COLUMBUS — Ohio Gov. John Kasich is proposing cuts in the state income tax in his next budget, but that could mean an increase in the severance tax, sales tax and cigarette taxes.

Severance tax

Ohio’s current severance tax is a volume-based tax, imposed on oil and gas at a rate of 20 cents per barrel and 3 cents per million cubic feet. Under the 2016-2017 budget proposal unveiled Feb. 2 by Kasich, small, traditional producers would not be taxed at all.

For larger producers using hydraulic fracturing in their wells, the tax would be imposed at a rate of 6.5 percent of the price of the oil or gas sold at the wellhead, or 4.5 percent of the price paid downstream from the wellhead.

Shale counties

After providing for regulatory needs such as the Ohio Department of Natural Resources, 20 percent of the increased tax revenue would be earmarked for the shale counties, to reimburse them for infrastructure and other costs associated with new drilling.

Industry response

Shawn Bennett, executive vice president of the Ohio Oil and Gas Association, said the industry’s frustration with the severance tax proposal is its timing.

“We are in survival mode at this moment,” said Bennett.

He said the state needs to do everything it can to keep the oil and gas industry in Ohio, and not increase the burden it is already facing.

“We have companies operating here in Ohio that are cutting capital budgets, laying down rigs and drilling less in 2015 than in 2014. We don’t need to give them another burden,” said Bennett.

He added that with current commodity prices, there is little benefit to companies to process natural gas liquids, or NGLs (like butane, propane, ethane). Increasing taxes means the companies will have even less incentive to increase the use of NGLs.

“Companies are looking for the best return on their investment,” said Bennett.

He urged state leaders to remember that the decrease in shale drilling will not just mean the loss of industry jobs, but spin-off jobs as well.

“They could all be threatened in today’s market,” said Bennett.

OFBF response

Brandon Kern, director of state policy for the Ohio Farm Bureau Federation, said the OFBF stands firm on its policy voted on by members in 2013 — the farm group is against increasing the severance tax in order to lower the income tax.

However, the goal is still to make sure the state keeps operating. So, if state regulators like the ODNR are fully funded, and a portion of the proceeds goes back to the counties impacted by the shale drilling, and the measure calls for landowner protection, then the OFBF can stand behind it.

“It’s a step forward. It will be interesting to see how budget hearings go and how the counties handle it,” said Kern.

The tax changes proposed by Kasich are not limited to the severance tax or the cuts in the income tax. Kasich is also proposing a $120 million debt relief fund to help residents repay college loans. The income tax rate would be cut by 23 percent over the next two years under the budget. The top rate would decrease from about 5.9 percent in 2011 to 4.1 percent in 2017. The budget plan also calls for the increase in the tax on cigarettes from $1.25 to $2.25 a pack.

Sales tax

The state sales tax rate will be increased from 5.75 percent to 6.25 percent. In addition, the tax base will be broadened by expanding it to a number of services, including cable TV subscriptions and parking. Kern added that with 23 different tax changes proposed in the governor’s budget, the OFBF and others will need time to complete a thorough analysis of the plant.

“We are still pretty early in the budget process,” said Kern.

He said the goal will be to make sure state programs like water analysis and protection get the funding they need, no matter how the budget is funded.