By: Kristian A. Gerrets and Geoff Campbell, CPA
Prepared by Advantous Consulting on October 23, 2020
In the November 3rd election, Louisiana voters will be weighing-in on several important amendments to the Louisiana Constitution. In particular, there is an amendment that should provide a positive change when it comes to the way oil and natural gas wells are valued for ad valorem tax purposes and an amendment that provides local taxing authorities the ability to directly negotiate ad valorem tax exemptions with qualifying manufacturers located within their taxing jurisdictions.
Constitutional Amendment No. 2 (Amending Article VII, Section 4(B)) – Permits ad valorem (property) tax assessors to take into consideration the presence or production of oil or gas when calculating the ad valorem tax assessment on oil and natural gas wells in Louisiana.
Currently, local ad valorem (property) tax assessors cannot consider the presence or production of oil or gas when determining the fair market value of oil and natural gas wells for the purposes of calculating their property tax assessment. Passed during the 2020 Regular Session, Act 368, which was the product of a collaborative effort between assessors and industry representatives from the state’s oil and gas community, proposed to amend the Louisiana Constitution and allow for a major (and positive) change in valuation methodology.
When calculating their ad valorem tax assessments, parish tax assessors currently employ various methods of valuation, such as utilizing the replacement cost or market value of the wells. However, many within the state believe the results of these approaches lack accuracy and consistency. This amendment would allow for the Louisiana Tax Commission, the regulatory body charged with overseeing the fair administration of property tax, to create rules as to how the presence or production of oil or natural gas will be factored into the methods currently being used by local ad valorem tax assessors.
The likely effect of this amendment will be to ultimately increase the ad valorem tax assessments on newer, high producing oil and natural gas wells and decrease the ad valorem tax assessments on older, low producing oil and natural gas wells. However, the potential change is being welcomed by both assessors and industry representatives alike, as the consensus is that the local assessors are finally being provided the ability to tap into all relevant data necessary to calculate a more accurate and consistent property tax assessment.
Constitutional Amendment No. 5 (Adding Article VII, Section 21(O)) – Empowers local governments to enter into cooperative endeavor agreements with qualifying manufacturers in order to establish an ad valorem tax exemption and establish a payment in lieu of tax (PILOT) financing arrangement.
During the 2020 Regular Session, the Louisiana Legislature passed Act No. 370 which proposed a Constitutional amendment that would provide for an ad valorem property tax exemption for certain property subject to a cooperative endeavor agreement requiring payments in lieu of taxes (PILOT). The application of this exemption is limited to property of a new or expanding manufacturing establishment. The amendment seeks to offer an alternative to the state-administered Industrial Tax Exemption (“ITE”) Program, which offers participants an 80% ad valorem tax abatement for a maximum period of 10 years. Alternatively, the cooperative endeavor agreements available through this amendment will provide for “front-loaded” financing terms which provide much needed operating capital to local governments sooner than the abated ad valorem tax payments associated with the ITE Program.
In order to be eligible for the cooperative endeavor agreement, participating manufacturers must meet all of the same qualifications as required by the ITE Program. However, unlike existing PILOT agreements, the agreements that are made available through this amendment do not require that the manufacturer transfer title to the newly acquired property to the local jurisdiction with whom it is entering the agreement. Multiple business organizations and local government groups have thrown their support behind this amendment and feel it is in the best interest of the state’s business community as well as local taxing jurisdictions of Louisiana.
The team of knowledgeable professionals at Advantous Consulting have been maintaining a close eye on these legislative developments and are prepared to assist you should you have any questions or concerns with regard to these Constitutional amendments.