it comes to political PR campaigns they have shown themselves to be so brain-dead that they deserve the beating they are taking- but the families that will also lose when this goes down DON'T deserve it.

The companies hired TIM GRIFFIN to be their champion! Can you believe it? A Rovian Republican in a state that is dominated by Democrats! Maybe they could hire The Hillside Strangler to be his assistant, that should complete the PR effect they are building. Griffin will be lucky to stay unindicted over the next two years. I still can't believe they hired him to make the case for them.

8:40 PM, March 16, 2008  
Anonymous Rick said...


I have followed this story with interest. As you know I spent the last 10 years in the newspaper business. As of last October I switched careers and went into the oil and gas business as a ROW Agent. This was a good move for me because my pay increased 6X. The jobs this industry create are far beyond what most jobs pay in this state.
If the severence tax is to high these companies may just move to another state. Either way I continue to work, but I would prefer to work in Arkansas if the jobs are here.

6:05 AM, March 17, 2008  
Anonymous Anonymous said...

Good Analysis. Does anybody care? Are there any grassroots conservatives in Arkansas anymore or are they all dependent and enslaved to the state through some form of handout or the other?

1:34 PM, March 17, 2008  
Anonymous Anonymous said...

Can you dumb this down enough so that the editors would understand it enough to put it in the "Letters to the Editor" section?

Just keep in mind you will be writing to someone with a reading and writing level of an elementary schooler. Public school mind you.

2:32 PM, March 17, 2008  
Blogger Mark Moore (Moderator) said...


6x? Need an assistant?

4:13 PM, March 17, 2008  
Anonymous Rick said...


Yes, 6X! God has really blessed with this job. Say the word and I will help you go to work.

6:34 PM, March 17, 2008  

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