HOUSE BILL REPORT

HB 1281

BYRepresentatives Belcher, Beck, R. King, Cole, Sayan and P. King; by request of  Joint Select Committee on Marine and Ocean Resources

Providing property tax relief for mineral production.

House Committe on Natural Resources & Parks

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass.  (6)

      Signed by Representatives Belcher, Chair;K. Wilson, Vice Chair;R. Fisher, Hargrove, Raiter and Sayan.

Minority Report:  Do not pass.  (2)

      Signed by Representatives Beck, Ranking Republican Member; and Brumsickle.

House Staff:Bill Koss (786-7129)

Rereferred House Committee on Revenue

Majority Report:  The substitute bill by Committee on Natural Resources & Parks as amended by Committee on Revenue be substituted therefor and the substitute bill as amended do pass.  (12)

      Signed by Representatives Wang, Chair; Pruitt, Vice Chair; Appelwick, Basich, Fraser, Grant, Haugen, Morris, Phillips, Rust, Silver and H. Sommers.

Minority Report:  Do not pass.  (3)

      Signed by Representatives Holland, Ranking Republican Member; Brumsickle and Van Luven.

House Staff:      Rick Wickman and Bob Longman (786-7136)

AS REPORTED BY COMMITTEE ON REVENUE MARCH 4, 1989

BACKGROUND:

Under current law, mineral reserves are assessed for property tax purposes, and property taxes paid on the mineral reserve's value. In practice, some counties do assess minerals, but many do not. The methods used for assessing minerals vary widely from county to county.  A major reason for this variation is the difficulty in assessing minerals:  reserves are difficult to quantify, and future production and product prices are impossible to quantify with certainty.

Instead of property taxes, another method of taxing minerals is a severance tax, a tax on oil and gas and other minerals when the mineral is "severed" from the ground.  A common severance tax is a flat rate tax based on a percentage of the value of the mineral being extracted.  The tax is applied to production from state and private lands.

Without exception, every state in the nation with oil and gas production has some form of severance, production, or conservation tax on the produced oil and gas.  Various states also have severance taxes on coal, sulphur, salt, cement, uranium, and metallic minerals.  Depending on the state, tax receipts are deposited into general funds, conservation commission accounts, and/or dedicated trust accounts.

In 1983, severance tax legislation on oil and gas passed the Senate (38 to 10) and was referred to House Ways and Means during the last week of the special session, where the bill died.  The bill would have established a 5.75 percent severance tax and .25 percent conservation tax on the wellhead value of the oil and gas produced.

SUMMARY:

SUBSTITUTE BILL:  A severance tax of 5 3/4 percent is imposed on the value of any oil or gas produced.  An additional 1/4 of 1 percent conservation tax is imposed.  Value of the oil or gas is established as the fair market value at the time and point of production, as determined by the actual price of the oil received by the seller.

Revenues obtained through the severance tax shall be distributed 80 percent to the general fund and 20 percent to local governments.  The local government portion will be used to offset impacts from oil and gas production in affected counties. The 1/4 percent additional tax goes to support the administration of the Oil and Gas Conservation Commission, already in existence.  Any proceeds remaining at the end of a biennium revert to the general fund.

Exemptions are provided for oil and gas owned by the federal government, the state, or local governments.

A property tax exemption is provided for oil and gas interests in oil and gas reserves and leases on the rights to develop and operate.  Equipment, machinery, etc., used in extracting or processing oil or gas are not exempt from the property tax.

SUBSTITUTE BILL COMPARED TO ORIGINAL: The original bill covered oil, gas, precious metals (gold, silver, etc.) and industrial minerals such as sand and gravel.  The substitute applies only to oil and gas. In the original bill, no severance tax rate was specified: in the substitute, the rate is 5 3/4 percent with an additional 1/4 percent earmarked to support the Oil and Gas Conservation Commission.

Revenue distribution changes from 30 percent to the general fund and 30 percent to local governments to 80 percent to the general fund and 20 percent to the local governments.  In the original, 40 percent was earmarked for the recreation, fish, and wildlife permanent fund.

The original bill immediately eliminated the ad valorem tax on minerals.  The substitute eliminates the ad valorem tax on oil and gas interests, but it does not exempt equipment used in exploration or processing.  The substitute bill does not contain a provision providing for a credit against the severance tax for actions taken to mitigate local impacts.

CHANGES PROPOSED BY COMMITTEE ON REVENUE:  Eliminated all provisions in the substitute bill. The Department of Revenue shall study potential taxation of minerals.  Minerals included in the study are oil, gas, coal, industrial minerals, and precious metals.  The department shall analyze the current property tax on minerals, review appropriate mineral taxation options, organize an advisory committee to assist in the study and prepare a report to the Natural Resources and Revenue Committees of the Legislature on or before July 1, 1990.

Fiscal Note:      Available.

House Committee ‑ Testified For:    (Natural Resources & Parks) None Presented.

(Revenue) None Presented.

House Committee - Testified Against:      (Natural Resource & Parks) Ann Clifton, Thurston County Assessor; Fred Saeger, Washington Association of County Officials; Larry Unzelman, Lewis County Assessor; Don Friend, citizen; John Wisch, Washington Irrigation and Development Company; Roy Bettesworth, Washington Aggregate and Concrete Association; Dick Junk, Washington Forest Protection Association; Ivan Holland, Garth Tallman, Echo Bay Mines; Pam Barrett, Northwest Mining Association; Vern Lindskog, Western States Petroleum Council; David Morris, Pacific Coast Company.

(Revenue) Mr. Lindskog, major oil company.

House Committee - Testimony For:    (Natural Resources & Parks) None Presented.

(Revenue) None Presented.

House Committee - Testimony Against:      (Natural Resources & Parks) Local government requires a predictable income which the ad valorem tax provides.  Eliminating the ad valorem tax and relying only upon the severance tax would create an erratic income flow to counties.  Suddenly imposing a severance tax would be unfair to currently operating mines since they have already paid taxes which they would not be credited with.  For small operators, the tax payment may serve as their annual work necessary to retain their mining claim.  The bill limits a county to obtaining 30 percent of the severance tax; currently counties retain 40 percent of the ad valorem tax.  Imposing a severance tax would be a burden to an industry with a slim profit margin, cyclical profits, and numerous marginal operators.  Taxing sand and gravel, the state's largest mineral sector, will reduce profitability and promote imports.

A "good" tax has four elements and this proposal lacks all of them:  equity among industries, benefit to the local community, stable income, and imposition of the tax based on ability to pay.

Any tax on minerals should differentiate among types of minerals.

If problems exist in assessing minerals, the Department of Revenue should address them through setting common procedures and standards.

(Revenue) Oil and gas severance taxes as proposed in the original bill are too high and the proposed method of taxation is too complicated.  The state has no experience in severance taxes and should consult experts in that field.