Columns » Ernest Dumas

The lowly severance tax

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The Christmas mail brought unexpected manna, an oversized greeting card from Justice Jim Johnson stuffed with a serviceable old necktie and a plea that I renew an old campaign to get the state to collect a severance tax on natural gas, one of the great defaults in Arkansas history. Should I succeed, Johnson promised in his big florid hand, “generations of children shall rise up and call you blessed.”

It was an attractive invitation but, alas, it was more than a low journalist could ever deliver. It was more than Bill Clinton at his peak could deliver and possibly more than Gov. Mike Beebe could deliver, if he were to be so bold as to try.

Justice Jim, the only man ever to receive the Democratic Party’s nomination for governor and the Republican’s for chief justice and to lose both times, has sometimes exercised a misplaced sense of injustice, but on such matters as the taxing of the poor and the rich he has been right on the mark.

Gas is a perfect case of economic injustice. The working stiff pays a dear tax rate for the gas that warms and feeds his family, 7 or 8 percent on the price of the gas, depending upon the town where he lives. But the big corporate producers reap a profit of 20 percent or so on the resource they sunder from Arkansas earth and they pay no taxes on it. Well, all right, they pay three-tenths of a penny on each thousand cubic feet they pump from the ground, which is no more than a nuisance to them and barely meets the government’s expense of collecting it.

No state in the union but Arkansas surrenders its precious natural resources to commercial operators and asks that they return so little to the public trust to compensate generations for the loss. If a tax can have a moral imperative, it is one levied on finite resources that can never be replenished.

If anyone is to earn the hosannas of generations, maybe it will be Sheffield Nelson, former Republican candidate for governor, state chairman, national committeeman and head gas man. Nelson wrote an op-ed article in the Arkansas Democrat-Gazette Sunday making a compelling case for Gov. Beebe and the legislature to enact a real severance tax on gas at this session. Nelson has been in this good fight before, but more in a minute about that.

The moment is right and about to pass, Nelson argues, because the big production companies are buying up drilling rights across a huge arc of the state and a great surge of exploration in the untapped Fayetteville Shale is under way.

Over the 30-year life of the fields at current market prices, the companies will take an estimated $300 billion from the shale and pipe nearly all of it at vast profit to industries and homes in the Ohio River Valley and points east. Except for the royalty owners and those who get work in the exploration, Arkansas will get little from it.

If Arkansas were to tax natural gas at Texas’s rate — Arkansans like to admire Texas’s low taxes — Arkansas could collect close to $20 billion over the next three decades for colleges and universities, which are Johnson’s and Nelson’s preferred beneficiaries.

But here is a more politically palatable idea for this governor and legislature: Use the proceeds of the severance tax to eliminate the sales tax on natural gas for homeowners and maybe on electricity and water, too. There is a tax cut that would help the genuinely poor, who bear a proportionately larger tax for energy than do the more affluent because their homes are inefficient.

You wouldn’t be killing Arkansas businesses. Eighty percent of the gas exploration in Arkansas is by out-of-state companies. The tax, even at the Texas rate of 7.5 percent of the wellhead price, would still be nothing more than a nuisance. They deduct it on their federal tax returns.

Justice Jim’s theory is that the tax can finally pass, in spite of the constitutional requirement of a three-fourths vote in each house, because the men who blocked the tax for 60 years, Witt and Jack Stephens, no longer have terrestrial interests.

A little history. Witt acquired extensive gas interests and a West Arkansas distribution company in the 1940s. Arkansas actually levied a modest severance tax on natural gas then, 2.5 percent of the market price, but in 1947 the legislature and Gov. Ben Laney made Witt, already a political mover, happy by slashing the tax to almost zero: three-twentieths of a penny per thousand cubic feet. When Gov. Orval Faubus needed to balance a sales tax increase with a business tax in 1957 to show that he was fair-minded, Witt let him raise it to three-tenths of a penny.

Clinton wanted to do the same thing in 1983: balance his sales tax levy with a progressive severance tax. Nelson, who had succeeded Witt as president of Arkansas Louisiana Gas Co. and was warring with him over transporting Stephens’s gas through Arkla lines, came out in support of the tax. The tax rate would have meant little to Witt financially but this was personal. Raising the tax would be a slap at him. “If Bill raises the gas tax,” Witt told me one day, “he’ll never be elected to another office as long as he lives.” Clinton quietly let the bill die.

Justice Jim and his Republican sidekick Sheffield think Mike Beebe and this legislature are guided by better impulses. I don’t think so.

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