Friday, December 21, 2012

Louisiana's Severance Tax Trap

As the much discussed Fiscal Cliff looms, Louisiana residents are constantly reminded by newspaper headlines of looming budget cuts to health care, mental health and education systems caused by our budget woes.  These headlines make a recent report by the Pew Center on the States on unnecessarily costly tax incentive programs entitled "Avoiding Blank Checks" all the more poignant.

The Pew study highlights two Louisiana tax incentive programs, the Severance Tax Relief Program (STRP) for horizontal drilling and the Motion Picture Investor Tax Credit.  Both programs are now used extensively, but they have become very costly for the state.  For example, in FY 2009, the STRP cost Louisiana $239 million in lost revenue, up from $285,000 in FY 2007.

The STRP was established in 1994, long before horizontal drilling and hydraulic fracturing came together to create the Haynesville Shale boom in 2008.  The program, which is uncapped, exempts producers from paying severance taxes for a period of two years.  Because shale wells decline so quickly, the vast majority of the potential severance taxes would have been paid in the first two years.  The program likely won't be as costly to taxpayers in FY 2011 and 2012 because of the sharp decline in Haynesville drilling and completion activity, but the state has no business overlooking more than $100 million in annual potential revenue.

While the STRP helps make shale gas wells more economically feasible, I would argue that the activity in the Haynesville Shale would not be any different without it.  The only difference is that the state has lost hundreds of millions of dollars of potential revenue as we fall deeper into debt.  The big question is why should horizontal shale wells be treated any different than a conventional well?

But don't look for things to change much.  Given that our esteemed Gov. Jindal vetoed the renewal of a four cent per pack cigarette tax last year to burnish his national reputation as an anti-tax crusader, don't look for any support from him.  No doubt industry will bitch and moan furiously about any effort to "raise taxes" so it likely will be lost in the discussion that elimination of the STRP for horizontal drilling would get rid of a loophole rather than actually raise new taxes.  But I doubt it will even come up for serious consideration.

No comments: