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