OVERALL TAX LEVELS SIMILAR ACROSS 11 PRODUCING STATES

Allan G. Pulsipher, Robert H. Baumann, Wumi O. Iledare
Louisiana State University
Baton Rouge

The Center for Energy Studies at Louisiana State University two years ago conducted a study that compared the tax per barrel that exploration and production (E&P) companies paid to state and local governments in the principal oil and gas producing states, a summary of which was published. 1

Despite considerable variation among states both in severance tax rates and in their relative reliance on individual indirect taxes, the analysis showed that states such as Texas and Louisiana that compete for E&P activity had remarkably similar overall tax bills when property, sales, and corporate taxes were also included in the comparison.

The purpose of this article is: 1) to update the compari sons presented previously with additional and revised data, 2) extend the comparisons by showing taxes on a percent of value as well as per barrel basis, and 3) extend the analysis by estimating the tax bills separately for oil and for gas.

BACKGROUND

Prior to the 1991 report, studies of taxes levied at the state or local level largely had been limited to comparisons of severance taxes.2

The only comprehensive study similar to ours was undertaken as a part of the debate over whether California should levy a state severance tax. However that study considered only the years 1979 and 1980, when oil prices were at their peak, and was limited to six states. 3

Our analysis showed that severance tax comparisons didn't tell the whole story and, in fact, could be quite misleading. Oil and gas companies also pay corporate income and franchise taxes as well as property and sales taxes and the relative reliance on these taxes varies considerably among states.

The most important source of variation in tax bills among states is attributable to differences in the treatment of severance and property taxes. North Dakota, Mississippi, and Oklahoma substitute severance taxes for property taxes, others levy both taxes, and Colorado allows the property tax payment to be subtracted from the severance tax liability. Moreover the base of the property tax itself varies Significantly, with states such as California, Texas, and Kansas taxing the value of oil and gas in the ground while others such as Louisiana tax only the value of structures and equipment.

The most surprising finding of the study was how close the tax bills of competing states were when all taxes were included in the comparison. Some states were clearly higher than the average and others clearly lower than average; but, in general, the differences in the total tax bills among competitive states such as Louisiana, Texas, and Mississippi were well within the likely margin of error of the date we collected.

After the summary of the report was published in Oil & Gas journal it became a standard point of reference by both industry and governmental analysts during subsequent considerations of energy taxes in several states. As a result of this interest, we have updated the study to incorporate newly available and revised data and extended its scope as is described in the following sections of the article.

TAXES PER BARREL

We computed the average tax bill expressed in dollars per barrel or barrel equivalent for the states included in the study (Fig. 1).

Tax data vary from year to year and often undergo major revisions, thus we use a four year average rather than data for individual years.

Much of the data had to be collected from state offices and reports that vary in definitions and schedules. Moreover, we have had to make other adjustments and estimates such as transforming production data reported on a calendar year basis to a fiscal year basis by averaging consecutive calendar years. Thus the data contain an inescapable margin of error that should be kept in mind as the following comparisons are considered.

Although the averages in Fig. 1 include another year of data as well as some revisions in previous years, the pattern is quite similar to the one described in our earlier article. North Dakota, Alaska, and Wyoming have tax bills above the average, and Oklahoma and California are clearly below average.

The remaining states lie within a range, bounded by Mississippi on the high end and Kansas on the low end, within which the differences among the states are probably within the margin of measurement error inherent in the data.

This tendency toward equivalence becomes more apparent if adjustments are made to reflect stripper well production. Production from stripper wells is excluded from severance taxation in Colorado and North Dakota and taxed at a considerably lower rate than production from ordinary wells in Kansas, Louisiana, Mississippi, and Wyoming. Thus, states which derive a substantial proportion of reduction from stripper wells might appear to have a lower rate per barrel tax bill than those with little stripper well production. This can be seen by adjusting for stripper well production in making the per barrel comparisons (Fig. 2).

Kansas, which obtained the largest proportion of its total oil and gas production from stripper wells (25.4%) and taxes stripper production at a reduced rate, jumps from the low end of the competitive range at $1.02/bbl to the middle of the range at $1.17/bbl.

Among the Gulf Coast states the differences are not affected significantly. Although the marginally higher-tax states of Louisiana and Mississippi tax stripper production at reduced rates they both derive less than 2% of their total production from stripper wells. Texas (the marginally lower-tax state), gets almost 8% of its total production from them but taxes stripper production at the same rate as production from ordinary wells.

TAX AS PERCENT OF VALUE

Although per barrel comparisons are convenient and easy to understand, they neglect the substantial variation in oil and gas prices among the producing states.

The price of a barrel of oil in Alaska is well below the price in the lower 48 because of the high transportation cost that must be paid to bring it to market. Because the value of a barrel of Alaskan oil is lower, an equivalent per barrel tax bill would be a higher percentage of the value of the barrel than would be the case for higher-valued oil from a less remote state.

