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

SPONSOR Foley

DATE TYPED 02/18/05 HB 644

SHORT TITLE Decrease Natural Gas Severance Tax Rate

SB

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

($50,500.0) ($48,400.0)

Similar Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Similar to Senate Bill 764.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue (TRD)

SUMMARY

Synopsis of Bill

House Bill 644 proposes to decrease the tax rate on the severance of natural gas to the same rate

currently imposed on the severance of crude oil. Specifically, the bill would decrease the Emer-

gency School Tax rate on natural gas from 4 percent of taxable value to 3.15 percent. The bill

would also reduce the stripper well incentive rates to be in the same proportion to 3.15 percent as

the old rates were to 4 percent.

The effective date of the provisions of this bill is July 1, 2005.

Significant Issues

The tax increase would equalize the rate paid by both natural gas and crude oil producers, plac-

ing them on equal footing. That said, current tax rate differentials between natural gas and crude

oil producers could likely represent differences in profitability.

House Bill 644 -- Page 2

FISCAL IMPLICATIONS

The total negative fiscal impact of this bill is $50.5 million for FY06 to the general fund. The

fiscal impact is calculated by comparing the product of the gas taxable value estimate by the pro-

posed new rate of 3.15 percent versus the product of the gas taxable value estimate by the exist-

ing rate of 4 percent. The assumed taxable value is based on the most up to date consensus oil

and gas revenue estimates for FY06 and FY07. The fiscal impact could change based on

changes in natural gas prices, which have tended to be fairly volatile in recent years. Since the

current consensus forecast assumes natural gas prices will remain above $4.00 per thousand cu-

bic (Mcf) feet through FY09, it is unlikely that the reduced rates for the stripper wells would

have a fiscal impact in the foreseeable future. The table below presents the natural gas estimates

by the consensus group forecast.

FY05 FY06 FY07 FY08 FY09

Gas Price

$5.20 $4.80 $4.65 $4.50 $4.35

Gas volume

1,525

1,510

1,495

1,480

1,465

Gas Deductions 18.00% 18.00% 18.00% 18.00% 18.00%

Gas Taxable Value $6,503 $5,942 $5,699 $5,460 $5,225

Consensus Group Forecast Oil and Gas Estimates

ADMINISTRATIVE IMPLICATIONS

Minimal impact to TRD.

OTHER SUBSTANTIVE ISSUES

TRD notes that the stripper well incentive prices of $1.15/Mcf and $1.35/Mcf seem low amid the

dramatic shift in natural gas prices over the last several years. They note that it may be a very

long time before prices are in this range and recommend a higher price for the incentive rates.

OPJ/lg