FISCAL NOTE

Date Requested: February 16, 2016
Time Requested: 04:26 PM
Agency: Tax Department, State
CBD Number: Version: Bill Number: Resolution Number:
2685 Introduced HB4570
CBD Subject: Taxation


FUND(S):

General Revenue Fund, State Road Fund

Sources of Revenue:

General Fund,Other Fund State Road 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 extend the current tax paid by extraction industries for the purpose of funding the State Road Fund and providing a tax credit from the tax for production of value-added products that employ state workers.
    
    Based on our interpretation, the proposed bill would make two distinct changes to current Law. The first would involve extending the temporary severance taxes on coal, natural gas and timber, which are currently funding the Old Workers’ Compensation Debt Fund (Old Fund) once debt to the Old Fund is fully repaid. There are a number of considerations when estimating this revenue impact. Timing of the Old Fund payoff and thus termination of the temporary severance taxes, based on current Law and anticipated actuarial assessment, is expected to occur in late October 2016. Assuming these conditions are met at this time, taxes on November production would be collected in December and would thus result in seven months of collections transferred to the State Road Fund in FY2017. This partial-year amount is estimated to be roughly $65.3 million. Under these circumstances and considering projected FY2018 production, revenues are expected to be $115.0 million in FY2018.
    
    However, the Executive Budget includes provisions to terminate these temporary severance taxes no later than June 30, 2016 and to divert collections to the General Revenue Fund for the remainder of FY2016. The Governor’s budget also includes provision to reinstate the severance tax on timber, once the temporary taxes are terminated, at a rate of 2.78 percent. These collections, as provided in the Governor’s budget, would benefit the Division of Forestry fund. As written, these bills present conflicting use of temporary severance tax collections.
    
    The second change would create a tax credit against the Personal Income Tax or Corporation Net Income Tax paid by eligible taxpayers (i.e., persons, firms, partnerships, corporations or other entities subject to the temporary severance tax) for promoting employment in the conversion of raw materials to value-added products. As written, a revenue estimate cannot be determined for the proposed bill as it does not define the basis for the credit, what value-added products may be considered, how many hours new full-time employees would spend training for or producing value-added products and what maximum or minimum employment requirements might be instituted, among others. Further, while the proposed bill benefits the State Road Fund by continuing to impose and redirecting funding of the temporary severance taxes, the tax credit created in §11-13DD-1 et seq. applies against the Personal Income Tax and the Corporation Net Income Tax, thus applying a burden on General Revenues.
    
    Revenues related to continuing the temporary severance taxes on coal, natural gas and timber are expected to benefit the State Road Fund by approximately $65.3 million in FY2017 and $115.0 million in FY2018. It is important to note this estimate does not include the impact of the tax credit on the General Revenue Fund for generating employment for the production of value-added products from raw materials.
    
    Additional administrative costs incurred by the State Tax Department are expected to be $44,100 in FY2017 and $35,100 for each subsequent year. No additional administrative costs are expected for the remainder of FY2016.
    
    



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 0 44,100 35,100
Personal Services 0 31,800 35,100
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 5,500 0
Other 0 6,800 0
2. Estimated Total Revenues 0 65,300,000 115,000,000


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


    Based on our interpretation, the proposed bill would make two distinct changes to current Law. The first would involve extending the temporary severance taxes on coal, natural gas and timber, which are currently funding the Old Workers’ Compensation Debt Fund (Old Fund) once debt to the Old Fund is fully repaid. There are a number of considerations when estimating this revenue impact. Timing of the Old Fund payoff and thus termination of the temporary severance taxes, based on current Law and anticipated actuarial assessment, is expected to occur in late October 2016. Assuming these conditions are met at this time, taxes on November production would be collected in December and would thus result in seven months of collections transferred to the State Road Fund in FY2017. This partial-year amount is estimated to be roughly $65.3 million. Under these circumstances and considering projected FY2018 production, revenues are expected to be $115.0 million in FY2018.
    
    However, the Executive Budget includes provisions to terminate these temporary severance taxes no later than June 30, 2016 and to divert collections to the General Revenue Fund for the remainder of FY2016. The Governor’s budget also includes provision to reinstate the severance tax on timber, once the temporary taxes are terminated, at a rate of 2.78 percent. These collections, as provided in the Governor’s budget, would benefit the Division of Forestry fund. As written, these bills present conflicting use of temporary severance tax collections.
    
    The second change would create a tax credit against the Personal Income Tax or Corporation Net Income Tax paid by eligible taxpayers (i.e., persons, firms, partnerships, corporations or other entities subject to the temporary severance tax) for promoting employment in the conversion of raw materials to value-added products. As written, a revenue estimate cannot be determined for the proposed bill as it does not define the basis for the credit, what value-added products may be considered, how many hours new full-time employees would spend training for or producing value-added products and what maximum or minimum employment requirements might be instituted, among others. Further, while the proposed bill benefits the State Road Fund by continuing to impose and redirecting funding of the temporary severance taxes, the tax credit created in §11-13DD-1 et seq. applies against the Personal Income Tax and the Corporation Net Income Tax, thus applying a burden on General Revenues.
    
    Revenues related to continuing the temporary severance taxes on coal, natural gas and timber are expected to benefit the State Road Fund by approximately $65.3 million in FY2017 and $115.0 million in FY2018. It is important to note this estimate does not include the impact of the tax credit on the General Revenue Fund for generating employment for the production of value-added products from raw materials.
    
    Additional administrative costs incurred by the State Tax Department are expected to be $44,100 in FY2017 and $35,100 for each subsequent year. No additional administrative costs are expected for the remainder of FY2016.
    
    
    



Memorandum


    The stated purpose of this bill is to extend the current tax paid by extraction industries for the purpose of funding the State Road Fund and providing a tax credit from the tax for production of value-added products that employ state workers.
    
    The proposed bill raises a number of concerns in that it is vague and will be difficult to administer. Although the bill changes the funding purpose of the additional severance taxes collected under West Virginia Code §11-13V-1 et seq., the bill retains the title “Workers Compensation Debt Reduction Act.” This title does not address the effective date, that the credit is against personal income tax or corporation net income tax liabilities or that the credit relates to training for or production of value-added products, among others.
    
    The bill does not amend §17-3-1 to include the taxes collected under the proposed legislation as a source of funding for the State Road Fund. Further, although the changes to Article 13V state that industries paying the Workers’ Compensation tax are eligible for the proposed tax credit in this bill, the credit is actually valid against personal income tax or corporation net income tax liabilities. The proposed bill also only states that the taxpayer must be “subject to” the tax under §11-13V-4 to be eligible and makes no indication that the taxpayer must have paid the tax.
    
    The definition of value-added products is vague and leave much room for interpretation, which could cause issues in administering the tax. Further, the bill does not define what constitutes as a new or full-time employee. The bill does not state how many employees must be hired in order to qualify, and does not set a maximum number of new employees qualifying for the credit that may be hired in a given year. There is no indication that any additional employees must be hired beyond those the taxpayer would have normally hired in the credit’s absence. It is also unclear how many entities are subject to the additional severance tax and also make value-added products.
    
    With respect to the requirement structure of the credit, the wording surrounding what task(s) new employees must be do for each hour of eligible credit is ambiguous. The proposed bill references a tax credit schedule although one does not appear to be attached. And, as there is no tax paid pursuant to this section despite the bill stating the credit amount is “up to the maximum tax paid pursuant by the taxpayer to this section,” one might assume that the maximum credit permitted up to the amount of taxes paid in personal income tax or corporation income tax is valid.
    



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