FISCAL NOTE

Date Requested: February 01, 2016
Time Requested: 02:09 PM
Agency: Tax Department, State
CBD Number: Version: Bill Number: Resolution Number:
1975 Introduced SB419
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Neither Program nor Fund



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    The stated purpose of this bill is to terminate taxes imposed under the Workers' Compensation Debt Reduction Act of 2005; to specify effective date of termination; to authorize sooner termination by Executive Order; to reallocate deposits of revenues with relation to the Old Fund; to authorize redirection deposits, by Executive Order, of specified revenues into the General Fund for a limited time period if budget shortfall exceeds specified amount; to delete language relating to actuarial determination and Executive certification of specified conditions; to reestablish severance tax on timber at a specified tax rate; to specify effective dates; and to specify dedication of revenues.
    
    According to our interpretation, passage of this bill would reduce the current cash flow into the Old Worker’s Compensation Debt Fund (Old Fund) from a pace of more than $250 million per year to a pace of closer to $51 million per year through two substantive changes involving personal income taxes and severance taxes beginning in late February 2016. One of the objectives behind the provisions of this bill is to more carefully target long-term Old Fund revenues to closely match long-term Old Fund liabilities. Under current Law, revenues continue to accrue to the Old Fund until “on and after the first day of the month following the month in which the Governor certifies to the Legislature…that an independent certified actuary has determined that the unfunded liability of the old fund…has been paid or provided for in its entirety” (West Virginia Code §11-13V-4(g)). The last actuarial report for the fiscal year ending as of June 30, 2015 was received in late October 2015. That report showed an unfunded liability of $90,454,000. The next report will not likely arrive until late October 2016. A potential overfunding could occur if the current annual revenue deposit pace of more than $250 million is not tapered off to a lower level in the near future. However, some ongoing revenue flow may be necessary given a highly uncertain short-term investment environment with rates of return averaging less than the long-term 5 percent assumed in the actuary’s calculations. The provisions of this bill would not alter current revenue flows from either subscriber surcharges, self-insured surcharges or Lottery funds.
    
    The provisions of this bill would terminate future flows of General Revenue to the Old Fund. Current Law requires a monthly General Revenue Fund transfer of $10.6 million in personal income tax revenues to the Old Fund during a nine month period beginning in October and ending in June of each fiscal year for a total transfer of $95.4 million per year. The provisions of this bill would terminate such transfers to the Old Fund beginning on or after February 1, 2016. The State General Revenue Fund would retain an extra $53 million in FY2016 as a result of no additional Old Fund transfers during the months of February, March, April, May and June of FY2016.
    
    Under current Law, there is provision for $30 million in annual personal income tax transfers to an Other Post Employment Benefit Trust Fund (OPEB) in each fiscal year following the year of full funding for the Old Fund until at least 2037. In addition, there would be a $5 million annual personal income tax transfer to a future benefit program not yet defined. The provisions of this bill would retain the OPEB transfers beginning in FY2017, but would eliminate the additional $5 million transfer program. Therefore, the State General Revenue Fund would retain an additional $65.4 million per year beginning in FY2017 given that revenue transfers to special funds would fall from the $95.4 million annual pace to $30 million.
    
    The provisions of this bill would accelerate the termination of the temporary severance taxes dedicated to the Old Fund from the beginning of the month following the month when the Old Fund is certified as fully funded to a sooner termination by Executive order that would occur sometime in the near future but no later than July 1, 2016. The provisions of the bill would also give the Governor executive authority to redirect deposits of these severance taxes from the Old Fund to the General Revenue Fund for a period between March 1, 2016 and June 30, 2016 if the current year budget shortfall as of December 1, 2015 is in excess of $100 million. As a result of these provisions, up to $39 million in severance tax collections could be allocated to the State General Revenue Fund between March 1st and June 30th of FY2016.
    
    The termination of the temporary severance taxes would reduce State tax revenues by an estimated $113.1 million or more per year beginning in FY2017. The elimination of the temporary 56 cent per ton of coal severance tax would reduce State revenues by an estimated $51.5 million in FY2017. The elimination of the 4.7 cent per thousand cubic feet of natural gas severance tax would reduce State revenues by roughly $58.1 million in FY2017. The elimination of the 2.78 percent timber severance tax would reduce State revenues by roughly $3.5 million in FY2017.
    
