FISCAL NOTE

Date Requested: January 15, 2016
Time Requested: 03:47 PM
Agency: Tax Department, State
CBD Number: Version: Bill Number: Resolution Number:
1734 Introduced HB4003
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 eliminate the severance taxes imposed on coal, natural gas and timber for Workers’ Compensation debt reduction purposes effective February 1, 2016, if the Governor has not yet provided the certification necessary to expire them earlier. Based on our interpretation, passage of this bill would result in the termination of the temporary severance taxes imposed on coal, natural gas and timber effective February 1, 2016. Under current Law, these taxes remain in place until the beginning of the month following the month when the Governor certifies to the Legislature that “an independent certified actuary has determined that the unfunded liability of the old fund, as defined in chapter twenty-three of this code, has been paid or provided for in its entirety.” Based on the timing of these annual reports, the next possible report containing such certification would likely be received in October of FY2017 and the earliest date for termination would fall on November 1, 2016. The provisions of this bill would accelerate that date by nine months. Severance tax funds deposited in the Old Workers’ Compensation Debt Fund (Old Fund) would decrease by roughly $39 million in FY2016 and by roughly $38 million in FY2017 under the assumption that the next actuary report would indicate full funding. In addition, under current Law, the regular timber severance tax dedicated to the Division of Forestry would be reinstituted at a rate of 1.22 percent at the time that the temporary timber severance tax is eliminated “under the authority of subdivision (g), section four, article thirteen-v of this chapter.” The provisions of this bill would terminate the temporary timber severance tax in a separate subsection and would not activate the provisions of subdivision (g). Therefore, the regular timber severance tax would not be reinstituted. At the rate of 1.22 percent, the Division of Forestry Fund would lose roughly $1.1 million per year beginning in FY2017. The Executive Budget also includes provisions to terminate the temporary severance taxes by Executive order no later than June 30, 2016, and to divert severance tax revenue collections received between March 1, 2016 and June 30, 2016 to the State General Revenue Fund. In addition, the Executive Budget contemplates the reinstitution of the regular timber severance tax at a rate of 2.78 percent effective July 1, 2016. In comparison with the Executive Budget Plan, the provisions of this bill would result in a decrease of $39 million in available FY2016 revenues designed to help close the FY2016 General Revenue Fund budget gap. In comparison to the proposed Executive Budget, funding for the Division of Forestry would be reduced by $2.4 million per year beginning in FY2017 due to the termination of all timber severance taxes. In total, losses of $39 million are expected in the remainder of FY2016. FY2017 losses could be between $39.1 million, including loss of Division of Forestry funds from the timber severance tax at 1.22 percent, and $40.4 million, including loss of Division of Forestry funds at the proposed timber severance tax rate of 2.78 percent. The table below outlines the projected revenue flow changes attributable to the provisions of this bill for FY2016 and FY2017. HB4003 Fiscal Effect Fund Proposed Change FY2016 FY2017 ($ millions) Severance Tax—Timber @ 1.22% Old Fund Terminate Temporary Severance Tax ($39.0) ($38.0) Division of Forestry No Reactivation of Regular Timber Severance Tax @ 1.22% $0 ($1.1) Net Severance Tax Changes ($39.0) ($39.1) Severance Tax—Timber @ 2.78% Old Fund Terminate Temporary Severance Tax ($39.0) ($38.0) Division of Forestry No Reactivation of Regular Timber Severance Tax @ 2.78% $0 ($2.4) Net Severance Tax Changes ($39.0) ($40.4) Additional administrative costs incurred by the State Tax Department are expected to be $11,900 for the remainder of FY2016 and $10,000 in FY2017. No additional administrative costs are expected in following years.



