LEGISLATIVE FISCAL OFFICE
Fiscal Note
Fiscal Note On: HB 57 HLS 21RS 194
Bill Text Version: ORIGINAL
Opp. Chamb. Action:
Proposed Amd.:
Sub. Bill For.:
Date: May 2, 2021 1:41 PM Author: COUSSAN
Dept./Agy.: Natural Resources / Revenue
Subject: Severance Tax Exemption For New, Enhanced, Orphan Wells Analyst: Greg Albrecht
TAX/SEVERANCE-EXEMPTION OR -$3,724,000 GF RV See Note Page 1 of 1
Exempts oil production of certain oil wells from severance tax
Present law imposes a severance tax rate on most oil produced in the state at 12.5% of value. Wells producing less than 25
barrels per day and at least 50% salt water per day pay one-half that full-rate (incapable wells, 6.25%). Wells producing
less than 10 barrels per day pay one-quarter the full-rate (stripper wells, 3.125%).
Proposed law provides a severance tax exemption for oil production from any newly drilled well, a well undergoing permitted
enhancement, or an orphan well. The exemption period is the earlier of months to payout of well costs or 12-months for
new wells, 6-months for enhanced wells, or 24-months for orphan wells. Available to wells that commence production on or
after January 1, 2022 and on or before December 31, 2024. Only one exemption is allowed per wellhead.
Effective upon governor's signature.
EXPENDITURES 2021-22 2022-23 2023-24 2024-25 2025-26 5 -YEAR TOTAL
State Gen. Fd. $112,000 $158,000 $161,000 $163,000 $167,000 $761,000
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 $112,000 $158,000 $161,000 $163,000 $167,000 $761,000
REVENUES 2021-22 2022-23 2023-24 2024-25 2025-26 5 -YEAR TOTAL
State Gen. Fd. ($3,463,000) ($19,821,000) ($22,390,000) ($18,628,000) ($1,809,000) ($66,111,000)
Agy. Self-Gen. $0 $0 $0 $0 $0 $0
Ded./Other ($261,000) ($1,492,000) ($1,685,000) ($1,402,000) ($136,000) ($4,976,000)
Federal Funds $0 $0 $0 $0 $0 $0
Local Funds $0 $0 $0 $0 $0 $0
Annual Total ($3,724,000) ($21,313,000) ($24,075,000) ($20,030,000) ($1,945,000) ($71,087,000)
EXPENDITURE EXPLANATION
The Dept. of Natural Resources indicates no additional administrative expenses. The Dept. of Revenue indicates $77,000 of
staff time to modify tax processing systems to incorporate the bill’s exemptions, as well as 2 additional positions
(Compliance Division and Field Audit Division) at roughly $160,000 per year; one-half of one position in FY22 plus set-up
costs, and 2 positions annually through the life of the program.
REVENUE EXPLANATION
The LSU Center for Energy Studies (CES) analyzed the bill in consultation with private energy firms and consultants, other LSU
economists, and economists from DNR and the Legislative Fiscal Office (LFO). That analysis was based on an existing baseline of 347 wells
per year in the state (187 new/yr and 160 enhanced/yr), modeled well types (full-rate, incapable, and stripper), accounted for production
decline rates, the number of tax exempt months provided by the bill, the differing severance tax rates based on well production volumes,
and the current official REC forecasts of oil prices. The resulting baseline severance tax losses were estimated at $3.7M in FY22, $21.3M
FY23, $24.1M FY24, $20M FY25, and $1.9M FY26; totaling $71.1M over five years. Approximately 7% of these losses will accrue to the
parish severance tax allocation, with the balance accruing to the state general fund. These losses are based on the bill’s full 12-month and
6-month exemption periods for new and enhanced wells, respectively. Loss estimates that were 19% smaller over the five year horizon
were made, as well, based on a 9-month exemption period for new wells. However, this shorter exemption period does not seem
consistent with likely new well costs, payout of which will actually determine the length of the exemption period. A broad aggregate
approach, averaging within well types, utilized by DNR and the LFO, resulted in $95.4M of baseline severance tax loss, with much of the
difference with CES being in the first year and due to no accounting for well production decline rates.
CES also estimated the bill’s possible effects on inducing additional oil drilling, and the associated economy-wide impacts. This analysis
was based on the effect on the internal rate of return of wells from the oil price change equivalent of the severance tax exemption, and
earlier CES estimates of the long-run responsiveness of oil production to oil price changes. The results were 45 additional wells producing
over a five year period (29 new, 16 enhanced, 0 orphan). Production from these wells could offset losses by 8.4% over five years, with
state royalty gains providing another 2.5% of offset (if all were on state land/waters). General economy-wide tax receipts attributable to
the spending associated with these induced wells provides another 7.3% offset. Total positive offsets to the baseline severance tax losses
were 18.2%. To complete the analysis, the state’s balanced budget constraint was recognized, requiring governmental spending
reductions or compensating tax increases matching the severance tax losses. The analysis reduced state government spending through
various sectors of the economy, proportional to the state budget, negating 24% of the positive offsets (generously reducing spending after
positive offsets and not accounting for federal match consequences of health care spending cuts). Complete results reduced the baseline
severance tax loss by 13.8%. This offset is as large as it is because the bill affects an industry with a long presence and well-developed
supplier linkages in the state economy. Other incentive programs may not provide similar effects. While this type of analysis can provide
interesting results, and the CES analysis is quite thorough and involved considerable hours of work, various aspects of analysis such as
this in general are subject to increased levels of uncertainty, and are less reliable for budgeting purposes.
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Change {S & H} Legislative Fiscal Officer
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