LEGISLATIVE FISCAL OFFICE
Fiscal Note
Fiscal Note On: HB 8 HLS 202ES 57
Bill Text Version: ORIGINAL
Opp. Chamb. Action:
Proposed Amd.:
Sub. Bill For.:
Date: September 29, 2020 8:46 AM Author: DEVILLIER
Dept./Agy.: Revenue
Subject: Severance Tax Exemption - Stripper Well Oil Production Analyst: Greg Albrecht
TAX/SEVERANCE TAX OR -$6,796,000 GF RV See Note Page 1 of 1
Provides with respect to exempt severance tax on oil produced from stripper wells (Items #61 & 65)
Current law imposes a severance tax on the production from stripper wells (no more than 10 barrels of oil per producing
day) of 3.125% of the value of the oil when severed. This tax is exempted in any month when the average value is less than
$20 per barrel.
Proposed law will exempt the tax on oil produced from stripper wells and stripper fields in any month when the average
value is less than $75 per barrel. The Dept of Revenue shall determine the oil value quarterly based on the average New
York Mercantile Exchange Price in the prior three months. This exemption is available for nine years, from January 1, 2021
through December 31, 2029.
The bill also requires all production reports be filed timely with the Revenue Dept verifying the average daily production
during each month.
EXPENDITURES 2020-21 2021-22 2022-23 2023-24 2024-25 5 -YEAR TOTAL
State Gen. Fd. SEE BELOW SEE BELOW SEE BELOW SEE BELOW SEE BELOW
Agy. Self-Gen. $0 $0 $0 $0 $0 $0
Ded./Other $0 $0 $0 $0 $0 $0
Federal Funds $0 $0 $0 $0 $0 $0
Local Funds $0 $0 $0 $0 $0 $0
Annual Total
REVENUES 2020-21 2021-22 2022-23 2023-24 2024-25 5 -YEAR TOTAL
State Gen. Fd. ($2,924,000) ($5,848,000) ($5,848,000) ($5,848,000) ($5,848,000) ($26,316,000)
Agy. Self-Gen. $0 $0 $0 $0 $0 $0
Ded./Other ($474,000) ($948,000) ($948,000) ($948,000) ($948,000) ($4,266,000)
Federal Funds $0 $0 $0 $0 $0 $0
Local Funds $0 $0 $0 $0 $0 $0
Annual Total ($3,398,000) ($6,796,000) ($6,796,000) ($6,796,000) ($6,796,000) ($30,582,000)
EXPENDITURE EXPLANATION
The Department’s current assessment of staff time associated with modifications to the tax processing system to incorporate
a new tax return necessary to implement the price-based exemption in this bill is $151,000. Additional staff time costs
associated with handling issues with taxpayers resulting from this change may also be incurred. In addition, the Taxpayer
Compliance Division and the Field Audit Division each anticipate the need for an additional position to review returns to
verify stripper certification, and to administer taxpayer inquiries and compliance ($78,000 FY21, $160,000 FY22).
REVENUE EXPLANATION
The current exemption was enacted by Act 2 of 1994, resulting in intermittent months of tax exemption from FY95
through FY99. Since then, oil prices have generally exceeded $20/bbl and these wells have been subject to the stripper rate
of 3.125% of value (1/4 the tax of full-rate production). Over the last four fiscal years, these wells have been producing
approximately 4 million barrels of oil per year, and being exempted from approximately $20.6 million of severance tax per
year (3.8 million barrels and $18.8 million in FY20) relative to the full-rate tax of 12.5% of value.
Oil prices are currently less than $75/bbl, and are not currently expected to exceed that price during the fiscal note
horizon. Thus, the bill is expected to exempt these wells from their current level of tax payment, some $6.8 million per year.
Modestly rising oil price projections are currently projected, and are assumed to offset modestly declining production over
the fiscal note horizon. The price/exemption determination is to be made on a quarterly basis and, under extreme price
movements, in some portions of a year this production could be exempt, and in some portions taxable.
On the full-year basis of FY20 actual collections, approximately 86% of annual severance tax reductions will affect the
state general fund ($5.848 million), with 11% affecting the parish severance tax allocation ($748,000) and 3% the wetlands
fund allocation ($200,000). Half-year effects are assumed for FY21 since the bill’s exemption is available beginning with the
second half of FY21 (January 1, 2021). Some portion of this exempted production will occur on state lands/waterbottoms,
resulting in a small royalty gain offset (less than 1%) to the severance tax losses estimated above. In addition, specific
estimates of revenue loss are highly uncertain at this time due to the effects of the Covid-19 virus pandemic on economic
activity in general and oil prices in particular.
While a severance tax exemption is similar to a price increase for producers, research by the LSU Center for Energy
Studies finds that oil and natural gas production are relatively unresponsive to price changes, and therefore severance tax
rates. Specifically, oil production from new wells (one year of age or less) is estimated to increase by 6.2 percent in
response to a 10 percent increase in prices in the long run. A statistically significant response of total production to prices in
Louisiana is not observed in the long run. A state unilaterally changing severance tax rates may exhibit greater production
response, but research on this case still finds the response to be small. This bill targets stripper production in particular, and
it seems unlikely that exemption from a low tax rate on low volume wells will elicit material additional or new well drilling
and production over a fiscal note horizon. Thus, the bill is likely to result in revenue losses as estimated above.
Senate Dual Referral Rules House
13.5.1 >= $100,000 Annual Fiscal Cost {S & H} 6.8(F)(1) >= $100,000 SGF Fiscal Cost {H & S}
Christopher A. Keaton
x 13.5.2 >= $500,000 Annual Tax or Fee 6.8(G) >= $500,000 Tax or Fee Increase
Change {S & H} Legislative Fiscal Officer
or a Net Fee Decrease {S}


Statutes affected:
HB8 Original: 47:633(7)