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A new documentary, Looting Louisiana, charts the state’s shrinking audits of oil and gas taxes 

click to enlarge Filmmaker Mike Stagg has produced a documentary titled Looting Louisiana, which he says highlights the state's plummeting oil and gas tax collections and royalty payments.

PHOTO COURTESY WWL-TV

Filmmaker Mike Stagg has produced a documentary titled Looting Louisiana, which he says highlights the state's plummeting oil and gas tax collections and royalty payments.

Higher education, health care and solar and film tax credits are all on the chopping block amid Louisiana's big budget crisis. Meanwhile, tax exemptions for oil and gas drilling, which have cost state coffers $2.4 billion since 2008, have gone unscathed. And this week marks the annual observance of Oil and Gas Industry Day at the State Capitol on Monday, May 4.

  That has environmental activist and filmmaker Mike Stagg seething.

  "If you're getting $2.4 billion in severance tax exemptions and that's not enough for you in an era when other people are getting cut ... that's greed," said Stagg, a former gubernatorial and congressional candidate from Lafayette.

  Stagg released a documentary last week titled Looting Louisiana, which shines new light on a series of legislative audits and revenue reports that sounded an alarm years ago about plummeting oil and gas tax collections and royalty payments.

  It's unclear how much revenue may have been lost, but Stagg pegged the potential amount at "hundreds of millions of dollars" — based on reports by the Legislative Auditor. The auditor's reports found that tax audits of energy companies that previously had flagged tens of millions of dollars in unpaid taxes each year all but stopped for a period of about three years.

  Most eye-popping was the 2013 Legislative Auditor's report that found a 99.8 percent drop in unpaid severance taxes identified via state tax audits between 2010 and 2012 — from $26 million to a little more than $40,000.

  Meanwhile, the state collected significantly less in total severance taxes for oil and gas production on private lands, in spite of an explosion in shale gas drilling. In 2010, revenue from severance taxes fell by $154 million, a 17 percent decrease from the previous year.

  What changed?

In 2010, the responsibility for performing those severance tax audits was moved from the Louisiana Department of Revenue (LDR), which handles tax collections, to the Department of Natural Resources (DNR), which regulates the oil and gas industry and hands out leases for state-owned lands. Critics have complained for years that the energy industry enjoys far too cozy a relationship with DNR.

  Stagg says the decline in audits shows collusion between the regulators and the regulated, but DNR spokesman Patrick Courreges says it's nothing so nefarious. Courreges said a special Streamlining Commission recommended DNR take over severance tax audits on private lands because it already was handling audits of oil fields on public lands that pay state royalties.

  "On paper it seemed like it should work, but the two functions just didn't mesh," Courreges said.

  The problems arose because DNR field auditors were looking in the wrong places. They tacked severance tax audits on top of the royalty audits they already were performing, mostly in south Louisiana, where the majority of state-owned water bottoms are located. But virtually all of the private oil and gas activity was elsewhere at that time — in the booming Haynesville Shale in northwest Louisiana, the Delhi Field in northeast Louisiana and the Austin Chalk and Wilcox fields in central Louisiana.

  "The royalty audits take longer and were slowing down the severance tax audits," Courreges said.

  So, after three years under DNR, the severance tax audits were handed back to LDR — and annual severance tax revenues began to climb again.

  Those numbers strongly suggest that the state has left millions on the table. Some state lawmakers want to force the issue by demanding audits for the years that DNR handled oil and gas severance tax audits, but legislation to do that died on the House floor in the final days of last year's legislative session.

  Time is of the essence. The state faces a three-year "prescriptive period" (expiration date or statute of limitations) for collecting unpaid taxes. The three-year period typically encompasses an entire tax year and starts from the date that tax returns were filed. Thus, if a tax payment for the last quarter of 2011 was made in 2012, the entire year of 2011 can still be audited and unpaid taxes collected — this year. Taxes owed for 2010 are no longer collectible, unless no return was filed or there was a deliberate attempt by the taxpayer to under-report.

  If no audits (or too few of them) are conducted, the state will never know how much money has gone uncollected. For years, LDR officials have asked lawmakers for money to hire more auditors, citing the relatively low cost of auditors compared to how much more money they pull in for the state.

Most eye-popping was the 2013 Legislative Auditor's report that found a 99.8 percent drop in unpaid severance taxes identified via state tax audits between 2010 and 2012 – from $26 million to just over $40,000.

  There is no such expiration date for royalty payments due for oil and gas production on state-owned lands — and LDR does not need specific legislative authorization to go back and conduct audits for previous years.