    Under current Law, the regular timber severance tax dedicated to the Division of Forestry would be reinstated at a rate of 1.22 percent once the temporary 2.78 percent tax dedicated to the Old Fund is terminated. Under the provisions of this bill, the regular timber severance tax would be reinstated as of July 1, 2016 at a rate of 2.78 percent. The Division of Forestry would receive roughly $2.4 million in timber severance tax collections beginning in FY2017 as opposed to nearly $1.1 million under current Law.
    
    The provisions of this bill would reduce the amount of revenues going to the Old Fund from a roughly $260 million pace in FY2016 to $168.4 million in FY2016 and up to $51 million in FY2017. If the actuary determines that the Old Fund is fully funded as of June 30, 2016 in a report provided in late October 2016, then the amount of funds dedicated to the Old Fund in FY2017 would be less than $51 million.
    
    The table below outlines the projected revenue flow changes attributable to the provisions of this bill.
    
    SB419 Fiscal Effect
    
    Fund Proposed Change FY2016 FY2017
     ($ millions)
    
    Personal Income Tax
    Old Fund Terminate Income Tax Transfers ($53.0) ($95.4)
    General Revenue Terminate Income Tax Transfer $53.0 $60.4
    General Revenue Terminate Transfer to Other
     Undefined Benefit $5.0
    OPEB Re-Direct Income Tax Transfers $0 $30.0
    
    Net Personal Income Tax Change $0 $0
    
    Severance Tax
    Old Fund Terminate Temporary Severance
     Tax ($39.0) ($113.1)
    General Revenue Temporary Re-Direction of
     Severance Tax $39.0 $0
    Division of
    Forestry Reinstate Regular Timber
     Severance Tax @ 2.78% $0 $2.4
    
    Net Severance Tax Change $0 ($110.7)
    
    The revenue impacts listed in the table are included in the Governor's Executive Budget.
    
    Additional administrative costs incurred by the State Tax Department would be $28,600 for the remainder of FY2016 and $8,000 in FY2017. No additional costs are expected to be incurred in any year thereafter with respect to the proposed bill.
    
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2016
Increase/Decrease
(use"-")
2017
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 28,600 8,000 0
Personal Services 0 0 0
Current Expenses 1,600 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 27,000 8,000 0
2. Estimated Total Revenues 0 -110,700,000 -110,700,000


Explanation of above estimates (including long-range effect):


    According to our interpretation, passage of this bill would reduce the current cash flow into the Old Worker’s Compensation Debt Fund (Old Fund) from a pace of more than $250 million per year to a pace of closer to $51 million per year through two substantive changes involving personal income taxes and severance taxes beginning in late February 2016. One of the objectives behind the provisions of this bill is to more carefully target long-term Old Fund revenues to closely match long-term Old Fund liabilities. Under current Law, revenues continue to accrue to the Old Fund until “on and after the first day of the month following the month in which the Governor certifies to the Legislature…that an independent certified actuary has determined that the unfunded liability of the old fund…has been paid or provided for in its entirety” (West Virginia Code §11-13V-4(g)). The last actuarial report for the fiscal year ending as of June 30, 2015 was received in late October 2015. That report showed an unfunded liability of $90,454,000. The next report will not likely arrive until late October 2016. A potential overfunding could occur if the current annual revenue deposit pace of more than $250 million is not tapered off to a lower level in the near future. However, some ongoing revenue flow may be necessary given a highly uncertain short-term investment environment with rates of return averaging less than the long-term 5 percent assumed in the actuary’s calculations. The provisions of this bill would not alter current revenue flows from either subscriber surcharges, self-insured surcharges or Lottery funds.
    
    The provisions of this bill would terminate future flows of General Revenue to the Old Fund. Current Law requires a monthly General Revenue Fund transfer of $10.6 million in personal income tax revenues to the Old Fund during a nine month period beginning in October and ending in June of each fiscal year for a total transfer of $95.4 million per year. The provisions of this bill would terminate such transfers to the Old Fund beginning on or after February 1, 2016. The State General Revenue Fund would retain an extra $53 million in FY2016 as a result of no additional Old Fund transfers during the months of February, March, April, May and June of FY2016.
    
