Energy and Environment Reporting for Texas

Texas Drillers Get Big Tax Breaks

Dave Fehling/StateImpact Texas

Pump jack in Pierce Junction oilfield south of downtown Houston

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The problem, said the Legislative Budget board that studied the audits, was that the tax break was outdated — the board said the tax break used “late 1970′s production factors” as a way to determine what constituted “high cost drilling”.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.

Texas Legislature

State Rep. Mike Villarreal

“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.

Read a report from the Texas Legislature on Tax Breaks for Natural Gas:


  • TexasOnMyMind

    1.     Unfortunately, this story misses the entire point of the program, mainly because the only legislators interviewed are opponents of it. Given that this program is supported by the overwhelming majority of members of both houses, including many Democrats, it is somewhat telling you only managed to find two opponents – who refuse to make an effort to understand the program – to interview for this story.
    Simply put, this tax program allows Texas to remain competitive in attracting billions of dollars in capital spending from oil and gas companies. Texas is surrounded by states that also have similar programs in place, and if this program goes away in Texas, those billions of dollars in investments and economic activity will flow out of our state and into Louisiana, Oklahoma and other states who desperately need the economic impact. The reality is that this program pays for itself several times over in the massive economic activity that it generates for Texans.
    It’s too bad Reps. Villareal and Turner prefer to play class envy politics rather than making a real effort to understand the very legitimate business reasons why this program was put into place in 1989 (not, as your story implies, just few years ago), in a Democrat administration and by a legislature dominated by Democrats, and why it has been renewed more than half a dozen times by legislatures and administrations dominated by both political parties.
    It’s also too bad that NPR couldn’t be bothered to interview any one of the vast majority of members of the Texas legislature who understand this program and support it.

  • they wouldn’t drill here if there were taxed?  HAHA RIGHT……..

  • How does it benefit me if an additional 7.5 % sales tax is levied on the gas I use to heat my home?

    If the state needs to raise revenues, rather than cut its excessive payroll, they should tax NPR.  There is no legitimate need for them to not pay their fair share.

  • Straightsh00ter

    As usual, NPR takes the claims of a couple of disgruntled Texas legislators [who happen to be Democrats] at face value, and spin this into another example of corporate “greed”.
    First thing to realize is that the program was initiated by the Texas legislature to encourage drilling for natural gas using innovative and expensive procedures. The companies doing the drilling put out big bucks to drill a well, and not every well produces gas at levels that warrant its continued operation. In that case, everybody loses, because the drilling company is out the money they put into the process, and the state doesn’t get the taxes they expect, based on the market value of the gas produced.
    Second, the tax rates are variable, depending on the documented cost of drilling a specific well and the average documented cost of drilling all wells of that type.
    Third, those wells which qualify for a reduced tax rate only get that reduced rate until they recoup 50% of the documented cost of drilling the well, or for 10 years, whichever comes first.

    The report talks about “reduced tax rates” for a well which might cost as little as $24,000 to drill. I ran the numbers. That well would qualify for a tax rate of 7.46%, rather than the full rate of 7.50%. And, it would only get that minor reduction in the rate until it saved the company $12,000.
    And all those wells that qualified for a zero tax rate? Essentially, they would simply recoup the 50% in drilling costs faster than at other, cheaper to drill, wells. In essence, all these extra auditors are doing is trying to get tax money into the state’s hands faster than they would otherwise.
    There is a potential fraud issue, but that does not appear to be a significant problem. In fact, with the auditors concentrating on the exact tax rate of thousands of wells that are likely complying with the law, they are more likely to miss the fraud cases.
    What isn’t mentioned is that these companies have to prepay these taxes based on the full tax rate, because they are getting REBATES of those taxes once the calculations are completed. These legislators are bitching because the State has to pay them interest on the excessive money the State got up front. Not a word about how the State had their money up front for months [or years] before the “Certification” process could be completed and the rebate issued.
    Another spin was the claim that the tax break was outdated, using “late 1970′s production factors”. The comparative cost of drilling new wells is update annually, using the figures from the prior year as the new baseline.

    The envy factor of the State legislators is evident in their comparison of the Texas taxing rates to those now in effect in Pennsylvania. You can file this under the heading of “Politicians believe that all money belongs to them, except for what they determine the taxpayers will be allowed to keep.”

  • Judyinmb1

    So what else is new?

  • Jim Binion

    It’s not really a tax break.  It’s a cut in the rate of a tax that’s only on gas.  The tax is just layered on top of all other taxes.  If the message is, “We can take more of your money because we don’t like you,” then jsut be honest about it.  SOmeone else could say the same thing about doctors, home builders, and candlestick makers.  If you want gas treated the same as everyone else, get rid of the stupid tax altogether and you won’t need any fracking incentives.  Let the gas people pay the same taxes as lawyers or journalists.

About StateImpact

StateImpact seeks to inform and engage local communities with broadcast and online news focused on how state government decisions affect your lives.
Learn More »