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

SPONSOR Smith

ORIGINAL DATE

LAST UPDATED

1/26/06

HB

SHORT TITLE Oil & Gas Property Taxation

SB 332

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

NFI

* see narrative

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates HB375

Relates to HB 276

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY06

FY07

FY08 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

232.0

232.0

464.0 Recurring General

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Energy Minerals and Natural Resources Department (EMNRD)

New Mexico Oil and Gas Association (NMOGA)

Responses Received From

Taxation and Revenue Department (TRD)

Energy Minerals and Natural Resources Department (EMNRD)

SUMMARY

Synopsis of Bill

Senate Bill 332 modifies the valuation methodology for property used in the distribution and

transmission of oil, natural gas, carbon dioxide, and liquid hydrocarbons. The valuation can in-

Senate Bill 332 – Page

2

clude deductions for “functional” and “economic” obsolescence.

Economic obsolescence is defined as the loss of value caused by unfavorable economic

influences or factors not including physical depreciations.

Functional obsolescence is loss due to functional inadequacies or deficiencies caused by

factors within the property not including physical depreciation.

The taxpayer choosing to include economic and/or functional obsolescence must submit a claim

documenting the obsolescence. Such documentation may include industry comparisons, volume

reductions, and other objective evidence of obsolescence. The Taxation and Revenue Depart-

ment (TRD) will determine if the evidence is sufficient and notify the taxpayer if a claim is re-

jected with the reasons and what additional information is needed to establish obsolescence, giv-

ing a taxpayer enough time to comply.

A taxpayer is given a choice of valuation methods:

1.

capitalization of income

2.

market value of stock

3.

cost less allowance for obsolescence and depreciation.

Whichever method chosen the taxpayer must use that method for subsequent years unless, after

three years, the taxpayer can show sufficient cause to change methods.

This act takes effect July 1, 2006 and is applicable to property tax years 2006 forward.

FISCAL IMPLICATIONS

There is no significant general fund impact though there may be significant impacts in energy

basin counties in northwestern and southeastern New Mexico, where most of the oil and natural

gas production takes place. There is no precise way to determine the impact of this modification

to the valuation methodology. Since there is a choice of methods, the likely result is that prop-

erty valuation will be lower in the future. Table 1 shows how much oil/gas pipeline property

valuation existed in tax year 2005.

