The Louisiana state House approved a bill on Monday that seeks to boost the struggling oil industry by reducing the oil severance tax rate by 4 percentage points. However, this move could potentially result in an $80 million shortfall in state tax revenue.
House Bill 259, sponsored by Rep. Beau Beaullieu, R-New Iberia, received minimal opposition on the House floor and was approved by a wide margin of 86-13. The bill will now proceed to the state Senate for further consideration.
In a resounding vote of 96-6, the House has also passed another Beaullieu bill, House Bill 418. This bill aims to significantly reduce the tax imposed on oil and gas extracted from wells that have been abandoned and are no longer in operation.
If a well has been inactive for two years or more, the current tax rate for any oil or gas produced from it is reduced to 50% of the general severance rate. However, HB 418 aims to further reduce this rate to 25% of the current rate. Additionally, the bill proposes to lower the tax rate for wells that have been abandoned for over 60 months from 25% to 12.5% of the general rate.
According to Beaullieu, the main objective of HB 418 is to encourage individuals to bring orphaned and inactive wells back into operation. The implementation of this legislation is estimated to result in an annual revenue loss of approximately $350,000 for the state, as stated in the bill’s fiscal note.
HB 259 is expected to have a significantly larger fiscal impact as it solely pertains to oil wells, not gas wells.
Louisiana currently imposes a tax of 12.5% on the value of oil extracted from specific active wells. However, under HB 259, this tax rate would gradually decrease to 8.5%. The legislation proposes to reduce the tax rate by half a percentage point each year, beginning in 2025.
Lawmakers in recent years have attempted to pass similar tax cuts but have been unsuccessful.
According to the Legislative Fiscal Office, the proposed change in HB 259 would result in a loss of approximately $107 million in tax revenue for the state over the next five years. Invest in Louisiana, formerly known as the Louisiana Budget Project, estimates that once the rate reaches 8.5%, it will leave the state with a shortfall of around $80 million in annual revenue.
Jan Moller, the head of the organization, has issued a warning against proceeding with the tax cut. This caution comes at a time when the state is expected to face a budget shortfall of half a billion dollars after the expiration of the temporary sales tax reduction next year.
Supporters of HB 259 contend that reducing the tax would stimulate fresh investments in the oil industry within the state. They argue that the increased extraction of oil could potentially counterbalance the loss in revenue. However, a state economist expressed skepticism during a House panel, stating that he doubted such impacts would be able to offset more than 5% to 15% of the revenue loss.
The state is anticipated to encounter increasing expenses due to the implementation of several tough-on-crime measures passed during the recent special session. These measures will result in longer periods of incarceration for individuals convicted of crimes, thereby reversing the cost-saving criminal justice reforms of 2017.
Correction: It is important to note that orphaned and inactive wells are not taxed at rates of 50% or 25% as previously mentioned. Instead, they are taxed at 50% or 25% of the general severance tax rate for active wells.
