Blog Posts > Natural Gas Property Tax Bill Could Have Major Impact on Local Governments
February 20, 2020

Natural Gas Property Tax Bill Could Have Major Impact on Local Governments

A bill recently passed by the Senate would change how natural gas property is valued for property tax purposes, and could have a major impact on local governments throughout the state.

At issue is how the State Tax Department calculates production expenses on natural gas wells. When valuing oil and natural gas wells for property taxes, the Tax Department allows a deduction for expenses. Under a legislative rule, the Tax Department is required to determine the average annual industry operating expense, and then deduct that average expense when determining the value of a well for property taxation. The deduction is capped at 30% of gross receipts, not to exceed $5,000, for conventional wells, and 20% of gross receipts, not to exceed $175,000, for horizontal wells.

The cap on deductions was the subject of a recent court case, with oil and natural gas companies arguing that the deduction should not have a limit. The State Supreme Court ruled this past summer that the deductions should be calculated using a monetary average, and not a percentage like the Tax Department uses. However this ruling left the question of how the new calculation would affect the cap on deductions unclear.

SB 655 addresses this by putting in to state code how natural gas producing property is valued for property tax purposes, including what operating expenses natural gas companies may deduct, with one key difference – SB 655 does not put a cap on deductions.

According to county and school officials, lifting the cap would cost local governments millions of dollars, with some counties losing up to half of the natural gas property tax revenue. For example, according to Steve Paine, the West Virginia Superintendent of Schools, the loss of revenue from lifting the cap on deductions would mean the state would have to increase its share of the school aid formula by $12.8 million to offset the lost local share revenue. County school districts would also lose $15.8 million in excess levy revenue, and $2.4 million in regular levy revenue that would not be replaced by the state.

Based on those numbers, the total impact could be over $53 million in lost revenue for local governments.

While the fiscal note for SB 655 says that revenue impact could not be determined, it is clear from the court case that it would have a major impact on local governments, and the state.

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