Leader Blues

Saturday, March 01, 2008

EDITORIAL >>Ledge must act on tax

Gov. Beebe is reported to be ready to summon the legislature to Little Rock to raise the severance tax on natural gas. It will be far harder to do than the weak arguments against it suggest. A handful of lawmakers in either house ónine in the Senate or 26 in the House of Representatives ó can stop the legislation.

The opposition to the initiated proposal by former gasman Sheffield Nelson, a flat 7-percent tax based upon the market price of the gas, suggests what Beebe will face as well. There are two big objections, one that is simply ridiculous and the other requiring a suspension of disbelief.

Several Republican legislators warn that the gas producers would pass the tax on to consumers, which would raise your monthly gas bill. If you are a customer of Centerpoint Energy, the former Arkla Gas, you would see your heating bill shoot up a few dollars every month.

This is one that you need not worry about. It canít happen. Natural gas is priced and sold like any other commodity. Centerpoint does not buy its gas from individual wells or from producers. It gets it from the pipeline, and whether gas produced in Arkansas is taxed at three-tenths of a penny per thousand cubic feet as the law now requires ,or at 7 percent of the wellhead value as Nelson proposes, makes not a whit of difference in the cost of gas to Centerpoint or to you. The exploration companies and their working partners will pay the higher tax and they will pass on part of the cost on to the state and federal governments by expensing the tax and thus lower their federal and state income tax liabilities.

The more serious objection, raised by Rep. Johnny Key in an op-ed article in The Leader and by others, is that the tax will kill the goose that laid the golden egg, to use the hoary phrase. The big Texas and Oklahoma exploration companies would just stop drilling if they have to pay a tax to Arkansas comparable to what they are paying in other states.

Businesses do not make decisions based upon whether they are sore about a particular government action, but upon questions of profitability. National demand for gas is rising and will rise as far into the future as anyone can calculate. Gas in the Fayetteville shale play across much of Arkansas is abundant and now easily accessible. There is almost no risk in the shale explorations. Unless there is a mechanical breakdown, like a shaft collapsing, every drilling exercise produces a working well. Last week, the Arkansas Oil and Gas Commission issued 26 drilling permits and reported another 26 wells completed, a ratio that suggests the minimal risk in shale drilling.

Profits from exploration are enormous, so fat that the little Arkansas tax would hardly be noticed in the dividend checks of gas stockholders. If you have any doubt, Southwestern Energy Corp. of Houston, the biggest player in the Arkansas shale, yesterday reported that its fourth-quarter profits doubled and it announced a 2-for-1 stock split. Fabulous profits from its booming Arkansas exploration accounted for much of it. Any severance tax that Arkansas is likely to levy, even if it were Texasí base rate of 7.5 percent, would not slow the companyís activity or any otherís.

There is a third issue, even more trifling. Beebe plans to use the tax to pay for highway repair and construction. Instead of the almost continuous spiking of gas prices ó the wellhead price reached $9 a thousand cubic feet this week ó what if the market fell back to the levels of the 1990s and tax collections slumped, too? What in the world would happen to the highway program?
The same thing that happens now when highway-user taxes or general-fund taxes slump, as both are starting to do. You donít build as many highways and you hold down expenditures on other services. The state has been doing that since 1948.