    Under current Law, there is provision for $30 million in annual personal income tax transfers to an Other Post Employment Benefit Trust Fund (OPEB) in each fiscal year following the year of full funding for the Old Fund until at least 2037. In addition, there would be a $5 million annual personal income tax transfer to a future benefit program not yet defined. The provisions of this bill would retain the OPEB transfers beginning in FY2017, but would eliminate the additional $5 million transfer program. Therefore, the State General Revenue Fund would retain an additional $65.4 million per year beginning in FY2017 given that revenue transfers to special funds would fall from the $95.4 million annual pace to $30 million.
    
    The provisions of this bill would accelerate the termination of the temporary severance taxes dedicated to the Old Fund from the beginning of the month following the month when the Old Fund is certified as fully funded to a sooner termination by Executive order that would occur sometime in the near future but no later than July 1, 2016. The provisions of the bill would also give the Governor executive authority to redirect deposits of these severance taxes from the Old Fund to the General Revenue Fund for a period between March 1, 2016 and June 30, 2016 if the current year budget shortfall as of December 1, 2015 is in excess of $100 million. As a result of these provisions, up to $39 million in severance tax collections could be allocated to the State General Revenue Fund between March 1st and June 30th of FY2016.
    
    The termination of the temporary severance taxes would reduce State tax revenues by an estimated $113.1 million or more per year beginning in FY2017. The elimination of the temporary 56 cent per ton of coal severance tax would reduce State revenues by an estimated $51.5 million in FY2017. The elimination of the 4.7 cent per thousand cubic feet of natural gas severance tax would reduce State revenues by roughly $58.1 million in FY2017. The elimination of the 2.78 percent timber severance tax would reduce State revenues by roughly $3.5 million in FY2017.
    
    Under current Law, the regular timber severance tax dedicated to the Division of Forestry would be reinstated at a rate of 1.22 percent once the temporary 2.78 percent tax dedicated to the Old Fund is terminated. Under the provisions of this bill, the regular timber severance tax would be reinstated as of July 1, 2016 at a rate of 2.78 percent. The Division of Forestry would receive roughly $2.4 million in timber severance tax collections beginning in FY2017 as opposed to nearly $1.1 million under current Law.
    
    The provisions of this bill would reduce the amount of revenues going to the Old Fund from a roughly $260 million pace in FY2016 to $168.4 million in FY2016 and up to $51 million in FY2017. If the actuary determines that the Old Fund is fully funded as of June 30, 2016 in a report provided in late October 2016, then the amount of funds dedicated to the Old Fund in FY2017 would be less than $51 million.
    
    The table below outlines the projected revenue flow changes attributable to the provisions of this bill.
    
    SB419 Fiscal Effect
    
    Fund Proposed Change FY2016 FY2017
     ($ millions)
    
    Personal Income Tax
    Old Fund Terminate Income Tax Transfers ($53.0) ($95.4)
    General Revenue Terminate Income Tax Transfer $53.0 $60.4
    General Revenue Terminate Transfer to Other
     Undefined Benefit $5.0
    OPEB Re-Direct Income Tax Transfers $0 $30.0
    
    Net Personal Income Tax Change $0 $0
    
    Severance Tax
    Old Fund Terminate Temporary Severance
     Tax ($39.0) ($113.1)
    General Revenue Temporary Re-Direction of
     Severance Tax $39.0 $0
    Division of
    Forestry Reinstate Regular Timber
     Severance Tax @ 2.78% $0 $2.4
    
    Net Severance Tax Change $0 ($110.7)
    
    The revenue impacts listed in the table are included in the Governor's Executive Budget.
    
    Additional administrative costs incurred by the State Tax Department would be $28,600 for the remainder of FY2016 and $8,000 in FY2017. No additional costs are expected to be incurred in any year thereafter with respect to the proposed bill.
    



Memorandum


    



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov