You could say Monday morning’s reconvening of Louisiana’s full House of Representatives was a live metaphoric illustration of “unmasking motives,” as a majority of the Republican majority in the chamber declined to wear anti-viral masks while congregated on the House floor.
While the vast majority of the full House business consisted of reading in new resolutions and assigning bills to committees, it was announced the two money panels – Ways and Means, concerned with the flow of state income, and Appropriations, which deals with spending that income – would meet simultaneously, upon adjournment of the complete body. Neither meeting had appeared on the main legislative website’s daily schedule until moments after they were announced on the House floor, when poof! There they were, complete with agendas.
Long known to state Capitol insiders as the “Ways to be Mean” committee, the panel charged with first vetting of tax measures, as well as composing the annual capital outlay bill, is chaired this term by Rep. Stuart Bishop (R-Lafayette). Eleven members are Republicans: six are Democrats.
Monday, they spent nearly half their total meeting time chewing on HB 506, by Rep. Phillip DeVillier (R-Eunice). Generally, the bill proposes a gradual reduction in the state severance tax on oil, a half-percent per year for the next eight years, but as amended it now includes price triggers that would cut oil and natural gas severance taxes by 80-percent, possibly as soon as the July 1 start of this next fiscal year. Currently, Louisiana severance tax is 12.5% of the price per barrel of oil at the time that oil is pumped out of the ground.
DeVillier is the legislative author of the bill, but it quickly became clear that Gifford Briggs, president of the Louisiana Oil and Gas Association (LOGA), is the true author. (Briggs is the ventriloquist here, with DeVillier as his dummy.)
Briggs told the committee, “We did a survey of our members that we’re actually releasing today. Four out of five of the producers that we have in our membership right now responded they have already taken steps to shut in production. The State Mineral Board is already looking at what it can do, because it knows production is going to be shut in. When production is shut in, royalty checks aren’t being distributed. And up in north Louisiana, south Louisiana, there are thousands of people getting royalty checks every month right now that they’re using to take care of their family because maybe they’re not working because jobs are closed down. So if we can keep the wells flowing, then we can continue to generate some severance tax for the state, we can continue to generate royalty checks and we can continue to have people that work. If we don’t, we are going to see massive shut in across the state. And twelve-and-a-half percent of zero production is zero dollars for the state and everyone else.”
(Here comes the punchline…spoiler alert: It’s about jobs.)
“We’ve got billions in wages that are going to be lost because of the crisis the industry’s facing,” Briggs added, before coming as close as he dared to spelling out the real reason for the plummet in the price of oil. “The crisis we are facing is huge, and it’s not gonna go away when everybody can go back to work because of the challenges of the global demand issue.”
Rep. Matthew Willard (D-New Orleans) had some sharply pointed questions for Briggs and DeVillier.
“Did we suddenly become the state with the highest severance tax rate in the country?” Willard wondered.
“Uh, no.,” Briggs replied. “We’ve had the highest severance tax rate in the country for a long time, which is one of the reasons why we see declining oil production, declining investment, declining jobs, and declining revenues in this state.”
“Have you heard from any oil and gas companies that would potentially relocate to Louisiana or expand their production capabilities because of this bill?” Willard asked
Briggs squirmed a bit before answering, “Um, uh, this legislation is not going to be enough to make a company relocate their headquarters here. It will make companies invest. And it will make companies that are here today that are producing oil – especially in this downturn – have the ability to continue producing it, uh, at such low prices.”
Willard then turned directly to DeVillier. “Looking at the fiscal note for this bill, we’re looking at more than $10-million lost in revenue in the first year, and after five years, we’re looking at more than a hundred-million dollars in lost revenue. How do you propose that we fill that budget gap? As the state responds to the COVID-19 pandemic, we are dealing with a budget that I would suggest is at best precarious. So is it wise right now to move forward with a bill that will remove tens, hundreds of millions of dollars from the state of Louisiana?”
“That’s a great question and something that we certainly need to be aware of,” DeVillier responded, with a grin. (He was not wearing a mask over his face, though he had a bandana tied around his neck.) “How do we deal with the loss? Certainly the fiscal note says that we will have a loss. But I am of the opinion that when we tax something less, we will create more. So we will produce more. More jobs create income, income creates sales taxes. Possibly people buy homes which means property taxes. Those things build the tax base. We’re going to produce much more revenues. And so when you look at the fiscal note dealing with just the severance tax changes, I don’t believe it tells the whole truth.”
(Yes, indeed. Don’t trust the legislature’s fiscal experts. Don’t believe the numbers or facts.)
