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Legislature adopts compromise amendment to natural gas property tax bill

CHARLESTON — A compromise was reached between the West Virginia Senate and the House of Delegates on a bill creating a better property tax valuation system for oil and natural gas wells and effect tax revenue for counties

House Bill 2581, providing for the valuation of natural resources property and an alternate method of appeal of proposed valuation of natural resources property, unanimously passed the Senate Saturday on the final day of the 2021 legislative session.

HB 2581 would provide a revised methodology to value oil and natural gas properties by the State Tax Commissioner in response to a West Virginia Supreme Court of Appeals decision in 2019 that struck down part of the methodology the department uses to value active oil and natural gas well sites.

The Senate version of the bill stripped from the version passed by the House a formula to value oil and natural gas property by using a weighted average price from regional markets, less the actual expenses as reported by the taxpayer. Instead, the Senate version directed the State Tax Department to promulgate regulations the Legislature can review and approve.

An amendment offered Saturday by state senators Mike Maroney, R-Marshall, Patricia Rucker, R-Jefferson, and Eric Nelson, R-Kanawha, expanded the bill by including property producing natural gas liquids.

The amendment requires the State Tax Department to base the fair market value of property producing oil, natural gas, and natural gas liquids through the process of applying a yield capitalization model to the net proceeds, defined as the actual gross receipts on a sales volume basis determined from the actual price received by the taxpayers as reported on the taxpayer’s returns, less royalties, and less actual annual operating costs as reported on the taxpayer’s returns.

“This could be construed as being a negative bill for my district, but I think it’s a positive bill,” Maroney said. “I think we need to address it. I think the court told us to address it…it’s something I think we need to own up to as a legislature. I believe that certainty will induce economic activity with investment.”

The House version of the bill would have resulted in a $9.1 million property tax revenue loss to county governments and county school systems. Natural gas-producing counties in the Northern Panhandle and North Central West Virginia would bear most of that loss.

During questioning by Sen. Mike Romano, D-Harrison, Maroney said there was no updated fiscal note for his amendment to the Senate Judiciary Committee’s amendment to HB 2581. Maroney said property tax revenue loss was still possible, but that could be offset by increased oil and natural gas production.

“Yes, they’re going to receive less money,” Maroney said. “I think the counties will get more money with the economic development and further investment by the gas companies. I think it could be a positive, I really do. But also more importantly, I think it’s the right thing to do.”

“Yes, there may be some losses in their current revenue stream, and there’s nothing we can do about that,” said Sen. Charles Clements, R-Wetzel. “But for some counties we’ve been told, they’re going to drill 14 new wells in a county. Now think about what that’s going to do to their overall revenue income.”

Romano voted for the bill, but raised numerous concerns about the Maroney amendment. He believes the amendment possibly ties the hands of the State Tax Department in developing a fair valuation.

“We’re taking a shot in the dark with this amendment,” Romano said. “I think common sense and prudence, especially those from the gas-producing counties, urges rejection to this amendment.”

The House approved the Senate’s changes to HB 2581 Saturday afternoon in a 57-43 vote. Del. Diana Graves, R-Kanawha, was the lead sponsor of the bill and worked to negotiate the compromise between the Senate, the State Tax Department, and industry leaders.

“In my professional opinion as an auditor and an accountant, what you’re going to see is new revenue for counties potentially with the addition of the new tax on (natural gas) liquids,” Graves said.

Del. Dave Pethel, D-Wetzel, still had misgivings about the bill and voted no. Pethel continued to express concerns about tax revenue loss for counties.

“We don’t know for sure how much this is going to cost until the Tax Department develops the rule,” Pethel said. “I’ve been against this bill. I know the people in the 5th District don’t want to lose money for the county.”

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