The Texas Comptroller’s office is adding auditors to increase scrutiny of tax breaks claimed by drilling operations.
“We are currently re-deploying resources and hiring auditors so that five auditors will work on oil and gas audits,” said Comptroller spokesperson R.J. DeSilva in an email to StateImpact Texas.
Why? It’s a response to a controversy that broke out last year during a session of the Texas Legislature. The same session that had to cut $15 billion from the state budget, mostly from health and human services.
Lawmakers learned that auditors found that natural gas well operations were using a tax break passed in 2003 to avoid paying as much a billion dollars a year in state taxes. Texas imposes a 7.5% tax on the market value of natural gas produced in the state. The break could reduce that rate all the way down to zero in some cases.
The problem, said the Legislative Budget board that studied the audits, was that the tax break was outdated — the board said the tax break used “late 1970′s production factors” as a way to determine what constituted “high cost drilling”. The tax break was intended to encourage such drilling by lessening the tax bill on the gas eventually produced.
But what was considered “high cost” decades ago is now widely known as “fracking” — injecting high-pressure fluid into rock formations to force out natural gas. Fracking now accounts for over half of the natural gas produced in Texas. The board said that in 2009 over a third of the wells approved as “high cost” in the state (2,128 of 5,967 wells) paid an effective tax rate of zero.
“This type of drilling has now become commonplace,” said Mike Villarreal, a Democratic state representative from San Antonio. He spearheaded efforts to get the tax break eliminated. But those efforts failed.
“I think a whole lot of reform needs to take place in this area,” said Villarreal, who was troubled not just by the tax break but by tax cheating that auditors also said they uncovered.
Auditors working for the Comptroller said they found that of 93 tax refunds given to natural gas producers in 2009, 52% did not meet the state tax code. The audits resulted in the state recovering $64.5 million.
“When 52% of all the cases investigated or audited turn up to be unjustifiable, [or] illegal, then there’s a problem,” said Rep. Villarreal.
The newly beefed-up audit teams are aimed at doing more to make gas operations comply with Texas tax laws.
But the oil and gas industry questions the need. And they warn that reducing the tax break could hurt Texas in the long run.
“I actually have wells that are in these tight formations and know something about the cost, the high cost of drilling those wells,” said Jon Rex Jones, an oilman in Albany, in West Texas, who testified last April before the legislative committee that considered changing the tax break.
“The oil and gas industry is one of the highest-taxed industries already at the national level,” said Jones. He said if Texas reduces the tax breaks to frack here, drillers will go elsewhere.
“I would predict many of those wells would not be drilled if that incentive were not in place,” said Jones.
As to tax cheats, Jones said he had not heard about what the state auditors found but he said that enough penalties—civil and criminal—were in place already to discourage oil and gas operations from cheating.