By Aurora Flores
and Tim Brown
Senior County Analyst
Senate Finance is expected to hear SB 1505, the bill written to address the oil and gas undervaluation problem, on Monday, April 4.
The County Judges and Commissioners Association of Texas and Texas Association of Counties met with stakeholders to work out the best possible language in the proposed legislation, which was authored by Sen. Carlos Uresti (D-San Antonio). Rep Tryon Lewis (R-Odessa) has authored similar legislation in the House. While this version does not meet all of the counties’ concerns, it is a definite improvement over the present statute.
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 CPA’s 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 Comptroller of Public Accounts (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.
Proposed Bill Language
Uresti and Lewis have introduced legislation to correct the inherent undervaluation and utilize market-based methodology. These legislators have conducted workgroup meetings for several weeks with industry, appraisal and county representation. It appears that a consensus is near on an agreed bill.
The CPA office and the revenue estimating methodology have been removed from the proposed bill language. The proposed legislation would 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 (PPI) rate and would be capped at an additional five years.
For more information, please contact Aurora Flores at or (800) 456-5974.