Last week saw two major announcements from Texas government officials that illustrate the huge way in which the ability to produce oil and gas from shale formations benefits the state’s economy:
- State Comptroller Glenn Hegar informed leaders of the state’s legislature that, thanks to a healthy economy largely driven by the oil and gas boom in the Permian Basin, Eagle Ford Shale, and other parts of the state, they will have an extra $2.8 billion in revenue to work with when developing the state’s budget for the next budget biennium; and
- The Texas Department of Transportation (TxDOT) announced that, thanks to two programs that allocate funds from the state’s Rainy Day Fund, it will receive a whopping $1.1 billion more than expected over the next two years.
That TxDOT announcement is again thanks to the booming oil and gas industry, since the Rainy Day Fund is funded almost entirely by severance taxes collected on oil and gas production.
Most folks don’t realize this, but Texas is a very high-tax state on the oil and gas industry when compared to most other states. In addition to the state’s severance tax – a tax that is levied on the production when it comes up out of the ground – oil and gas producers also pay the state’s sales tax, a franchise tax to do business in the state, and ad valorem taxes to local taxing jurisdictions like counties, cities, school districts and hospital districts.
The area of ad valorem taxes is where industry taxes get really high when compared to other states. In most other states, the industry pays these taxes based on the value of its plant and equipment, similar to the bases for homeowners and other business entities. But Texas is one of just two states in the nation that also requires the oil and gas industry to pay ad valorem taxes on the value of the oil and gas reserves while they remain in the ground. Thus, the average barrel of oil and molecule of natural gas is taxed more than 3 times before it is ever produced.
This almost unique feature of the Texas tax system is why you will always begin to see new schools, football stadiums, municipal facilities and better roads pop up whenever there’s an oil boom going on in any of the state’s counties.
Don’t misunderstand: No one in the oil industry is complaining about the tax system in Texas. The resource in the state is so abundant and accessible that companies are happy to foot that bill.
The net result of that bill is a tremendous benefit to local and state governmental budgets, and thus to every citizen of Texas. It’s an important thing to keep in mind.