By Aurora Flores
TAC Legislative Staff
SB 1505 by Sen. Carlos Uresti (D-San Antonio), which is identical to HB 889 by Rep. Tryon Lewis (R-Odessa) and relates to the valuation of oil and gas properties, is on its way to the governor. If signed into law, this legislation will replace the revenue-estimating comptroller’s forecast with a market-based methodology to more accurately value properties.
Uresti and Lewis both introduced legislation this session to correct the inherent undervaluation of oil and gas and utilize market-based methodology. The legislators conducted weeks of workgroup meetings with industry, appraisal and county representation. County officials also testified in the House Ways & Means and the Senate Finance committees, after which the bills were voted favorably from committee and continued through the legislative process. While SB 1505 does not meet all of the counties’ concerns, the legislation is a definite improvement over the present statute.
Counties with oil/gas properties should write the governor and respectfully request that he sign the bill in order to fairly value these properties for ad valorem tax purposes. His address is:
The Honorable Rick Perry
Governor of Texas
PO Box 12428
Austin, TX 78711
In 1993, the Tax Code (Sec 23.175), was amended to require that the formula for the valuation of oil and gas properties include the average price of oil and gas for the past year, causing appraisal values to lag behind recent market results and allowing for severe changes in annual appraisals.
In 2007, HB 2982, (80R), altered section 23.175 of the Tax Code to add a forward looking component, the Comptroller of Public Accounts’ (CPA) estimate of the price of oil and gas for the upcoming year. The change requires appraisers to use forecasted and average historical prices published by the CPA for determining future product values when appraising oil and gas properties — whether prices are going up or down.
At that time, the explanation given was that the bill’s changes would level the wide variations caused by the use of the past year’s prices with no significant effect on local or state revenues. After the bill became law, the CPA determined that HB 2982 (80R) required the use of the state severance tax revenue estimate methodology. In 2008 and 2009, the CPA’s conservative estimates severely underestimated the actual price of crude oil resulting in a shift of the tax burden to other property owners and a loss of revenue to the state and local governments. The CPA determined that legislative changes would be necessary to change the formula enacted from the 80th Session.
During the interim, both the Senate Committee on Finance and the House Committee on Ways & Means studied the undervaluation issue and heard from all interested parties. In the interim report, Senate Finance recommended that the Legislature eliminate the requirement that the forecasts be based on revenue estimating methodology to enable the CPA’s office to better focus on incorporating market value methodology to its estimates.
Current Bill Language
During the past three years, the CPA produced an estimated forecast that has averaged approximately 35 percent below the actual market price. This resulted in the undervaluation of those properties and forced counties to either shift this tax burden to other taxpayers by increasing the tax rate or reduce their budgets and services.
The CPA office and the revenue estimating methodology have been removed from the bill language. The enrolled legislation will use the price estimated for the coming year in the EIA (US Energy Information Administration) Annual Energy Outlook at the full value to determine the price adjustment for the first year. This “price adjustment” will be calculated by the chief appraiser, using the forecasted price for current calendar year and dividing by the estimated price for oil for the previous calendar year. The escalation rate for future years is based on the Producer Price Index. Escalation of the price is capped after year six.
From analyses by Texas Association of Counties and appraisal experts, an immediate benefit to counties with oil-producing properties is expected if this bill becomes law. For counties with gas-producing properties, a benefit is expected when the market recovers from its present depressed condition.
TAC staff will continue to monitor the progress of SB 1505 as it makes its way to the governor’s desk for his approval. For more information on this article, please contact Aurora Flores at or (800) 456-0519.