NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

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(Parenthesis ( ) Indicate Revenue Decreases)

Relates to HTRC substitute for HB-280

SOURCES OF INFORMATION

Taxation and Revenue Department (TRD)

Energy Mineral and Natural Resources Department, Oil Conservation Division (OCD)

SUMMARY

Synopsis of Bill

The House Taxation and Revenue Committee substitute for House Bills 281 and 236 does the following:

1. It changes the well workover credit so that the incentive rate applies to all production from workover projects and not just the incremental increase due to the workover.



2. The workover incentive rate is increased from 1.875 percent to 2.45 percent. This has the effect of decreasing the incentive to compensate for the change making it applicable to all production.



3. Stripper well oil production is provided a 50 percent tax rate reduction against the oil and gas emergency school and severance taxes when the average annual taxable price for oil falls below $15 dollars per barrel; stripper well gas production is provided the 50 percent cut when the annual taxable price of gas falls below $1.15 per million cubic feet (mcf).
4. Stripper well oil production is provided a 25 percent tax rate reduction against the oil and gas emergency school and severance taxes when the average annual taxable price for oil is between $15 and $18 dollars per barrel; stripper well gas production is provided the 25 percent cut when the annual taxable price of gas is between $1.15 and $1.35 per million cubic feet (mcf).

The tax rates proposed in the bill are shown in the following table.

The provisions of the bill become effective on July 1, 1999.

FISCAL IMPLICATIONS

TRD estimated that the proposed legislation would cost the general fund $1.7 million in FY 2000. The cost to the severance tax bonding fund would be $2.1 million according to TRD. They say that nearly all the impact is due to the stripper well incentives as at today's prices the impact of the workover incentive is probably less than $100 thousand.

The assumptions used in making these estimate are:

• •Oil production from stripper wells will be approximately 10 million barrels (1997 data).
• •Oil price in FY 2000 will be $11.75, and thus oil production would be eligible for the 50 percent rate reduction equal to 1.875 percent for the severance tax and 1.58 percent for the school tax.
• •Gas price in FY 2000 will be $1.80, and thus gas would not be eligible for the lower rate.

ADMINISTRATIVE IMPLICATIONS

TRD reports that they will need one full time equivalent employee to coordinate with OCD. OCD reported no administrative burden for their agency.

SUBSTANTIVE ISSUES

The reduction in severance tax revenues will affect future severance tax bonding capacity.

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