Gov. Beebe’s dilemma over the severance tax illustrates better than anything the ruinous effect of a particularly perverse section of our state Constitution that was adopted at the threshold of the Great Depression.
That provision requires a three-fourths vote in each house of the legislature to raise a tax that existed that year, 1934. Any fresh tax after that, like sales and a variety of other consumer taxes, could be levied and increased by a simple majority vote. It meant that a small minority of lawmakers in either house could block a tax for which there was a wide public consensus.
This describes perfectly the situation in which we find ourselves in the spring of 2008. Funding for highways, roads and streets has been shrinking but Beebe’s widely acclaimed and endorsed plan to restart the road building and maintenance program with severance taxes on natural gas is apt to be held hostage by a tiny group of legislators, mostly but not all Republicans.
Nine of the 35 senators or 26 of the 100 House members can block it.
A tiny segment of lawmakers who are subservient to the commercial gas interests have blocked a severance tax for 60 years. Arkansas is the only gas-producing state in the country that does not collect compensation from gas producers for exploiting a vanishing natural resource.
Oh, we collect three-tenths of a penny per thousand cubic feet, a mere annoyance for production companies that barely raises enough money to cover the administrative costs of collecting the tax. Arkansas collects a real severance tax on other natural resources. Oil, for example, has long been taxed at 5 percent of its market value at the wellhead, which is what Beebe now proposes for natural gas.
Beebe, a legendary deal-maker in a long legislative career, announced this week that he had made a deal with the major gas interests, including the four big exploration companies in the Fayetteville shale, on a 5 percent tax. It includes huge concessions to the producers.
The tax would be nonexistent or negligible until a producer and its partners recovered the full costs of exploration at each well. In other words, the tax would kick in when nothing but profits on the gas flow lay ahead.
Arkansas consumers have never been confronted with such a bonanza. They will have a $100-million-a-year building and maintenance program for highways, roads and streets — maybe much more — and they will bear none of the cost. The severance taxes cannot be passed on to homeowners and businesses through higher gas rates. If the severance tax fails, gasoline taxes and vehicle registration fees will have to be raised. That will almost certainly come in the 2009 legislative session.
Republicans hold 25 seats in the House of Representatives and eight in the Senate, one short of enough to block the severance tax in each house. The chairmen of both houses’ tax committees, Republicans, said they would oppose the tax if Beebe calls a special session at the end of the month. So did the Republican leader of the House and the chairman of the state Republican Party. But Republicans will not vote as a phalanx. Two Republican senators said the case for the tax was so compelling that they could not oppose it. Others may follow.
Rep. Johnny Key, the House minority leader, laid out the entire case against the tax: The big gas producers, he says, would leave the state or drastically cut back their drilling if the state levies the tax and that would deprive people of hundreds or perhaps thousands of new jobs.
But the argument is nonsensical. Not even the gas companies themselves raise it. Why would they cut back on exploration in Arkansas with a 5 percent tax when they have been drilling with frenzy in the shale formations of Texas and Oklahoma, which have severance tax rates of 7.5 percent and 7 percent respectively? They were drilling in the Barnett shale of Texas when gas prices were half what they are now, $9 a thousand cubic feet and rising.
Does it make sense that a company that is in business to make a profit would stop drilling wells if the state starts collecting a tax that would reduce the company’s annual profit on a high-producing well from $950,000 down to $920,000? That would be the approximate effect of the tax.
The only thing that will curtail or slow exploration in the Fayetteville shale is a collapse of the economy and of the demand for natural gas. A 5 percent severance tax or even the 7 percent in Sheffield Nelson’s initiated proposal would have no effect on it. (Note to Republicans: Nelson is a member in good standing, a former state GOP chairman and national committeeman.)
If the Republican naysayers and Sen. Bob Johnson, the leader of the Democratic brotherhood in the Senate, think gasoline taxes and car licenses are a better way to build roads, they should be honest and tell us.