Briggs jumped in, then, saying, “We’re the highest paying industry in the state. Our average wages are the highest in the state. And so when we talk about losing the 23,000 workers that are directly employed in the oil and gas industry, according to what our members are telling us in the next 90 days, is 2.3 billion in lost wages – because it is uneconomical to produce oil and natural gas.”
“Are other states experiencing similar decreases in production and exploration right now, or is this a unique problem just for the state of Louisiana?” Willard asked.
“We’re seeing a massive shutdown and shut in of production across the country,” Briggs admitted. “It is a global crisis that we are facing, where the value of the product that we sold has decreased by 85-percent. That’s the challenge that we’re facing that’s not going to be going away.”
“The severance issue – how long has it been around?” Rep. Buddy Mincey (R-Denham Springs) wanted to know. “How long have we been tryin’ and how long has oil and gas been tryin’ to bring those rates down now?”
“We haven’t really looked at oil severance before this, saying we need to bring it down,” Briggs admitted. “We’ve seen such a shift to natural gas that we haven’t really looked at it. We hadn’t really started to lose our aggressive oil production like we have in the last four years. And so for our members it continued to bubble up and they asked us to address it. I think they would like it to be a lot lower than eight-and-a-half percent, but trying to do it in a manner that would ease the transition for the state was the best we thought we could do at this time.”
“I hear it will increase production. How will we gauge the results of this, reducing the severance? How does the industry plan to come back and say, yes, it did increase production by so much?” Mincey asked.
“Right now, we’ve got one rig drilling for oil. If we start lowering the rate, and we can move back to two rigs, then we’re moving in the right direction and restoring some confidence,” Briggs replied.
Weak factual support and spurious claims notwithstanding, the Ways and Means Committee renewed their allegiance to the oil and gas industry, sending the severance tax-cutting bill to the House floor with a vote of 14-3 in favor.
Meanwhile, across the hall in Appropriations, committee members received abbreviated previews of the possible revenue changes that will be detailed at next Monday’s meeting of the Revenue Estimating Conference. A fair portion of the more intensive attention focused on mineral revenues, and the state’s oil and gas industry as a whole.
Dr. Stephen Barnes, who replaced longtime REC member Dr, Jim Richardson as the economist designee on the panel last fall, gave the Appropriations Committee a brief rundown on the anti-COVID measures’ affect on unemployment claims, drilling down on the mining sector numbers, which include oil and gas workers.
“We know the oil and gas industry has taken a severe hit over the last month or so, and that’s something that hasn’t even really started to show up in the unemployment data yet,” Barnes said.”By regional perspective, Houma and Lafayette are on high alert, although they still haven’t seen real effects of the slowdown in oil and gas present themselves to the extent that we expect they will.”
(Note: this does coincide with what Briggs had been telling the committee across the hall – that exploration and production are preparing to shut down.)
Legislative Fiscal analyst Greg Albrecht went next, telling the budget panel by way of preface, “I’ve been here nearly 35 years, and this is the strangest situation I’ve ever seen. I can’t give complete numbers until the REC meeting May 11th, but I can tell you, without a doubt, that the forecast will go down, and the order of magnitude here is going to be substantial.”
Albrecht ticked off the larger components of Louisiana’s income streams, saying, “Sales tax will drop off. Income tax will drop off. And mineral revenue will be the biggest drop off.”
Asked if there was any hope of that changing soon, Albrecht was blunt.
“Mineral revenue may start recovering, but not until the price of oil gets close to $50 per barrel. We need demand to increase in order for the price to recover, but there’s a large inventory sitting out there. And we – the U.S. and the state of Louisiana – are part of the oversupply problem.”
There it is – what DeVillier didn’t understand and what Briggs would not say as clearly. The problem, created primarily by Saudi Arabia and Russia getting into an oil pricing limbo contest (how low can you go?), increased the worldwide supply of oil dramatically. That became a glut as the COVID pandemic spread and demand dropped precipitously, with much of the world’s population self-isolating to slow the contagion.
Until it is safe to move about freely again, we won’t be needing all the crude oil already pumped out of the ground and stored in tanks and tankers, or sitting, unflowing, in pipelines. If HB 506 passes, Louisiana will end up sacrificing much more than a gradual move toward reducing its mineral revenues by one third over the next eight years. Based on the wobbles of current oil prices under $30 per barrel, it will be the loss of 80 percent of the revenue from of what little production remains.
So, on second thought, DeVillier may have been right when he said, “When you look at the fiscal note dealing with just the severance tax changes, I don’t believe it tells the whole truth.”