Governor Beebe learned this week, like the rest of us, that there are limits to his legendary prowess as a dealmaker. He could not work out a deal with the big energy companies on a reasonable severance tax for them to pay for the vast quantities of natural gas they take from Arkansas soil.
It is just as well. We have our doubts that, even with the exploration companies signing off on a tax increase, he could corral the extraordinary three-fourths vote for the tax in both legislative houses, which our perverse Constitution requires for business taxes.
It will be easy to achieve the other option for building highways, raising taxes on gasoline and diesel fuel. If Beebe’s severance tax initiative fails at the general election, which is where the issue is headed, the higher fuel taxes are coming, probably in 2009. The legislature will always raise gasoline taxes because ordinary folks pay them. Every motor-fuel tax proposal the past 40 years has passed. Lawmakers draw the line at taxing big corporations.
Beebe said he would now draft an initiated act and get it on the ballot. It would set the tax rate close to the rates in Texas and Oklahoma, the big gas-producing states to our west. Beebe said his sticking point with the producers in the end was not the tax rate — Texas collects 7.5 percent of the market price of gas and Oklahoma 7 percent — but the companies’ insistence on exempting gas from taxation at every wellhead until long after the companies had recovered their exploration costs at each well. He wanted a shorter exemption. Oklahoma rebates taxes from horizontal wells like those in the Fayetteville shale until the company recovers its investment. Texas allows them to recover half the investment in a well before it taxes the production.
What, you may ask, are we talking about here? The typical exploration cost for a new well in the shale is $3.5 million. (The drillers find gas nearly 100 percent of the time in the Fayetteville shale, although a mechanical failure sometimes causes a driller to abandon a well.) If a new well produces 3.4 million cubic feet a day, like a typical one that came in the other day in White County, the producer at today’s wellhead prices will earn about $24,000 a day from that well and will have recovered its full investment inside six months. After that, it’s all gravy. Gas prices for future delivery on the New York Mercantile Exchange are running close to $9 a thousand cubic feet.
Beebe would do well to simply embrace the initiated proposal of Sheffield Nelson, the former gas company CEO who is circulating petitions to put a 7 percent severance tax on the ballot. Nelson would channel only 80 percent of the proceeds of the tax — perhaps $100 million a year — to highways, streets and county roads, and Beebe wants to direct nearly all of it to those purposes. Nelson would send the other 20 percent to colleges and universities to curtail rising tuition at the state campuses.
But we understand that the governor’s pride may not permit his surrendering leadership on a vital public issue to a prominent figure from the other party. He will want to be the undisputed father of a modern highway program that doesn’t burden the motorist and the hard-pressed family. But there will be glory to go around if he can bring about this long-needed reform.
