A bill recently passed by the West Virginia House seeks to change how natural gas property is valued for property tax purposes and would impact local governments throughout the state.
The bill, HB 2581, stems from a recent West Virginia Supreme Court case challenging 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 percent of gross receipts — not to exceed $5,000 — for conventional wells, and 20 percent of gross receipts — not to exceed $175,000 — for horizontal wells.
However, the Supreme Court ruled that deduction caps should be calculated using a monetary average, and not a percentage like the Tax Department uses.
HB 2581 addresses this by changing how natural gas producing property is valued for property tax purposes, including allowing for additional expense deductions that would lower the appraised values of oil and gas wells, resulting in an overall tax cut for the industry.
According to the bill’s fiscal note, the total impact would be a loss of $9.1 million in property tax revenue, concentrated in the state’s gas producing counties. Since most property tax revenue funds local school districts, this loss of revenue would mean that the state would increase its share of the school aid formula by approximately $1.1 million.
With other tax cut proposals threatening both state and local government budgets, HB 2581 merely adds to West Virginia’s growing budget problems.
