High-Cost Natural Gas Tax Rate Incentive Study

Rider Element B

Rider Element B: Provide recommendations for increasing the effectiveness of the high-cost natural gas tax rate reduction program.

The high-cost natural gas tax rate reduction program, as mentioned earlier in this report, is established by statute as Tax Code Section 201.057. The structure and a number of specifics regarding the functioning of the rate reduction program are in this section of the Tax Code.

In terms of increased administrative effectiveness, below are two proposals intended for discussion by the Legislature and stakeholders, but not presented as recommendations by the Comptroller of Public Accounts:

  1. Streamline the exemption application process. Under current law the natural gas producer submits an application to the Texas Railroad Commission (RRC) to obtain certification for a high-cost well. The RRC provides the producer with that certification if appropriate, then the producer provides the Comptroller with a copy of that certification along with the well's drilling and completion costs for determination of the natural gas production tax rate on natural gas produced from that well. After the producer is provided with the well's high-cost natural gas tax rate calculated by the Comptroller, the producer files an amended tax return to claim a tax refund from previous tax reports at the full tax rate. This proposal is to require producers, when applying for well certification by the RRC, to also include the well's drilling and completion costs. Implementing this proposal would:
    • Eliminate the need for a Comptroller filing deadline.
    • Eliminate the 10 percent penalty for not filing within 45 days of RRC certification.
      Since November 2010, a total of 1,121 leases have been assessed this penalty.
    • Reduce taxpayer filing and correspondence costs.

    In addition to the proposal’s benefits above, Comptroller operations related to the natural gas production tax would be improved as these application and approval procedures would become more highly automated. A reduction in amended taxpayer reports (See Appendix B for a sample of reports and their instructions) could occur.

  2. Streamline taxpayer reporting requirements. This proposal would require natural gas production taxpayers to prepare a single production volume report to be submitted to both the RRC and the Comptroller. Presently there are separate submissions, and Comptroller staff has noted that at times the two reports do not agree. This proposal would reduce paperwork and increase accuracy for the two agencies and for taxpayers.

As covered earlier in this report, the high-cost natural gas tax rate reduction program is statutorily established in Tax Code Section 201.057 (See Appendix A). The certification as to whether a natural gas well is high-cost, or not, is administered by the Texas Railroad Commission.

As provided by the statute and addressing workload, the program's 10-year time horizon (this is the maximum) for the early and peak years of the wells in the Barnett Shale development have either come to an end (those wells first receiving the tax rate reduction in fiscal 2005, or before) or will be ending in the next two to three years (those wells first receiving the tax rate reduction in fiscal 2006 through 2008). Therefore, and with respect to the Barnett Shale wells previously drilled and any possible new exploration, the administrative workload associated with this program should diminish as the older wells revert to full taxability status and fewer new applications for the high-cost provision are received.