Increased Severance Tax Will Hurt Arkansas Economy

by Ryan Norris, Pulaski County GOP Committee Chairman: As a child, I spent my summers on my grandparent’s farm and fishing in their stock pond. While I waited for a fish to take the bobber under, I killed the time by throwing rocks into the still surface of the water and watching the ripples travel in perfect rings to the shore. So you can imagine my bewilderment as have listened to Arkansas state representatives and senators discuss an increase to the severance tax in the middle of the Fayetteville Shale and then deny that there would be ripples. Here are a few of the ripples that I perceive with an increase on the severance tax:

1) Ultimately a consumer will pay the increased tax. The severance tax is based on the “market value” of natural gas when it is sold to the “first purchaser.” The drilling company extracts the gas and processes it for sell to a distributor. The distributor, or “first purchaser,” is then charged the cost of the drilling and processing, plus the increased severance tax. The distributor then adds on his costs for distribution, which now includes the increased severance tax, and passes that cost on to his customers. The customer then pays the cost of the drilling, processing, distribution and all applicable taxes. To increase the severance tax is to increase taxes on the general public that use natural gas. The Governor is quick to point out that the natural gas companies have accepted the severance tax increase. But why shouldn’t they? The consumer—not the company—will ultimately pay for it. The companies need only to collect the tax for the state.

2) Natural gas companies will invest less in Arkansas. While conducting a study on the economic impact of the Fayetteville Shale, the University of Arkansas Center for Business and Economic Research (UACBER) asked the drilling companies if they would limit their investment, if the severance tax was increased. The response from the companies was “yes.” According to the study, there would be a loss of over $2.4 billion in the first five years of drilling, due to decrease in investment.

3) Less investment will mean fewer jobs created. When the cost of a product goes up, the most expedient way to cut overhead is through layoffs or hiring fewer people. According to the Fayetteville Shale study conducted by Kathy Deck, director of the UACBER, nearly 3,000 fewer jobs would be created over a five year period if the severance tax was increased to five percent. What voters should note is that Gov. Mike Beebe is willingly and knowingly choosing to forgo Arkansas jobs that could produce a projected average of $480 million in revenue per year so that he can raise a tax that will produce a $100 million for highways.

4) A plan for spending the money doesn’t exist. The Highway and Transportation Department does not have a plan for the funds, and further adds that the projected funds will not fully fund all highway projects throughout the state. The Highway Department will be on an honor system that they should spend the money as the governor wishes, but the senators controlling the purse strings of these taxes have said that if they believe that the money is not being spent the way that they believe that it should be spent, then they are more than willing to redirect the severance tax funds. There is nothing in the bill that mandates that future General Assemblies cannot move the money to other projects.

It is the duty of the voters to question the logic by which their government is operating, and all eyebrows should be lifted and magnifying glasses out as we scrutinize the governor’s proposed bill. He is asking us to believe that you can charge a higher tax on a specific industry and that the industry will continue with business as usual, even though the companies themselves have said otherwise. During those summers at my grandparents, I may have thought that I wasn’t in school and therefore not learning anything, but now that I think about it, throwing rocks in a pond and counting ripples might have taught me enough to be governor.

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Tags: Arkansas, increased taxes, Mike Beebe, Pulaski County, Ryan Norris, severance tax, special session To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. Thanks!