Effects of a Tax Exemption for Downhole Processing Equipment

The Perryman Group found that total State and local tax gains outweigh losses stemming from an exemption for downhole processing equipment within five years, and net positive effects continue to grow over time.

Although exempting equipment used in downhole processing of oil and natural gas from sales tax would initially reduce sales tax collections, it would also tend to increase exploration activity by reducing costs to drill and stimulating incremental production. Oil and gas exploration and production results in substantial gains in economic activity, not only providing opportunities for Texas businesses and workers but also generating tax receipts. In fact, The Perryman Group found that total State and local tax gains outweigh losses stemming from an exemption for downhole processing equipment within five years, and net effects continue to grow over time.

Between 2017 and 2030, the present value of the net State and local tax benefits (calculated using a 3% real discount rate as of 2016) was found to be approximately $345.8 million. In addition, incremental royalties to the State over the same period are estimated at $401.5 million (on a net present value (NPV) basis).

At the request of the Texas Association of Business, The Perryman Group recently examined the potential economic and fiscal implications of exempting equipment used in downhole processing of oil and natural gas from sales taxes. The report is available for download below.