LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE 75th Regular Session April 15, 1997 TO: Honorable Tom Craddick, Chair IN RE: House Bill No. 3491 Committee on Ways & Means By: Holzheauser House Austin, Texas FROM: John Keel, Director In response to your request for a Fiscal Note on HB3491 ( Relating to tax exemptions on oil and gas production.) this office has detemined the following: Biennial Net Impact to General Revenue Funds by HB3491-As Introduced Implementing the provisions of the bill would result in a net negative impact of $(7,340,894) to General Revenue Related Funds through the biennium ending August 31, 1999. Fiscal Analysis The bill would amend Chapter 201 and 202 of the Tax Code to exempt from one half the oil and gas severance tax a proportion of the production of oil or gas from certain oil leases. The exemption would last for five years. To qualify, a lease would be required to show an increase in production over average lease production in a baseline year, calendar 1995. No particular action on the lease would be required to qualify for the exemption. The bill would define certain incremental production techniques, but it would not require any to be implemented to qualify for the tax rate reduction. The bill would exempt from the gas severance tax any gas previously flared from an oil well or oil lease but now sold. To receive a credit, the operator would be required to apply to the Comptroller no later than the first anniversary after the date the Railroad Commission certified the incremental ratio for a qualifying lease. The measure of incremental lease production would be divided by average total lease production during the four-month test period used in qualifying a lease to compute an incremental ratio. This ratio, held constant through the five-year duration of an exemption, would be multiplied times total lease production in any future month to get the volume of oil or gas that would be exempt from one half of the applicable severance tax. A ratio, once established for a lease, would exempt that proportion of lease production from severance taxes each month for five years unless the taxable price of oil, measured in 1997 price equivalent, rose above $25 per barrel and remained so for three consecutive months. If the taxable price of oil dropped and remained below $25 per barrel, in 1997 price equivalent, for three consecutive months, the rate reduction would become operational again. The bill would take effect September 1, 1997. Methodolgy The bill would apply only to oil leases, but oil or gas produced from a lease would be given the half-rate exemption. Baseline production would be defined as the average production of oil and gas from a lease during calendar 1995. The universe of leases that potentially could qualify are those with baseline production not to exceed seven barrels of oil equivalent (BOE) per well per day within a lease. The bill does not specify that the number of wells to be used in computing baseline lease production have to be producing wells. Railroad Commission data for 1995 was used to determine leases with average well yields of seven BOE or less per day. The four-out-of-five month criteria specified in the bill was used to determine the volume of incremental production that would qualify for the reduced tax rate. This volume of production is presumed to be an increment of oil or gas production that would be forthcoming in the absence of any inducement beyond ordinary business incentives. The probable fiscal implications of Implementing the provisions of the bill during each of the first five years following passage is estimated as follows: Five Year Impact: Fiscal Year Probable Revenue Gain/(Loss) from General Revenue Fund 0001 1998 ($3,699,582) 1998 (3,641,312) 2000 (3,588,901) 2001 (3,542,862) 2002 (3,496,669) Net Impact on General Revenue Related Funds: The probable fiscal implication to General Revenue related funds during each of the first five years is estimated as follows: Fiscal Year Probable Net Postive/(Negative) General Revenue Related Funds Funds 1998 ($3,699,582) 1999 (3,641,312) 2000 (3,588,901) 2001 (3,542,862) 2002 (3,496,669) Similar annual fiscal implications would continue as long as the provisions of the bill are in effect. State tax measures that induce petroleum production from properties heretofore not operating at full capacity increase the value of such properties to local taxing jurisdictions. The degree of increase is not definite due to uncertainty as to the future price of crude oil and natural gas and the number of wells that would be entered into such production incentive programs. Source: Agencies: 455 Railroad Commission 304 Comptroller of Public Accounts LBB Staff: JK ,RR ,CT