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 11,900 10,000 0
Personal Services 0 0 0
Current Expenses 6,400 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 5,500 10,000 0
2. Estimated Total Revenues -39,000,000 -2,400,000 -2,400,000


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


Based on our interpretation, passage of this bill would result in the termination of the temporary severance taxes imposed on coal, natural gas and timber effective February 1, 2016. Under current Law, these taxes remain in place until the beginning of the month following the month when the Governor certifies to the Legislature that “an independent certified actuary has determined that the unfunded liability of the old fund, as defined in chapter twenty-three of this code, has been paid or provided for in its entirety.” Based on the timing of these annual reports, the next possible report containing such certification would likely be received in October of FY2017 and the earliest date for termination would fall on November 1, 2016. The provisions of this bill would accelerate that date by nine months. Severance tax funds deposited in the Old Workers’ Compensation Debt Fund (Old Fund) would decrease by roughly $39 million in FY2016 and by roughly $38 million in FY2017 under the assumption that the next actuary report would indicate full funding. In addition, under current Law, the regular timber severance tax dedicated to the Division of Forestry would be reinstituted at a rate of 1.22 percent at the time that the temporary timber severance tax is eliminated “under the authority of subdivision (g), section four, article thirteen-v of this chapter.” The provisions of this bill would terminate the temporary timber severance tax in a separate subsection and would not activate the provisions of subdivision (g). Therefore, the regular timber severance tax would not be reinstituted. At the rate of 1.22 percent, the Division of Forestry Fund would lose roughly $1.1 million per year beginning in FY2017. The Executive Budget also includes provisions to terminate the temporary severance taxes by Executive order no later than June 30, 2016, and to divert severance tax revenue collections received between March 1, 2016 and June 30, 2016 to the State General Revenue Fund. In addition, the Executive Budget contemplates the reinstitution of the regular timber severance tax at a rate of 2.78 percent effective July 1, 2016. In comparison with the Executive Budget Plan, the provisions of this bill would result in a decrease of $39 million in available FY2016 revenues designed to help close the FY2016 General Revenue Fund budget gap. In comparison to the proposed Executive Budget, funding for the Division of Forestry would be reduced by $2.4 million per year beginning in FY2017 due to the termination of all timber severance taxes. In total, losses of $39 million are expected in the remainder of FY2016. FY2017 losses could be between $39.1 million, including loss of Division of Forestry funds from the timber severance tax at 1.22 percent, and $40.4 million, including loss of Division of Forestry funds at the proposed timber severance tax rate of 2.78 percent. The table below outlines the projected revenue flow changes attributable to the provisions of this bill for FY2016 and FY2017. HB4003 Fiscal Effect Fund Proposed Change FY2016 FY2017 ($ millions) Severance Tax—Timber @ 1.22% Old Fund Terminate Temporary Severance Tax ($39.0) ($38.0) Division of Forestry No Reactivation of Regular Timber Severance Tax @ 1.22% $0 ($1.1) Net Severance Tax Changes ($39.0) ($39.1) Severance Tax—Timber @ 2.78% Old Fund Terminate Temporary Severance Tax ($39.0) ($38.0) Division of Forestry No Reactivation of Regular Timber Severance Tax @ 2.78% $0 ($2.4) Net Severance Tax Changes ($39.0) ($40.4) Additional administrative costs incurred by the State Tax Department are expected to be $11,900 for the remainder of FY2016 and $10,000 in FY2017. No additional administrative costs are expected in following years.



Memorandum


The stated purpose of this bill is to eliminate the severance taxes imposed on coal, natural gas and timber for Workers’ Compensation debt reduction purposes effective February 1, 2016, if the Governor has not yet provided the certification necessary to expire them earlier. One area of consideration in the proposed bill is that West Virginia Code §11-13A-3b discontinued the timber severance tax that it imposed as long as the severance tax on timber collected pursuant to West Virginia Code §11-13V-4 was still in effect. If the timber severance tax imposed by West Virginia Code §11-13A-3b is not affirmatively re-imposed, then there is a solid argument that it has lapsed because the Legislature cannot pass laws that bind future Legislatures.



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