Louisiana House Bill 167, introduced on February 24th, is designed to gradually decrease the tax burden related to the production of oil. The bill first appeared on the legislative calendar on February 25th, and currently awaits further action in the House Ways and Means Committee.
Under the current and proposed law, the tax rate is based on the value of the extracted oil at the point of severance. The current rate is 12.5%, but the pending legislation, initially sponsored by Republican Rep. Phillip DeVillier, would reduce that rate to 8.5% over eight years. If the language passes, the rate would remain 12.5% through July 1, 2023, but drop to 8.5% by July 1, 2030.
According to Investopedia, severance taxes are state levies imposed upon the extraction of natural resources intended to be consumed in other states. The purpose of such costs is to provide compensation to the state for the loss of the resource, as well as defray any associated government expenses. Such taxes apply to operations removing gas, oil, timber, or minerals.
The new legislation does not change the calculation for determining the value of the oil. Under the existing statute, the value is determined by the highest of either: 1) The gross receipts received from the first buyer, minus transportation costs like trucking, barging, and pipeline fees or 2) The posted field price.
In addition, while it does not alter the amount of tax or change language regarding the definitions, the Louisiana House Bill 167 does clarify the severance rate for certain types of oil production facilities. “Incapable wells,” defined as a well that cannot produce more than 25 barrels of oil per day of production, are given a set tax rate of 6.25%. Under the current law, the rate for incapable wells is set as half of the regular severance tax. Stripper wells, which cannot produce more than 10 barrels of oil per day of production, are taxed at 3.125%. As mentioned, these are only clarifications of the current rate, not increases or decreases.