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F I S C A L I M P A C T R E P O R T

SPONSOR HTRC

DATE TYPED 03/07/05 HB 197/a HTRC

SHORT TITLE Tax Credit for Electrical Generation Water

SB

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

NFI ($1,500.0)

(3,000.0) Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates: Senate Bill 111

SOURCES OF INFORMATION

LFC Files

Responses Received From

Energy, Minerals & Natural Resources Department (EMNRD)

Taxation and Revenue Department (TRD)

SUMMARY

House Bill 197 as amended by House Taxation and Revenue adds an applicability section, which

states that the provisions of the act apply to taxable years beginning on or after January 1, 2007.

Synopsis of Bill

House Bill 197 would provide a corporate income tax credit to a taxpayer who gathers, transports

or treats produced water (byproduct) in the generation of electricity. The disposition of water

must be in accordance with rules of the oil conservation division of EMRD. The tax credit

would be $1 thousand per acre-foot of produced water in the taxable year, provided that the total

tax credit to all claimants not exceed $3 million. The total accumulated tax credits claimed by

the taxpayer cannot exceed fifty percent of the capital cost of equipment for gathering, transport-

ing, or treating the produced water. If the tax credit exceeds the taxpayer’s tax liability, the

credit may be rolled over for up to three consecutive years.

House Bill 197/aHTRC -- Page 2

FISCAL IMPLICATIONS

The total full-year fiscal impact of House Bill 197, as per TRD’s analysis, is $3 million to the

General Fund. The analysis TRD provided suggests that, according to industry representatives,

there is no produced water that is currently being diverted to use in electricity generation, though

the total volume of produced water in the state is significant. The amount of water used in power

plant cooling is also significant. TRD notes that statewide water use for this purpose is well in

excess of the 3,000 acre-feet that would maximize the utilization of this credit. TRD’s fiscal

analysis assumes that, due to the significant size of the tax credit, the proposed activity will

grow, though it may take a while before the credit usage is maximized.

The amendment does not change the full-year fiscal impact. Due to the new applicable date,

however, there would be no fiscal impact in FY06 and a half

ADMINISTRATIVE IMPLICATIONS

The bill will impact both TRD and EMNRD. According to TRD, implementing provisions of

the bill would require forms, instructions and publication changes, as well as employee educa-

tion. It would also require coordination with the Conservation Division of EMNRD. TRD will

probably employ about .25 FTEs at a cost of $10,000 annually to administer the credits, depend-

ing upon the number of corporations claiming the credits.

The Oil Conservation Division (OCD) of the Energy, Minerals, & Natural Resources Department

would be responsible for determining if the produced water is disposed of in accordance with

rules in Subsection B of the bill and would be responsible for issuing the certification of eligibil-

ity for the tax credit. The OCD is reportedly already in the process of promulgating rules related

to that use of produced water. The bill also requires the OCD to determine how much of the

produced water was used in the generation of electricity. Since the OCD does not currently

gather this information, it currently has no mechanism to track produced water from production

to disposition. The associated infrastructure support, inspection activities, and 0.5 FTE required

will cost approximately $50,000 per year according to EMNRD.

TECHNICAL ISSUES

Three technical issues that TRD noted include:

1.

The bill does not provide the department with guidance on how to allocate credits among

taxpayers when more than one taxpayer is involved in the process of gathering, transport-

ing and treating a given volume of water.

2.

The bill does not provide guidance on how the $3 million cap on total credit claims in

one year should be allocated among competing claimants.

3.

The bill does not provide for a process by which taxpayers apply to the department for

approval of their credits prior to claiming them on tax returns.

Additionally, there is an ending quotation mark at the end of Subsection E of the bill, which has

no accompanying quotation mark.

House Bill 197/aHTRC -- Page 3

OTHER SUBSTANTIVE ISSUES

According to EMNRD, the only taxpayers eligible for the credit are corporations – there is no

comparable credit for sole proprietors, partnerships, etc. EMRND believes that if the corpora-

tions benefiting from this tax credit pass the savings on to their customers, they will have an un-

fair advantage over their non-corporate competitors doing the same work.

OPJ/yr:lg