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Abstract

The recent development of the Fayetteville Shale Play, an unconventional natural gas reservoir in Central and Eastern Arkansas, has created considerable opportunities for the state and its citizens as the industry has made substantial investment in the region. These developments have resulted in thousands of new jobs for Arkansans, billions of dollars in direct and indirect output, and millions in state and local tax revenues. One of the most visible issues in recent state news has been the controversy surrounding the severance tax levied by the state government on the extraction of natural gas. The question at hand has been whether or not to increase Arkansas's rate. The state has had the lowest severance tax incidence in the nation causing many to speak out for a raise in the tax rate to something comparable to surrounding states in the region. These demands caught the attention of Arkansas Governor Beebe who worked with natural gas companies to find a reasonable severance tax package including some discounts for shale play wells. The legislature shortly thereafter approved this increase to be enacted January 1, 2009. The purpose of this study was to evaluate the state's reaction to these recent events and offer any additional recommendations that may enhance this set of decisions. A comparison of Arkansas Kansas, Louisiana, Oklahoma, and Texas was conducted on multiple levels of economic conditions to evaluate the overall tax structure within each state. Outside research was also considered in forming these conclusions. After completing an extensive cross-state comparison and incorporating econometric research, it was determined that the Arkansas state legislature was justified in increasing the severance tax rate. However, the rationale for tax increases - specifically the reasoning that other states have higher severance tax rates - is somewhat flawed based on consideration of economic conditions, natural gas production numbers, and overall tax structures. A stronger rationale lies in additional research that suggests that an increase in liabilities for severance taxes yields minor changes in investment and drilling activity and potentially positive economic rewards.

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