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Senate Judiciary Committee narrowly approves reworked oil and gas well tax valuation bill | Energy and Environment


The Senate Judiciary Committee has approved a bill that would change the methodology for valuing producing oil and natural gas wells, but not before fundamentally altering the legislation to allow more latitude for the state Tax Department to reform how it values wells — much to the oil and gas industry’s chagrin.

The judiciary panel signed off on the bill Tuesday afternoon after an 8-7 vote Monday night in favor of deferring consideration of the bill upon a motion to do so by Sen. Patricia Rucker, R-Jefferson, after extensive testimony and debate on the legislation, which had been amended significantly from the previous version to newly direct the state Tax Department to propose rules for approval by a legislative rule-making review committee.

When the committee reconvened Tuesday afternoon, Rucker proposed an amendment that she said was designed to split the difference between the version of the bill that eventually prevailed and the version of the bill that the House of Delegates passed in a 66-34 vote last week despite concerns from members of both parties about the bill’s impact on local government revenues.

County school boards and commissions would have absorbed most of a projected revenue loss of $9 million stemming from additional expenses allowed by House Bill 2581 if it was enacted as passed by the House, according to the Tax Department.

Under Rucker’s amendment, the Tax Department would have proposed a legislative rule by June 30 on valuation of properties producing oil, natural gas and or natural gas liquids while providing for a tax on net profit by defining net proceeds for oil and natural gas as actual gross receipts based on sales volume minus royalties and operating costs and including lease-operating, lifting, compression, processing and transportation expenses as annual operating costs.

“We’re essentially coming up with almost like a net profit in order to do an ad valorem evaluation,” Sen. Mike Romano, D-Harrison, objected. “That doesn’t make any sense to me because it’s the value of the minerals, it’s the value of the oil and gas that we’re trying to come to, not what the net profit is.”

Ad valorem property tax amounts are based on the assessed value of a property.

“It’s just defining something,” Rucker said of her amendment. “It’s getting at a starting point.”

But that amendment was defeated in a 9-8 vote, and the panel subsequently voted 11-6 to move the bill to the Finance Committee.

There were no Tax Department estimates for what Rucker’s amendment would have cost local governments, and there are no estimates for what the current version of the bill would cost them. That figure would depend on the Tax Department’s own rule-making, although the burden on local governments is expected to be less.

House Delegate Dianna Graves, R-Kanawha, the bill’s lead sponsor, and oil and gas industry representatives had criticized changes made to the bill at the judiciary panel’s meeting Monday night.

Graves lobbied for the committee to back Rucker’s amendment Tuesday, saying it would still give the Tax Department significant leeway in future legislative rule-making.

Graves urged the committee to restore the bill to the House-approved version and argued that the projected $9 million hit to local governments should be weighed against the tens of millions of dollars that counties will keep pulling in from oil and gas property taxes. Graves contended that now would be a convenient time to enact the bill as originally designed given the extra cushion that counties have from CARES Act coronavirus relief funding.

But Sen. Ryan Weld, R-Brooke, majority whip and vice chair of the Judiciary Committee, didn’t agree.

“Your counties would probably lose about $97,000,” Weld told Graves, citing Tax Department estimates for Graves’s district consisting of Kanawha and Putnam counties. “My counties combined would lose a little over $2.5 million, which is about 28% of the total monies here. So I’m trying to figure out exactly what we’re doing here. I’m sure you can understand the reluctance of somebody who represents an area that is standing to lose a lot from this piece of legislation versus someone who’s really going to lose nothing.”

Weld’s district includes all or parts of Brooke, Hancock, Marshall and Ohio counties.

Oil and gas industry lawyer Philip Reale registered what he called “huge disappointment” in the committee’s reworked version of the bill Monday night.

“It’s a problem that we need not kick down the road, but it looks like that might be the decision of the folks here,” Reale said.

But Acting State Tax Commissioner Matt Irby told the panel Monday night that the department saw the original version of HB 2581 as deeply flawed.

“We thought that bill did not provide anything that resembled true and actual value,” Irby said. “ … What it was doing was allowing taxpayers to use their own gross proceeds but then use sort of an industry average expense. We had concerns about the way taxpayers were reporting gross proceeds currently and that they’d be reporting their gross proceeds very, very close to the wellhead but attempting to take average expenses way far out to the market, and that was what resulted in our large estimate.”

Taxpayers would essentially be claiming double credit for their expenses, Irby added.

The Tax Department uses a mass appraisal system for oil and gas wells based on an average to value individual properties instead of valuing properties individually.

The latest version of the bill would still empower the Office of Tax Appeals to hear property tax appeals and lower the standard of proof that a taxpayer has to meet to get their property reevaluated from clear and convincing to a preponderance of the evidence.

The bill would apply to assessment years starting July 1, 2022.

Reach Mike Tony at mtony, 304-348-1236

or follow @Mike__Tony on Twitter.


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