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    Since 1957 the Severance Tax rate on all natural gas, no matter the type of well, was three tenths of a cent per 1,000 cubic feet of gas produced.  This was only collecting a small amount of money as only about $2.7 million was collected for 2006, 2007, and 2008 combined.  

    In 2008 two ballot initiatives were proposed to increase the Severance Tax on natural gas produced in Arkansas.  One was rejected by the Secretary of State based on its language but another filed by Sheffield Nelson was certified to start collecting signatures to appear on the 2008 ballot.  Mr. Nelson is a former executive for Arkla Gas, which is now Center-Point Energy and he is also a former Republican candidate for Governor in Arkansas.  Mr. Nelson's proposal would increase the Severance Tax rate on natural gas to a flat 7%.  

    Before Mr. Nelson completed gathering the necessary signatures, Governor Mike Beebe called a special session of the legislature to propose his own alternative plan.  His plan, which was agreed upon by the gas industry, would not increase the tax as much as Mr. Nelson's plan.  His plan introduced lower rates for high cost hydraulically fratured wells and a higher rate for conventional natural gas wells.  Producers could also deduct the cost of dehydrating, treating, compressing, and delivering the gas to the buyer from the taxable amount of gas they produced.  The proposal also gave a lower tax rate on wells for the first four years until producers made back their costs for the well.  

    Here is how Mr. Beebe's plan works for hydraulically fractured wells.  A well is taxed at 1.5% for the first three years of the well and companies can get an extension for a fourth year if they have not made back their cost for the well at this point.  After the fourth year, the well is then taxed at a rate of 5%, however when the well starts to produce less than 250,000 cubic feet of gas per day, the tax rate drops to only 1.25%.  Wells in the Fayetteville Shale drop to 250,000 cubic feet of gas per day on average at about the five year mark.  This means most wells are only taxed at the 5% rate for a few years and some are never taxed at that rate.  Under Beebe's plan, 70% of the tax collected would go to the Arkansas Highway and Transportation Department for state highways, 15% would go equally to Counties across the state and 15% to cities. The remaining 5% would go to general revenue.

    Governor Beebe's proposal was passed by the legislature and took effect in 2008.  In 2009, with the higher rate and production rates increasing, the tax collected about $28 million.  In 2010, $54 million was collected and $59 million in 2011 on the $3.65 Billion in natural gas produced in the state.  That equals out to a total of about 1.5% paid in Severance Taxes by the industry.  Due to a slow-down in production only $40 million was collected in 2012.

    In 2009 the Arkansas Highway and Transportation Department (AHTD) singed an administrative order to put all the money that they received from the severance tax (70%) directly towards roads in the Fayetteville Shale area.  In 2010 the AHTD did an analysis of road damage in the Fayetteville Shale area.  The study estimated that there was over $218 million in road damage from natural gas industry activity in the Fayetteville Shale.  Repairs that had already been made were not factored in to this number.  AHTD reported seeing 20 years worth of damage to area highways in a five year period from 2005-2010.  They indicated that most state highways in the area were not designed to handle the repetitive, extremely heavy loads and that the damage was occurring faster than they could repair it with the money available.  This issue of damaged roads is common in other major shale plays around the country.

    To address this issue, the AHTD developed a plan to place new weight restrictions on 133 miles of state highway in the Fayetteville Shale area. These new restrictions were set to go into effect in Febraury of 2010, but before this could happen AHTD announced that they would instead have a public comment meeting before making their decision.  After lobbying by the natural gas industry and county judges who didn't want these trucks on their county roads, the list was shortened to 69 miles of highway.  This left the AHTD unable to keep up with road damages.

    During the Legislative General Session in 2011, a bill was sponsored that would remove the lower tax rates for the "high-cost" hydraulically fractured wells but would preserve the lower tax rate for wells that did not produce above the 250,000 cubic feet per day.  This bill failed to pass the legislature.  During the same session, State Representative Jonathan Barnett (R) , who is now the Co-Chairman of the Oil and Natural Gas Caucus and formerly a State Highway Commissioner, filed a bill that would place an initiative on the ballot for voters in 2012 that would increase the state sales tax by a half cent.  It passed the legislature to be able to appear on the 2012 ballot as Issue 1.

