Earlier this year, at a legislative breakfast in Charleston, representatives from two of West Virginia’s natural gas associations spoke about the economic benefits of the industry.
The state was prospering thanks to the oil and gas industry, said Charlie Burd, executive director of the Independent Oil and Gas Association of West Virginia. In 2018, the industry contributed $139 million in severance taxes, and $88 million and property taxes, Burd told the room.
“When you drive out there and see everything that’s going on, you see all those new schools and nice things; that’s the reason why,” he said.
This wasn’t the first time Burd, or other industry officials, promoted the gas industry’s positive influence. But while Burd was trumpeting the industry’s contributions to tax coffers, major producers were quietly litigating against multiple counties and state tax officials to dramatically slash those tax payments.
Those cases rose to the West Virginia Supreme Court, where lawyers for the industry argued vigorously just last month for the justices to back formulas that would curb their property tax payments. One month after Burd’s presentation, lawyers for the West Virginia Tax Department, as well as the Doddridge County Tax Department, stood in front of the justices, asking that they reverse a Business Court Division ruling on the value of natural gas wells in four counties.
In each case, the Business Court Division ruled that the state Tax Department failed to assess gas wells operated by CNX Gas Co. or Antero Resources “at their true and actual value.”
In several cases, the companies argued that this was a violation of the state constitution. The Business Court agreed with that assessment.
The Supreme Court’s decision to uphold the Business Court’s ruling could have a devastating impact on the state, county and state department lawyers argued in legal briefs and in front of the Supreme Court justices in March.
Those cuts would hurt schools and local governments, shattering their ability to provide for their citizens, opponents say. Several letters compiled into an amicus brief by the West Virginia Association of County Officials Inc. describe the potential effects the Business Court’s decision would have on services, such as the maintenance and repair of roads, police protection and emergency services.
“The issue presented to the Court by this appeal is of utmost importance to county governments of the State is the significant, or even severe, negative financial impact that would be felt by many counties of the State by loss of gas well property tax monies they presently receive as well as what they may have to pay back in the form of refunds to gas well companies if the Respondent Antero Resources Corporation were to prevail in this matter,” the brief says.
Property taxes on gas wells are determined by the state Tax Department’s formula, which was written in a legislative rule, meaning the Legislature approved the formula. The Tax Department allows companies to deduct operating expenses from property taxes. That deduction is capped at 30 percent of receipts for conventional wells (and not more than $5,000), and 20 percent of receipts for horizontal wells (not more than $175,000).
According to the Tax Department, oil and gas tax revenue amounted to about $93 million in 2017.
The companies argue that the deduction on their expenses shouldn’t be capped at all, and that the Tax Department should consider the cost of producing the revenue from gas wells.
“The case asks that the State Tax Department consider actual costs, so that a more accurate value will be determined before the property tax levy rate is applied,” Burd said in an email.
In an amicus brief, the Wetzel County Commission argued that its limited tax base — about 17,000 people — couldn’t fund the county’s needs, like its sheriff’s department, drug court program and senior citizens center.
Jail expenses have “skyrocketed as a result of the opioid, heroin and methamphetamine crisis,” leaving the Regional Jail Authority with a $60,000 bill in May 2018, the Wetzel commission wrote.
The Supreme Court’s decision could be a blow to the state’s education system, too, state schools Superintendent Steve Paine wrote in an amicus brief.
“The debate in this case over the specific legal issues may seem to some like an esoteric academic exercise,” he wrote. “Yet, the consequences of an adverse outcome will have a direct impact on students, educators and all taxpayers and citizens in this State who value the fundamental constitutional right to an education enshrined in our Constitution.”
In at least one of the cases involving Doddridge County, the state would be forced to come up with $550,000 for the county if the Supreme Court upheld the Business Court’s decision, Paine wrote. That decision could cost the Doddridge County Board of Education $4.7 million in property tax revenue otherwise used for textbooks, maintenance and employee salaries and benefits, Paine wrote.
Doddridge County taxpayers could be forced to make up the cost in bond levy taxes, Paine wrote. Other counties could lose $15 million in excess levy revenue and $2 million in regular levy collection, he estimated.
“In effect, the students and teachers in the impacted counties will become the collateral damage in this debate over the taxation of oil and gas wells,” he wrote.
But some wells are more expensive to operate than others, which is why companies challenged the valuation system, Burd said.
“Even if the State Tax Department upholds the lower court’s decision, there will still be tax money for counties. If West Virginia is known for fair taxation, then in our view, it is more likely that additional drilling will occur,” he said.
These cases illustrate a situation not all that different from the coal industry’s treatment of West Virginia, Sean O’Leary, senior policy analyst for the West Virginia Center for Budget & Policy, said in an interview. This is the way extraction industries do business, he said.
“We want to be able to do what we want, to come onto your property, but we don’t want to pay our taxes,” he said.
In a blog post last month, O’Leary outlined the ways a ruling in favor of the industry could hurt local economies. For example, Doddridge County received $15 million in oil and natural gas property tax revenue in 2017 — half of its total tax revenue. This means Doddridge County could lose “a quarter of its total property tax revenue, making it nearly impossible to avoid residential property tax increases or service cuts,” he wrote in the post.
The Supreme Court is considering two cases that challenge the way gas companies do business in West Virginia. That day in March, the court heard from EQT Corp., a Pittsburgh-based drilling company, about why it had the right to enter private property to extract gas from adjacent properties. In another case, heard in January, Harrison County residents argued that Antero Resources should compensate them for the drilling-related nuisances they endure.
In both cases, industry groups submitted arguments, touting the industry’s economic benefit to the state.
“I think they should look at this as a privilege they get to come to West Virginia and drill on our land and take our resources, and they should have to chip in and pay their property taxes to get that privilege,” O’Leary said.
The Supreme Court hasn’t ruled on any of the cases.
Al Schopp, regional senior vice president and chief administrative officer of Antero, said the taxes assessed had been paid, but that Antero wanted to ensure the “methodology is appropriate going forward.”
“We disagreed with the mathematical equation they were using and how they were applying it. It is unfortunate the process takes this long. We’re hopefully coming to the end of the process, then everyone will move forward,” he said in a statement.
Representatives from the West Virginia Oil and Natural Gas Association and CNX did not respond to requests for comment.
“The property tax, like the severance tax, is one of the most important ways that we can insure that the state and its people benefit from natural gas extraction,” O’Leary wrote. “While the economic promises of the industry have fallen short, the property tax helps make sure that local governments aren’t left holding the bag.”