  In that regard, though, there are also questions about which companies are getting audited for royalty payments. For example, the percentage of publicly owned oil fields audited had decreased from 23 percent to 12.75 percent while DNR also was handling the severance tax audits, the legislative auditor found. But it rebounded to hit a new high of 25 percent last year, Courreges said.

  The explanation? The legislative auditor directed DNR to audit some of the smaller players — not just the bigger companies — but when the DNR auditors did that, they didn't have the resources to conduct robust audits on the big boys. "We were auditing more of the smaller companies, but it came at the expense of auditing that 20 percent of them who pay most of the royalties," Courreges said.

  Courreges added that he could understand why some people would wonder if the historically cozy relationship between the state and the oil and gas industry was rearing its head again.

  "I know folks like to look at that, and Louisiana's got its history, but it ain't Huey Long and Standard Oil anymore," Courreges said. "I understand the skepticism. But the findings in the audit have been a guiding light for us ... to make things better."

Some legislators are concerned that oil and gas lobbyists continue to have too much influence over the process. State Sen. Rick Gallot, D-Ruston, proposed a resolution last year, based on the legislative audit findings, to urge the state agencies to perform a study and do everything possible to verify that all severance taxes and royalties were being collected.

  Gallot's resolution passed unanimously in the Senate but was killed in the House near the end of the session. "The lobbyists who are paid to protect the oil and gas industry, they are the ones who were responsible for killing it," Gallot said.

  Gifford Briggs of the Louisiana Oil and Gas Association said industry lobbyists had nothing to do with killing Gallot's resolution — and nothing to do with the state's auditing issues. He said the industry is always ready to pay its fair share of taxes and royalties, but reductions in recent years have had more to do with changes in production.

  "We've got a severance tax on oil of 12-and-a-half percent, the second highest in the nation, but if most of our production is moving over to gas, which it is because of the Haynesville Shale, you're going to see a dropoff," Briggs said, noting that natural gas severance taxes fluctuate with the commodities market.

  Briggs added the industry's tax exemption for horizontal drilling, a big part of the shale gas and fracking boom, didn't cost the state much money because those types of wells operated for relatively short periods of time. They never last the two years the exemption is available on each well, he said.

  On that front, Stagg also complains that oil and gas companies have been slow-walking their tax exemption applications because the state had been required to pay judicial interest of 4 percent on the rebates. Four percent is substantially higher interest than banks are paying these days on savings and money market accounts.

  The longer it took for a company to claim its rebate, the more interest the state would have to pay on top of the rebate itself. The legislative auditor found that the state overpaid $13 million in severance tax refunds from 2010 to 2012, then paid $24 million in interest on top of that.

  "One of the problems they found was that oil and gas companies were essentially gaming the severance tax process," Stagg said.

  Courreges says that has been changed, so that now the companies must pay the high judicial interest on unpaid taxes and the state pays money market rates on delayed severance tax rebates.

  In the current fiscal climate, Gallot says, there's growing political will to hold the industry and the regulators more accountable — and possibly to get rid of some tax exemptions.

  "Now I think it's more critical than it's been in recent times because our budget situation is so critical," Gallot said. "The companies have done exceptionally well [because of the Haynesville Shale], but the state and people have not done so well."

This year, state Rep. Joe Bouie, D-New Orleans, has picked up that mantle. His House Concurrent Resolution 45 would direct the legislative auditor to conduct audits to identify severance taxes owed but not yet paid to the state for fiscal years 2011 through 2014 — and report its findings by January 2016. The resolution also would require annual audits going forward. Finally, it would require DNR, which maintains a comprehensive database of oil and gas activity in the state, to send quarterly reports of oil and gas production to LDR so the tax-collecting agency can verify the accuracy of the data provided by the oil and gas companies.

  Bouie cites a "disconnect" between state agencies responsible for auditing and collecting back taxes and a "dysfunction" at DNR with regard to reporting the amount of oil and gas produced in Louisiana.

  "Given the $1.6 billion deficit that we face, we should be looking for ways to generate additional revenue and to collect monies owed to the state," Bouie says. He adds that the state could reap a windfall "to the tune of a half-billion dollars" for the years 2011 through 2014 if the audits are thorough.

  "We need audits of those years and for the years going forward to get an accurate gauge of what's owed," he says. "We also need current reports for what's being extracted so that we can know that we're collecting all taxes that are owed going forward."

— This story was originally reported by our newsgathering partner WWL-TV. An earlier version of this story originally appeared on WWL-TV's website. To see David Hammer's video report, visit www.wwltv.com.

— Clancy DuBos contributed to this story.

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