LITTLE ROCK—The vast majority of the Arkansas’ natural gas wells qualify for exemptions reducing their tax rates under a severance tax proposal to be considered at a special session later this month, according to state data.

Only 5 percent of the state’s wells are classified as wells that would pay the full tax rate that has been proposed by Gov. Mike Beebe as a way to fund additional highway improvements, according to numbers provided by the Arkansas Department of Finance and Administration and the state Oil and Gas Commission.

Beebe last week announced that he would call a special session beginning March 31 to consider raising the tax for the first time since 1957, saying he has more than enough votes necessary in both chambers to pass the tax hike.

Beebe’s proposal would place a 5 percent base tax on gas-sale proceeds received by producers with lowered rates for some wells.

Passing the tax hike requires 27 votes in the Senate and 75 in the House.

The current tax, three-tenths of 1 cent per 1,000 cubic feet of gas extracted, brings in about $660,000 annually.

The proposed tax hike is a response to increased drilling in the state’s Fayetteville Shale natural gas formation.

Several lawmakers have said a key factor in supporting the tax hike was the fact it was preferable to an increase proposed for the November ballot by former Arkla executive Sheffield Nelson. Under Nelson’s proposal, the state would place a 7 percent tax on gas-sale proceeds with no exemptions built in.

If the most recent numbers from the state are any indication, there will be plenty of exemptions to go around for the state’s natural gas wells. According to numbers as of Dec. 31, 2007,—the latest available from the Oil and Gas Commission—38.3 percent of the state’s 4,294 wells are “high cost” wells that are eligible for a reduced 1.5 percent rate for the first three years of production and 56.6 percent are “marginal” wells eligible for a 1.25 percent rate.

Beebe said the estimates for the severance tax revenue, which he estimates will reach $100 million by 2013, takes the exemptions into account.

“If anything, those numbers which rise to $100 million within three or four years, are conservative,” Beebe said last week.

Lawrence Bengal, director of the Arkansas Oil and Gas Commission, said it’s difficult to predict how many of the wells in the coming years will pay the full tax rate versus the lowered rate under the exemptions. About 600 of the 1,646 wells identified as “high cost” were located in the Fayetteville Shale, Bengal said.

“It changes every day because wells are drilled, wells are plugged and wells change categories,” Bengal said.

“That’s the difficulty in projecting accurately because they’re changing every day.”

If approved by lawmakers, the new tax rate will take effect Jan. 1 and will bring in $57.14 million next year, according to the state Department of Finance and Administration.

That number will rise over the coming years and hit a peak of $101.57 million in 2015 before starting to decline.

State economic analyst John Shelnutt said the estimates were based on production figures provided by the commission and the industry and the increase reflects a projected rise in production, not a projected change in the exemptions. Shelnutt said he believed the estimates are conservative because they factor in potential changes in drilling technology.

“It comes back to relative rates of change in total production, not so much the well distribution,” said Shelnutt, the state’s administrator for economic analysis and tax research.

House Majority Leader Steve Harrelson, D-Texarkana, said Monday he’s supporting the tax because he thinks it’s the best way to pay for highway improvements. He said he’s still concerned about the impact of the exemptions but said it’s a secondary concern if the revenue predictions are accurate.

“If this is being sold as a true 5 percent tax, then I think there are lots of wells here that are simply not going to be taxed at 5 percent,” Harrelson said.