FISCAL NOTE
Date Requested: February 17, 2017
Time Requested: 01:23 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2391 |
Introduced |
SB341 |
|
|---|
| CBD Subject: |
|
|---|
|
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 establish a West Virginia business growth in low-income communities tax credit.
According to our interpretation of the proposed bill, a tax credit is given to a qualified community development entity that makes a qualified equity investments or to a subsequent holder of the qualified equity investment. This credit is calculated annually by multiplying the purchase price paid to the qualified community development entity for the qualified equity investment by the applicable percentage for the credit allowance date, which is 0 percent for the first three credit allowance dates and 15 percent for the next four credit allowance dates. The annual credit allowance may be used to offset the entity’s state insurance premium tax liability for tax periods on or after the credit allowance date.
It is difficult to determine the level of investment in low-income communities by qualified community development entities. However, given that the bill authorizes the Tax Commissioner to certify a maximum of $60 million in qualified equity investments, it stands to reason that General Revenues would not be affected for three years and thereafter could be reduced by no more than $9.0 million per year for new applicants for a total of $36.0 million over the life of this proposed program. However, the perpetual carryforward provisions of the bill could alter the annual revenue impact year-to-year; the potential or magnitude of this occurring cannot be determined.
The federal New Markets Tax Credit (NMTC), authorized in the Community Renewal Tax Relief Act of 2000, is a comparable credit to the one proposed in this bill that is slated to expire on December 31, 2019. Over an 11-year period from 2003 to 2014, approximately $7 billion in NMTC allocation had been awarded nationwide. This figure includes an approximate $49 million to West Virginia communities. In 2013, the Urban Institute reviewed NMTC projects started through 2007. Of those surveyed, 93 percent of projects obtained “advantageous financing” and 84 percent develop real estate, while only 53 percent started up or supported businesses and 9 percent attracted new investors to low-income communities.
Review of the NMTC suggests there exists an imbalance with the federal and other public funds provided to eligible entities compared to the amount of private-sector funding invested in qualifying projects. Further, the presence of other public funding for such projects duplicates the federal subsidy relative to private funding. According to the U.S. Government Accountability Office, of NMTC projects originating from 2010 to 2012, approximately 33 percent received other federal funding alone and 62 percent received public funding from federal, state, or local sources.
There are a number of concerns with respect to the proposed legislation. The tax against which this credit applies is administered by the Insurance Commission, not the State Tax Department. Requiring the Tax Commissioner to, essentially, administer a portion of the Insurance Premium Tax imposes unnecessary complexity on these departments. This in turn introduces difficulty for the Tax Department specifically, as it currently lacks capacity sufficient to adequately certify the credit and monitor activity. The Tax Department would incur substantial costs to bring in staff with necessary qualifications and provide training and support for the roles associated with the administration of a venture capital program. From a revenue perspective, the proposed bill would ultimately reduce collections by up to $36 million over a period of several years while insurance premium tax collections dedicated to volunteer fire departments and municipal pensions would be held harmless. The projected fiscal impact depends on the ability of the venture capital company to transfer available tax credits to insurance companies subject to the West Virginia Insurance Premium Tax.
Additional costs incurred by the State Tax Department to administer this bill would be $5,000 for the remainder of FY2017 and $100,000 per year beginning in FY2018 and for each year thereafter.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2017
Increase/Decrease
(use"-") |
2018
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
5,000 |
100,000 |
100,000 |
| Personal Services |
0 |
100,000 |
100,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
5,000 |
0 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
According to our interpretation of the proposed bill, a tax credit is given to a qualified community development entity that makes a qualified equity investments or to a subsequent holder of the qualified equity investment. This credit is calculated annually by multiplying the purchase price paid to the qualified community development entity for the qualified equity investment by the applicable percentage for the credit allowance date, which is 0 percent for the first three credit allowance dates and 15 percent for the next four credit allowance dates. The annual credit allowance may be used to offset the entity’s state insurance premium tax liability for tax periods on or after the credit allowance date.
It is difficult to determine the level of investment in low-income communities by qualified community development entities. However, given that the bill authorizes the Tax Commissioner to certify a maximum of $60 million in qualified equity investments, it stands to reason that General Revenues would not be affected for three years and thereafter could be reduced by no more than $9.0 million per year for new applicants for a total of $36.0 million over the life of this proposed program. However, the perpetual carryforward provisions of the bill could alter the annual revenue impact year-to-year; the potential or magnitude of this occurring cannot be determined.
The federal New Markets Tax Credit (NMTC), authorized in the Community Renewal Tax Relief Act of 2000, is a comparable credit to the one proposed in this bill that is slated to expire on December 31, 2019. Over an 11-year period from 2003 to 2014, approximately $7 billion in NMTC allocation had been awarded nationwide. This figure includes an approximate $49 million to West Virginia communities. In 2013, the Urban Institute reviewed NMTC projects started through 2007. Of those surveyed, 93 percent of projects obtained “advantageous financing” and 84 percent develop real estate, while only 53 percent started up or supported businesses and 9 percent attracted new investors to low-income communities.
Review of the NMTC suggests there exists an imbalance with the federal and other public funds provided to eligible entities compared to the amount of private-sector funding invested in qualifying projects. Further, the presence of other public funding for such projects duplicates the federal subsidy relative to private funding. According to the U.S. Government Accountability Office, of NMTC projects originating from 2010 to 2012, approximately 33 percent received other federal funding alone and 62 percent received public funding from federal, state, or local sources.
There are a number of concerns with respect to the proposed legislation. The tax against which this credit applies is administered by the Insurance Commission, not the State Tax Department. Requiring the Tax Commissioner to, essentially, administer a portion of the Insurance Premium Tax imposes unnecessary complexity on these departments. This in turn introduces difficulty for the Tax Department specifically, as it currently lacks capacity sufficient to adequately certify the credit and monitor activity. The Tax Department would incur substantial costs to bring in staff with necessary qualifications and provide training and support for the roles associated with the administration of a venture capital program. From a revenue perspective, the proposed bill would ultimately reduce collections by up to $36 million over a period of several years while insurance premium tax collections dedicated to volunteer fire departments and municipal pensions would be held harmless. The projected fiscal impact depends on the ability of the venture capital company to transfer available tax credits to insurance companies subject to the West Virginia Insurance Premium Tax.
Additional costs incurred by the State Tax Department to administer this bill would be $5,000 for the remainder of FY2017 and $100,000 per year beginning in FY2018 and for each year thereafter.
Memorandum
The stated purpose of this bill is to establish a West Virginia business growth in low-income communities tax credit.
The proposed bill would be very difficult for the Tax Commissioner to administer given that the credit is applied against the premium tax, which is administered by the Insurance Commissioner. The description of the credit as “earned and vested” is vague, and the carryforward provided in the bill is apparently unlimited in duration while any the bill is silent as to any carryback provision. The language surrounding the allocation of credit to the pass-through insurer’s members, partners, etc. is confusing.
In contrast to the New Markets Tax Credit (NMTC), which is scheduled to expire December 31, 2019, the proposed credit has no termination date. Further, the proposed bill lacks appeal right provisions.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov