West Virginia Tax Department to get another chance on natural gas property tax rule
CHARLESTON — A bill considered by the House Finance Committee on Monday afternoon would give the State Tax Department another try at developing a rule for determining tax assessments for natural gas-producing property in West Virginia.
The committee recommended House Bill 4162 for passage, authorizing the State Tax Department to promulgate a legislative rule relating to valuation of property that produces oil, natural gas, and natural gas liquids. It also states the legislative rule previously filed by the State Tax Department is not authorized.
HB 4162 comes nearly one month since the West Virginia Legislature’s Rule-Making Review Committee moved to not approve an earlier legislative rule submitted by the State Tax Department last summer regarding assessments of natural-gas producing property.
House Bill 2581, passed during the 2021 legislative session, required the State Tax Commissioner to develop a revised methodology to value oil and natural gas properties based on the fair market value based on a yield capitalization model applied to gross royalty payments for royalty interest to net proceeds once royalties and annual operating costs are subtracted from gross receipts.
Instead, the emergency rule and the draft rule developed by the State Tax Department lowered the capitalization rate, eliminated the use of a three-year weighting, and left it up to the State Tax Department to use its own reasonable standard, which is undefined in the rule itself instead of the actual revenues and expenses of the producer.
By not approving the agency-submitted rule in January, the emergency rule submitted by the State Tax Department remains in place for tax year 2022. Both the emergency rule and the final rule proved to be unpopular with lawmakers, county assessors, and representatives of the natural gas industry.
The original version of last year’s HB 2581 would have resulted in a $9.1 million property tax revenue loss to county governments and county school systems, with $7 million of that cost hitting eight counties in the Northern Panhandle and North Central West Virginia.
Del. Dave Pethel, D-Wetzel, questioned State Tax Commissioner Matthew Irby why the department was unable to provide a new statement on the fiscal impact for natural gas-producing counties.
“I voted against that bill because I believed it was definitely going to hurt the 5th District, which is Wetzel and a small portion of Monongalia,” Pethel said. “I remember we were told at that time that this would be worked out. Then when I went to a meeting I believe was in December in Moundsville, the person there from the Tax Department didn’t have any idea how much (HB 2581) was going to cost those counties.”
“We didn’t do (a fiscal note) on the way the bill finally passed,” Irby said. “The fiscal note we originally produced kind of presumed a lot of things. Anything else we would do would presume a lot of things. Sometimes those presumptions are wrong … we’re still continuing to analyze those numbers. There are a lot of differing factors associated with this that makes it really hard to calculate what the particular bill itself did.”
Irby said the effect on county budgets and county school system budgets would depend on the prices of natural gas. Irby estimated tax revenue decreased by $45 million in 2022, with 75 percent of that due to the passage of HB 2581 last year.
That doesn’t county the property tax assessments for major multi-county utilities set by the state Board of Public Works. Some of the largest drops between the tentative tax assessment and the total assessment for tax year 2022 were in natural gas.
The tax assessment for natural gas pipelines dropped by $52.4 million, from $3.44 billion in tax year 2021 to $3.39 billion for tax year 2022. The assessment for underground natural gas storage dropped by $40.2 million, from $204 million in 2021 to $163.8 million for 2022.
Still, Irby said the State Tax Department did not recommend the committee approve HB 4162 Monday.
“From our perspective, we think the rule is an appropriate implementation of House Bill 2581. We would not urge rejection of that, but that is a policy decision for you all,” Irby said.
“If we accept this rule as you said you recommend, we still don’t know what kind of fiscal effect it’s going to have on the counties,” Pethel said.
The bill now heads to the House Government Organization Committee.
Steven Allen Adams can be reached at email@example.com