Similarly, heavy, sour California crudes sell at a substantially lower price than the lighter, sweeter crudes produced in Louisiana and Mississippi because they are harder to refine.

Gas prices also vary among states because of the higher proportion of capital and transportation cost that must be covered in bringing gas to market as well as, during this period, differing amounts of surplus capacity. Gas produced in close proximity to major markets in areas served by competing pipelines sells at substantially higher prices than gas produced in more remote locations served by only one pipeline.

We also compared the tax per barrel values shown in Fig. 1 with the same tax bill expressed as a percent of the value of oil and gas produced in each state (Fig. 3). Although the patterns on the two sides of the figure are roughly the same, some differences are apparent.

Measured as a percent of value, Alaska becomes the state with the highest tax bill. Moreover, at 13.9% of the value of the oil and gas produced in the state, Alaska's tax bill is 23% higher than the second highest state, Wyoming. Although the differences are not as large, New Mexico and Louisiana both jump two places in the ranks, replacing Mississippi and Colorado as the fourth and fifth highest-tax states.

The relative range between the highest and lowest state in the overall distribution, however, is almost the same for both measures, with the tax bill in the highest state 2.48 times higher than the bill in the lowest state on both sides of the figure.

Differences in the proportions of oil and gas produced account for most of rest of the difference between the two measures. States such as Louisiana and New Mexico that produce considerably more gas than oil move " up" in the ratings because gas prices were well below oil prices (on an energy equivalent basis) throughout this period. Thus the value of combined oil and gas production is lower in these states and taxes represent a larger percentage of total value.

Using value rather than volume also changes the relationships among Louisiana and its two Gulf Coast competitors. On an energy equivalent basis, Texas and Mississippi both produce about the same amount of oil and gas; but Louisiana produces about twice as much gas as it does oil. As a consequence, Mississippi's tax bill, which is above Louisiana's on a volume basis, falls below it on a value basis.

OIL VS. GAS

Although states levy separate severance and conservation taxes on oil and gas, corporate, sales, and property taxes are levied on companies that often produce both oil and gas. Thus revenues from these taxes normally are not allocated between oil and gas.

Colorado is a partial exception to the rule as it distinguishes between oil and gas operations when reporting property taxes.

However, by making the assumption that corporate, property and sales revenues were allocated in the same proportion as the value of oil and gas production in the state, these revenues can be allocated and combined with reported oil and gas severance revenues to make estimates of total state and local taxes attributable to oil and gas respectively.

Such estimates can be expressed per barrel (Fig. 4) and as a percent of value (Fig. 5). On a barrel vs. barrel equivalent basis, total state and local taxes on oil exceed total taxes on gas in every state, although the margin is very close in Mississippi and New Mexico. In contrast, compared as a percentage of the respective value of production (Fig. 5), only Alaska, Louisiana, and North Dakota show higher taxes on oil than gas.

In terms of relative balance within an individual state, Louisiana and New Mexico appear to be the extreme cases. Although both states rink near the middle of the pack when taxes on oil and gas are combined and both states produce considerable more gas than oil, Louisiana taxes oil more heavily than gas while New Mexico taxes gas more heavily than oil.

Louisiana has the second highest rate for oil and the lowest for gas, while New Mexico has the second highest rate for gas while ranking third from the bottom for oil (Fig. 5).

CONCLUSIONS

Using newly available and revised data the comparisons described here confirm the conclusion of our 1991 study that the differences in state and local tax bills among states that compete for E&P activity are not significant enough to be a major determinant of E&P activity, given the magnitude of the other uncertainties involved in such decisions.

This conclusion holds if tax bills are measured either as a percent of the value of the oil and gas produced in the state or on a per barrel of production basis.

This study also estimates state and local tax bills on oil and gas separately. Although the pattern of differences among states is similar, some potentially significant imbalances are apparent.

A producer would pay 83% more in state and local taxes on oil in Louisiana than he would in Texas, while conversely he would pay 112% more on gas in Texas than in Louisiana.

Similarly a producer would pay 40% more on gas in New Mexico than in Colorado but 28% less in New Mexico on oil than in Colorado.

These are the extremes, however, and for most states estimating the tax bill for oil and gas separately does not appear to change our overall conclusions.

REFERENCES

1. Pulsipher, A.G., "State and Local Taxes Minor Factors for E&P Locations," OGJ, April 22, 1991, p. 64.

2. Lagace, G.L., "State Energy Severance Taxes, 1972-1987, " Energy Information Agency/Monthly Energy Review, July 1988.

3. Deacon, R., S. DeCanio, H.E. French and M.B. Johnson, Taxing Energy: Oil Severance Taxation and the Economy. Holmes & Meier, New York, 1990.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.