The tax break for high-cost natural gas wells in Texas — which is of particular importance to producers active in the state’s shale plays — continues to draw attention from lawmakers wrangling with a $27 billion budget shortfall.

The producer tax exemption has turned up in legislation introduced by state Sen. Rodney Ellis (D-Houston) that calls for a periodic sunset review of a number of state tax breaks. Earlier last week SB 1051, which would create the Commission on Periodic Tax Preference Review, was debated in the Senate Finance Committee.

The measure would “scrub, sunset and possibly repeal scores of preferential tax breaks in the Texas budget,” Ellis said.

He asserts that Texas gave away more than $7.4 billion in revenue from 2004-2009 to natural gas producers “due to an antiquated definition of high-cost gas that reduces the tax rate actually paid from the 7.5% in statute to under 2%.

“The Texas Tax Code contains several preferential tax breaks that were inserted into the code in the distant past but live on long past the time the rationale became unjustified spending programs ‘hidden’ within the tax code,” Ellis said. “These breaks cost Texas billions of dollars in revenue and may provide no real economic benefit. It is long past time to scrub the tax code for all such wasteful provisions.”

Besides the natural gas industry, Ellis also has his revenue-raising eye on Texas retailers, which he said received “a tax break of over $200 million last year simply to file their sales tax on time.”

State agencies are subjected to a sunset review every 12 years to determine their effectiveness, Ellis said. “The tax code would benefit from a similar periodic review of all its exemptions, exclusions and special treatments to answer one simple question — are they working?”

Ellis spokesman Jeremy Warren said the bill’s prospects look good. “The chairman [of the Senate Finance Committee] loves it…We haven’t gotten word from everyone on the committee, but we’ve heard a whole lot of support for it, so we believe it will get out of committee.”

The high-cost gas well exemption was recently targeted for outright elimination by Fort Worth Democrat Rep. Lon Burnam, who maintains the tax break, which was created in 1989, is no longer needed. His legislation to repeal it (HB 2001) has been in the House Ways and Means Committee since March 7 (see NGI, March 14). Ways and Means Committee Chair Rep. Harvey Hildebran’s office did not respond to an inquiry about the bill’s prospects.

“In terms of the high-cost gas incentive, there is probably no more important incentive to the Texas oil and gas industry right now, primarily because we’re competing for rigs against such as Pennsylvania that don’t even have severance taxes,” Justin Furnace,president of the Texas Independent Producers and Royalty Owners Association, told NGI. “Right now as we sit with the price of gas being what it is we have to be competitive against other states for rigs. A big part of that is the high-cost gas incentive.”

Former Texas Lt. Gov. Bill Hobby, who is still seen as influential in state politics, has called for elimination of the tax break for high-cost wells, saying the revenue could be used to ease the budget deficit.

Burnam Chief of Staff Craig Adair told NGI that a number of members are interested in the legislation, particularly as it sinks in with them just what such a large budget shortfall means to the state, with the potential for significant cuts to education and social service programs.

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