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Illinois proposes fracking tax that is lower than in other states

Oil producers enjoy lowest tax rates when oil is flowing at its peak due to ‘tax holiday’

April 01, 2013|By Julie Wernau, Chicago Tribune reporter

In Illinois, oil producers will enjoy their lowest tax rates when oil is flowing at its peak and tax rates would be less than half that of some states with fracking operations.

The state would receive estimated $725,508 in taxes on each fracking well, assuming a life span of 10 years and a price of $85 per barrel of oil. A separate tax that would go to the county in which the well is located would generate about $307,437, according to an analysis for the Tribune by Mark Haggerty of Headwaters Economics in Montana.

Haggerty’s primary finding: Oil and gas drillers will be getting a sweet deal in Illinois.

He plugged Illinois’ proposed tax rates into a model the firm has used to evaluate tax policies involving horizontal hydraulic fracturing in Oklahoma, Wyoming, Montana, North Dakota, Colorado and Texas. Compared with those states, Haggerty said the combination of state and local taxes on extraction (on which severance taxes are based) and production of oil would amount to an effective tax rate of 5.4 percent. That is less than half the tax rates of some states, he said. North Dakota and Wyoming, for example, have rates approaching 12 percent.

“If you make the rate too high ,you’re going to reduce revenue to the state because you’re going to eliminate the possibility of this development happening,” said Brad Richards, executive vice president of the Illinois Oil and Gas Association.

Initially, the tax rates considered by Illinois legislators were more in line with North Dakota and Wyoming. “Originally it was a 12 percent severance tax — flat from the start,” Richards said. “I believe it would have been essentially a de facto ban” on drilling.

In principal, Richards said, the oil and gas industry was opposed to a severance tax but realized it would have to compromise. At one point, Illinois House Speaker Michael Madigan threatened a moratorium on fracking because of stalled discussions over the tax rate. The legislation is expected to be taken up when legislators return in two weeks.

A severance tax called for in legislation would adjust based on fluctuating oil prices and oil well production rates.

Illinois’ legislation also calls for a “tax holiday” for the first two years after wells are drilled. So oil producers would enjoy 3 percent tax rates when the oil is flowing at its peak. Oil production drops dramatically after the first 18 to 24 months. Thereafter, the tax rate would rise incrementally until it reaches 6 percent of the value of produced oil.

Oil industry representatives contend that “tax holidays” are necessary to encourage investment. Companies can spend up to $10 million to drill a well and don’t start making money until after it begins producing oil.

“Only one in 3 wells actually produce oil even in the fracturing field,” said Clark Sackschewsky, a tax partner with the natural resources practice of BDO in Houston, with clients across the oil and gas industry. “It’s still a risky business. They don’t know for sure it’s there.”

Sackschewsky said oil companies have a choice about where to drill next, and taxes are a consideration.

In Oklahoma, politicians are considering legislation that would eliminate its holiday that taxes oil producers at 1 percent for the first four years of production — the period when about two-thirds of production occur — and 7 percent thereafter. The state wants a change because it is facing a prolonged fiscal crisis and budget shortfalls despite its oil boom.

“Rather than funding schoolteachers and helping college students, we are giving tax breaks to large energy companies on the order of hundreds of millions of dollars per year,” said David Blatt, director of the Oklahoma Policy Institute, a nonprofit that promotes fiscal responsibility.

Richards, at the Illinois Oil and Gas Association, disagreed that tax holidays are “tax breaks.”

“When you’re agreeing to a tax that didn’t exist before, it’s hard to say you’re getting a tax break,” he said.


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