Severance tax exemption cost La. $1.15 billion

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COURTESY LOUISIANA LEGISLATIVE AUDITOR
  • COURTESY LOUISIANA LEGISLATIVE AUDITOR

Louisiana’s severance tax suspension for horizontal gas wells cost the state nearly $1.15 billion in fiscal years 2010 through 2014. During that time, higher education and health care suffered massive cuts in state general funding, which means students, families and the poorest citizens of the state suffered so that energy companies could reap larger profits.

That is the inescapable conclusion to be drawn from the latest report from the Louisiana Legislative Auditor’s office. A report released Monday, August 24, by the auditor’s office cites the Louisiana Department of Revenue’s (LDR) annual Tax Exemption Budget to back up its figures.

Worst of all, the severance tax exemption on horizontal gas wells cost the state money that it will never recoup, even if lawmakers were to suddenly repeal the exemption, according to the auditor’s report. That’s because the exemption applies to the most productive period of a well’s life — the first two years. Production from horizontal gas wells declines significantly during the two-year suspension period and does not bounce back afterward.

“Approximately 98% of the revenue loss from fiscal years 2010 through 2014 was from horizontal wells drilled for natural gas,” the report stated. “Most of these wells are located in the Haynesville Shale in northwest Louisiana. According to [the Louisiana Department of Natural Resources, which keeps tabs on oil and gas production in the state], all of the Haynesville Shale horizontal wells’ best production is in the first two years. Because production dwindles significantly after the first two years, some operators may never pay severance taxes.”

State lawmakers initially approved the severance tax exemption for horizontal gas wells in 1994, ostensibly to encourage what was then an experimental technology. Since that time, horizontal drilling for shale oil and gas became the norm in America’s hydraulic fracturing or “fracking” boom.

“Louisiana is the only top producing oil and gas state with horizontal drilling that currently grants a severance tax suspension for horizontal wells,” the report adds. “There are currently no other states that allow tax suspensions on horizontal wells, and four other states grant rate reductions for these wells.”

In the most recent legislative session, state lawmakers “reformed” the horizontal gas well exemption by instituting a “tiered” severance tax exemption system based on the price of oil and gas. However, the fiscal note attached to the legislation acknowledged that the state is unlikely to realize any revenue from the “reform” for at least five years because the current and projected prices of oil and gas are below the thresholds established in the revised law.

In other words, lawmakers passed another meaningless “reform” that does nothing to address the state’s structural deficit — and the energy industry continues to get everything it wants from Louisiana.


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