First Wind, Now Gas: Tax Breaks Face Scrutiny

Updated Nov. 14, 2:25 p.m.:

In report to lawmakers this week, Comptroller Susan Combs did not recommend any changes to a tax exemption covering “high-cost natural gas drilling” – an incentive that shaved more than $8 billion off operators’ tax bills since 2008, including $812 million this year.

Among several questions, lawmakers had asked Combs to recommend ways to increase the effectiveness of the program. Her report included two proposals that were “not presented as recommendations.” They involved reducing paperwork for operators and state agencies.

Original Story, Oct. 20: 

Susan Combs, the state comptroller, stirred controversy last month when she said Texas’ growing wind energy industry should “stand on its own two feet.”

“Billions of dollars of tax credits and property tax limitations on new generation helped grow the industry, but today they give it an unfair market advantage over other power sources,” said Combs, a Republican, upon the release of a study meant to illustrate how energy policy affects Texans’ wallets.

The 15-page report described wind power as a massive strain on taxpayer dollars. It cited state property tax reductions, a recently expired federal production tax credit and a nearly $7 billion power line build-out geared toward adding wind to the grid.

Critics, including renewable energy advocates, energy market experts and a Texas railroad commissioner, panned the report largely for what it did not say: that the new power lines have yielded benefits across the grid, and that Texas has subsidized its money-making fossil fuels sector for a century.

“If we want to have that conversation about how we invest in our energy infrastructure let’s have that conversation,” said Marita Mirzatuny, a climate and energy policy specialist at the Environmental Defense Fund, which supports the expansion of renewable energy. “But let’s do it across the board.”

Mirzatuny may get that wish. The comptroller’s office will soon release a report that could rekindle debate surrounding Texas’ largest incentive for natural gas producers.

Between 2008 and 2013, a tax exemption covering “high-cost natural gas drilling” has shaved more than $7 billion off operators' tax bills, according to data from the comptroller’s office.

The incentive, which applies to wells completed after 1996, originally cut taxes on just 5 percent of gas produced in Texas. Now, the tax code treats more than half of Texas gas as “high cost.” That’s largely because of advances in hydraulic fracturing, an expensive technique that has boosted production and spurred the state’s drilling boom.

Industry advocates say the exemption keeps companies in Texas, where a 7.5 percent severance tax on gas is higher than what most states require. (Texas producers also pay relatively high property taxes, but do not pay state income tax.)

“I think it gets misconstrued by the folks that would do harm to the oil and gas industry as a giveaway, but it’s really not,” said Adam Haynes, a partner at Cross Oak Group, an energy firm in Austin.

In recent years, the policy has sliced more than 3 percent from the effective severance tax rate for all gas produced in Texas, the comptroller’s data shows. Falling prices, however, have reduced those savings since they peaked in 2008.

Some lawmakers have called for reform. In 2013, the state Legislative Budget Board recommended overhauling the exemption, which, with other incentives has “reduced many producers’ tax liabilities to zero,” it said.

The group’s report noted that the policy is based on a 36-year-old federal production definition, and it allows “high cost” certification “regardless of the actual production cost.” In 2009, for instance, Texas certified a $24,000 well even though the median drilling cost was $2.3 million.

Lawmakers last session declined to change the policy, but they instructed the comptroller to study its effectiveness. That report is due by November 1. Whether lawmakers will follow any of Combs’ recommendations is an open question.

“People ask me, when are we going to cut the subsidies for renewables?” said Michael Webber, deputy director of the Energy Institute at the University of Texas at Austin. “I say, probably the same day we cut the subsidies for oil and gas, which is never.” 

Disclosure: The University of Texas at Austin is a corporate sponsor of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.