Illustration: Potential Fiscal Impacts of HB-375

Estimated

Net

Total Pipelines Loss in

Estimated

Taxable Value,

Assessed % of Total Assessed % of Total Loss/Shift in

County

Pipelines* % of Total Value Assessed Value** Assessed Obligations***

Bernalillo 33,843,024 3.21 11,002,745,292 0.31 3,384,302 0.03 134,626

Catron - - 79,816,454 0.00

0 - -

Chaves 52,155,187 4.94 789,734,022 6.60 5,215,519 0.66 141,730

Cibola 14,407,061 1.37 226,421,527 6.36 1,440,706 0.64 45,481

Colfax 9,936,936 0.94 484,149,148 2.05 993,694 0.21 21,969

Curry 8,142,208 0.77 447,626,964 1.82 814,221 0.18 18,790

De Baca 2,163,181 0.20 37,354,701 5.79 216,318 0.58 5,781

Dona Ana 15,046,059 1.43 2,532,509,902 0.59 1,504,606 0.06 46,842

Eddy 145,059,831 13.74 2,142,990,148 6.77 14,505,983 0.68 284,366

Grant 7,233,189 0.69 506,896,825 1.43 723,319 0.14 16,781

Guadalupe 5,723,833 0.54 92,320,166 6.20 572,383 0.62 18,260

Harding 2,722,580 0.26 28,424,729 9.58 272,258 0.96 6,138

Hidalgo 13,269,308 1.26 117,164,432 11.33 1,326,931 1.13 28,754

Lea

119,359,625 11.31 2,056,750,177 5.80 11,935,963 0.58 323,568

Senate Bill 332 – Page

3

Lincoln 20,586,799 1.95 686,219,982 3.00 2,058,680 0.30 50,541

Los Alamos 230,369 0.02 651,053,050 0.04 23,037 0.00 464

Luna 21,199,596 2.01 321,253,366 6.60 2,119,960 0.66 46,113

McKinley 57,852,375 5.48 605,214,520 9.56 5,785,238 0.96 208,618

Mora - - 71,229,738 0.00

0 - -

Otero 4,383,727 0.42 678,279,824 0.65 438,373 0.06 12,607

Quay 6,684,470 0.63 116,307,543 5.75 668,447 0.57 17,806

Rio Arriba 78,456,690 7.43 1,548,239,274 5.07 7,845,669 0.51 174,464

Roosevelt 7,704,877 0.73 228,795,110 3.37 770,488 0.34 16,797

San Juan 349,153,941 33.08 3,653,126,771 9.56 34,915,394 0.96 839,536

San Miguel - - 394,907,217 0.00

0 - -

Sandoval 26,554,497 2.52 1,791,689,224 1.48 2,655,450 0.15 76,700

Santa Fe 11,798,050 1.12 4,887,341,480 0.24 1,179,805 0.02 29,861

Sierra 1,262,198 0.12 201,271,893 0.63 126,220 0.06 3,070

Socorro 3,107,939 0.29 178,138,033 1.74 310,794 0.17 9,568

Taos 1,646,545 0.16 833,527,532 0.20 164,655 0.02 3,075

Torrance 19,197,434 1.82 236,306,231 8.12 1,919,743 0.81 45,821

Union 3,734,640 0.35 101,033,556 3.70 373,464 0.37 8,192

Valencia 12,762,637 1.21 820,258,796 1.56 1,276,264 0.16 39,568

Totals 1,055,378,806 100.00 38,549,097,626

105,537,881 0.27 2,675,887

*Includes other properties subject to alternative valuation under House Bill 375, 2005 Tax Year

** 10 per cent of pipeline values listed in column 2.

*** Estimated loss in value multiplied by average nonresidential tax rate in associated county.

TRD reports that because of the way the property tax rates are set, there is no impact but rather

the rates will be adjusted for all taxpayers as the proportions of valuation changes. The millage

rates for property taxes are set according to the need (for debt service, etc) so the rates adjust for

all taxpayers to ensure that the same total amount of revenue is generated. This is the “yield con-

trol” provision of property tax rate setting. TRD reports that approximately $2.7 million will be

shifted to other taxpayers (see table). Their estimate is based on pipelines which is the majority

of the property that would be affected.

SIGNIFICANT ISSUES

The New Mexico Oil and Gas Association have indicated that this legislation clarifies the intent

of the current statute. According to NMOGA, the intent embodied in the phrase “any other justi-

fiable factor” includes economic and functional obsolescence. NMOGA feels that this obsoles-

cence was generally accepted from 1973 till 2003 when the Property Tax Division of the Taxa-

tion and Revenue Department began rejecting claims of obsolescence without adequate explana-

tion to the taxpayers.

TRD reasons that the cost approach remains the most valid method of appraisal in that the other

methods require too much subjective analysis that exposes the department to litigation with

valuation experts on both sides without adding substantial accuracy in valuation.

ADMINISTRATIVE IMPACT

TRD:

The proposal would substantially increase the Department's Property Tax Division’s costs of

administering the property tax system. The Division currently performs approximately 14

unitary appraisals annually. Performing unitary valuations on pipelines and similar proper-

Senate Bill 332 – Page

4

ties would increase this figure substantially, and require approximately four full-time em-

ployees to perform at a cost of approximately $232,000 including salaries, benefits, equip-

ment, travel and similar expenditures. The Department would also probably incur substantial

legal costs associated with litigation that would likely result from enactment of the proposed

legislation. A detailed discussion of the administrative burdens associated with the proposal

is included at the end of this review.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

SB 332 duplicates HB 375. SB 332 relates to HB276 as far as proposing to use functional and

economic obsolescence as a factor for valuation. HB 276 refers to electrical generation facilities.

NF/nt