Ohio has undoubtedly been the beneficiary of a multitude of benefits from shale development, including a staggering uptick in jobs, millions in tax revenues, such as sales, hotel, fuel revenue and income taxes, support of infrastructure, construction of roads and bridges, millions of work hours and wages, and even preserving some of Ohio’s historical landmarks. The positive impacts have been astounding, and the good news continues to come, as Ohio counties have not yet realized another $80 million coming their way in ad valorem tax revenues alone, which feed directly to county coffers and support local schools.
In Ohio, natural gas and oil producers are subject to an ad valorem tax, or a real property tax on the oil and gas they produce. This tax is levied at the county level and is based on production of a well, which is assessed by statute. The assessment on oil and gas is calculated once per year (in June) and collected in two stages the following year. Notably, this tax is in addition to several other taxes levied on energy producers.
The ad valorem tax bill is paid by the owner of the oil and gas production and collected by the counties. The counties use the taxes for the benefit of their general fund, public schools, cities, libraries, and other local government entities and services. As this is similar to a property tax and requires assessment, billing, and collection, a county may not see the actual revenue of a producing well for up to two years.
Here’s how it works:
So how much money will the counties realize from this tax?
EID asked several conventional well drillers to provide us with the ad valorem taxes they have paid for the past 10 years on their top producing wells. Based on two of the top producing wells in Southeastern Ohio, we learned that each well generated approximately $130,000 per well over the course of a decade when prices were much higher than today. Note, the wells normally produce more initially and decline over the decade.
Therefore, we can conservatively assume that a Utica well, where production numbers have grown by over 350 percent for gas, and 200 percent for oil, will produce at least $100,000 per well for 10 years in ad valorem tax revenue. Given these assumptions, EID calculated all the producing wells (832) in the most active Utica Shale counties based on the first quarter of 2015 production numbers, and arrived at ad valorem tax revenue calculation of $80 million over the course of 10 years.
It is important to note that these estimates are very conservative. We assumed only the wells producing to date will pay the tax and no contribution from wells drilled but not producing or wells to be drilled. For example, when you factor in economic impact studies that have reported property taxes on minerals amounting to between $150,000 and $540,000 per Utica well over the course of 10 years, or $15,000 to $54,000 per year, we can see how an assumption of $100,000 per well is likely a considerable underestimate.
It is also important to note that ad valorem taxes are just one way the oil and gas industry is supporting Ohio’s tax coffers. A recent story from the Steubenville Herald-Star reported that taxes collected from hotels/motels have doubled, and as a result have paid the debt of the Wheeling-Ohio County Convention and Visitors Bureau, which was leveraged to support the Capitol Theatre project. The bureau’s executive director, Frank O’Brien, said:
“Oil and gas pretty much did it. We were able to take care of a historic building in our community with revenue generated. We have improved the life of people in Ohio County with these hotel/motel taxes. We are now averaging 57,000 people a year going to shows at the Capitol.”
Whether it is sales tax, income tax, hotel/motel tax, or taxes not yet even realized, such as the ad valorem tax, there’s no question that Ohio’s oil and gas development is continuing to save county budgets and provides services to the residents who live and work there. This is obviously exciting news for Ohioans, especially given the fact that the ad valorem analysis is likely a conservative (under)estimation of the tax revenues yet to come.