Report Recommends Changes to Tax Exemption for Fracking

Updated, 4:45 p.m.:

David Blackmon, a spokesman for the Texas Oil and Gas Association, said by email that the group was pleased that the Legislative Budget Board did not recommend elimination of the high-cost gas provision (unlike HB 55). However, he added, the association is "at a loss to understand why the LBB, at a time when the state is running a significant budget surplus, would be calling for what would be a major tax increase on the most  highly-taxed and greatest job-creating business in the state of Texas.  Without this reduction, the Texas severance tax rate is among the highest in the nation. The high cost gas tax reduction is what keeps our state competitive with other states in attracting investment capital from the oil and gas business."

Updated, Wednesday, 2:15 p.m.:

State Rep. Lon Burnam, D-Fort Worth, said that the LBB recommendation was a "significant step in the right direction." Burnam, a frequent critic of the drilling industry, described the exemption for high-cost gas as "a classic example of special-interest legislation that may have been justified at its inception, but has long outlived its purpose." He has filed a bill, HB 55, to limit exemptions. State Sen. Rodney Ellis, D-Houston, has also filed a bill, SB 71, that would reduce the exemptions.

Original story:

A Legislative Budget Board report on how government can be more efficient and effective has recommended that the state reduce its gas tax exemption for hydraulic fracturing.

The expansive report released Wednesday by the LBB, a state body that offers budget and policy recommendations for legislators, recommended that the state change the method it uses to calculate the tax. That change would have the practical effect of increasing tax rates on gas produced through hydraulic fracturing, or fracking.

The push to increase taxes on frackers has surfaced periodically in the Legislature, especially given the spread of fracking in recent years and the state’s tight budgets. But the drilling industry has argued that higher taxes would force gas companies to drill in other states.

The taxes are a key component of the state’s Rainy Day Fund, where the state sets aside excess revenue.

Last session, the LBB, whose members include Lt. Gov. David Dewhurst, House Speaker Joe Straus and other legislators, had drafted recommendations that would increase the tax, but a published report did not contain those, reflecting the political explosiveness of the issue.

In its new report, the LBB recommends changing the way the law calculates drilling costs associated with “high-cost gas” — a term that encompasses hydraulic fracturing, which is generally more expensive than conventional drilling. Currently gas production is taxed at a 7.5 percent rate (relative to its market value), but special provisions in the tax code such as the high-cost tax exemption “have reduced many producers’ tax liabilities to zero,” according to the report. The change would allow drillers to claim smaller exemptions.

In 2011, 55 percent of gas production in the state came from “high-cost” wells, according to the report. That’s up from only 5 percent two decades ago. The exemption has reduced payments to the state by an average of $1.2 billion per year between 2004 and 2011, according to the report.

The report also recommended that the state study the high-cost gas tax rate’s effect on gas production.

The LBB report also contained numerous recommendations on water issues, including providing additional funding for the state water plan and improving water utilities’ ability to tally water leaks in their systems.