03/15/2012 12:46 pm ET Updated May 15, 2012

Kasich's Tax Shift Proposal Could Be Model

Ohio Governor John Kasich opposes tax increases. During his first six months heading the Buckeye State, in fact, Kasich presided over a $300 million tax reduction.

With his conservative credentials secure on the tax front, Kasich might be the right trailblazer pointing the way towards tax reform, a Nixon-going-to-China grand bargain that trades a fossil energy tax boost for an income tax cut.

Kasich has stirred up the political class in Columbus with his proposal to tax the shale energy bonanza heading Ohio's way and dedicate nearly all proceeds to state income tax reductions. The tax shift could total up to $1 billion over five years, if today's oil and gas prices hold up.

Kasich's proposal is a layer cake: it would differentiate taxes on conventionally produced oil from taxes on petroleum coming out of horizontally drilled, hydraulically fractured, or "fracked" wells. Taxes for small gas producers operating conventional wells would be zeroed out. Gas from fracked wells would pay a flat rate of 1 percent of their gross. A new tax scaling up to 4 percent of gross sales would be charged for natural gas liquids -- butane, ethane, and propane -- extracted from fracked wells.

Revenues would go into a fund dedicated for income tax reductions that would go into effect after a revenue growth threshold is met. Except for revenues held back to administer energy regulations, all of the proceeds would pay for tax cuts.

Kasich's proposal has received predictable greetings: Republicans are having palpitations over anything that hints of raising taxes. Oil and gas companies have warned that Kasich will chase jobs and growth out of Ohio. Democrats say the state should firmly grasp Big Oil's revenue pipeline and squeeze hard.

The tempest in Ohio is a preview of what we'd likely see if Kasich's idea or something similar were proposed at the federal level.

First, the most credible proponent of a federal tax shift would have to be a Republican like Kasich, who, since his days in Congress, has been both a firm conservative holding the line on taxes and a creative lawmaker willing to take policy roads less traveled in order to get things done.

Second, the proposal would have to overcome opposition from less creative lawmakers: Republicans afraid of saying or doing anything that might upset Grover Norquist, Democrats suspicious of any plan that might leave a few extra dollars in citizens' pockets.

A tax shift that trades higher levies on fossil energy for equal or greater reductions in income taxes could be part of a broader tax reform package that simplifies our mess of an internal revenue code, closes loopholes, and drops rates across the board. A tax shift also could serve as a long overdue national energy policy that discourages pollution, encourages efficiency, and diversifies our energy portfolio.

It would take a Congress willing to climb out of its polarizing ideological rut to adopt such a big-bang reform. If Kasich can push his tax shift through in Ohio, that bellwether of states, it would point a promising way forward for the nation.