High-Cost Natural Gas Tax Rate Incentive Study

Legal Citation and Language

The statutory high-cost natural gas tax rate reduction provisions can be found in Tax Code Section 201.057 (Temporary Exemption or Tax Reduction for Certain High-Cost Gas). This section is included as Appendix A. Texas has had two high-cost natural gas tax rate reduction programs. The first was for a 100 percent tax exemption that began in 1991 and ended 2001. The second program is the tax rate reduction program currently in law.

Section 201.057 provides the calculation procedure for the high-cost natural gas tax rate reduction, as follows:

  • The amount of tax reduction shall be computed by subtracting from the tax rate imposed by Section 201.052 (the natural gas production tax) the product of that tax rate times the ratio of (the well's drilling and completion costs) to (twice the median drilling and completion costs for high-cost well during the previous state fiscal year), except that the effective rate of tax may not be reduced below zero.

That procedure is expressed in this formula:

0.075 – ( 0.075 * ( the well's drilling & completion costs / ( 2 * the previous year's median drilling & completion costs )))

Examining the results produced by this formula for a new well drilled in 2014 and using the median drilling and completion cost from 2013 ($4,824,414), one may see that a well with a 2014 cost of $9,648,828 (twice the 2013 median) or more would result in a tax rate of zero. A 2014 cost equal to the 2013 median would produce a 3.75 percent tax rate. A 2014 well with a cost of $2 million would have a rate of 5.9 percent.