A bill cutting severance taxes for oil and gas companies in their third and fourth years of production passed the Senate on Wednesday in Cheyenne.
Senate File 98 is meant to be an incentive, said Sen. Eli Bebout, R-Riverton. He hopes it would draw additional drilling activity to the state at a time when more rigs are needed to boost revenue and jobs. Others question the logic, arguing that tax cuts won’t encourage company interest for drilling in Wyoming, but it will cut into state revenue.
The bill made it through a third reading on a 17 to 13 vote. SF 98 now heads to the House.
Oil production, particularly with horizontal wells, begins with a flush and rapidly declines. Companies would still be obligated to pay severance taxes on the most robust years of a well’s life, but would receive a two-year tax break when the well begins to yield less.
Bruce Hinchey, president of the Wyoming Petroleum Association, said operators would likely drill more with the tax cut. They’ve told him so.
But what the tax helps to do in Hinchey’s opinion is put Wyoming on par with Colorado, where production is outpacing the Cowboy State.
The relatively low cost of drilling in northern Colorado has drawn operations south, he said.
“It certainly puts us, not on even playing field, but closer with Colorado,” he said.
Others are sure that the tax break does nothing but give companies a free lunch.
Sarah Gorin, former board chairwoman for the Equality State Policy Center, said the exemption is too far out to affect investment decision for companies.
“The notion that somehow a producer is going to make a decision based on a tax break in the third and fourth year of production is fanciful,” she said in an email. Gorin noted a University of Wyoming study commissioned by the Legislature and published in 2001 that found tax cuts for industry were not likely to increase production.
“Oil production is highly inelastic with respect to changes in production taxes,” the study states.
Hinchey, of the Petroleum Association, said it’s hard to estimate how much of a boon the tax exemption would be for Wyoming. But the ebb in new wells in the state is a problem that continues to drive down production volumes.
“We need more rigs out there and more people drilling,” Hinchey said. “I’ll take anything I can get to try and get that up. More rigs and more wells means more revenue to the state and the counties.”