    After the effort to eliminate the exemption for high cost wells during the Session failed, the Severance Tax was challenged again by Sheffield Nelson.  He submitted another ballot initiative to raise the tax to a flat 7% for all natural gas wells and for the life of the well.  An increase to 7% would have produced about $256 million in 2011 compared to the $59 million that was actually collected.  Mr. Nelson's initiative was certified by the Secretary of State's office and he began collecting the 62,507 necessary signatures to get the proposal on the ballot for all Arkansans to vote on in 2012.  

    Mr. Nelson formed the Committee for a Fair Severance Tax.  He raised about $163,000 over the course of his campaign to put this proposal on the ballot.  His signature campaign was met with strong opposition from the industry.  A group called Arkansans for Jobs and Affordable Energy (AJAE) was formed and the President/CEO of the Arkansas State Chamber of Commerce, Randy Zook, was named Chairman of the organization.   This group was funded largely by the gas industry and launched a strong campaign against Mr. Nelson's effort to collect the signatures he needed.  Over the course of their campaign, AJAE raised almost $2,328,000 with Southwestern Energy contributing $850,000, XTO (Exxon-Mobil) contributing $600,000 and Stephens Production Company contributing $850,000.  Most of the remaining $28,000 of support for AJAE was from other natural gas industry companies.

    The Conway Area Chamber of Commerce (CACC) also helped oppose Mr. Nelson's attempt to gather signatures.  In early 2012, the President of the (CACC) Brad Lacy, the Vice President of CACC Jamie Gates, and Faulkner County Judge Preston Scroggin went on a 250 mile, six city tour around the state to urge other local and county leaders to oppose Mr. Nelson's initiative.  They traveled on this tour in the brand new Compressed Natural Gas GMC Yukon that was given to the CACC by Southwestern Energy.

    In July of 2012, State Representative Jonathan Barnett, mentioned above, wrote a guest column in the Arkansas Democrat Gazette about his opposition to Mr. Nelson's proposal and his support instead for Issue 1 as a better way to pay for roads in the state.  Mr. Barnett ended by saying quote, "If asked to sign a petition to put the harmful severance tax on the ballot, just say, “No thanks.”  We already have the issue on the ballot that will do Arkansas the most good. That’s Issue 1. It’s the clear winner, and it deserves your support."

    Many questioned the ethics of the harsh campaign against Mr. Nelson's efforts by so many public officials when Mr. Nelson was simply trying to gather the signatures necessary to allow all the citizens of Arkansas to vote on whether they wanted to raise the tax on this industry.  Another group named Stop the Gas Tax AR was even accused of poll intimidation.  This group had a place on their website where people could plot on a map where they saw anyone canvassing for signatures for Mr. Nelson's ballot initiative.  Mr. Nelson did manage to turn in more than the required amount of signatures, but a large portion were disqualified.  After a 30 day extension was granted to gather more signatures, Mr. Nelson announced that he would suspend his efforts to get the initiative on the ballot.  Many of the signatures that were thrown out came from a firm that was hired by Mr. Nelson to canvass for signatures.  Many who opposed the initiative called for an investigation into the large number of disqualified signatures, which Mr. Nelson supported fully as he knew voter fraud had occurred and he felt that there had been wrongdoings by the canvassing firm he had hired.  

    In October, a month before the election, the AHTD was questioned by legislators about radio ads that were paid for by the Department concerning Issue 1.  On November 6th, 2012 during the General Election, voters in Arkansas approved Issue 1 that was filed by Jonathan Barnett and referred to voters by the legislature.  This increased the states sales tax by a half percent.  Voters approved this tax increase by a margin of 58%-42% with the proceeds of this tax going to highways in the state.

Sheffield Nelson
Governor Mike Beebe
Governor Beebe signing his severance tax plan
State Rep. and Oil & Natural Gas Caucus Co-Chair Jonathan Barnett
Road damage from natural gas activity in Faulkner County
A truck like this full of fluid would be over the weight limit for this road.