FISCAL NOTE

Date Requested: February 28, 2017
Time Requested: 01:25 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2708 Introduced SB478
CBD Subject: Governor -- Bills Requested By


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 impose that severance tax on the privilege of producing coal at graduated rates depending upon the gross income of the taxpayer derived from sales of coal during the reporting period divided by tons of coal produced and sold by the taxpayer during the reporting period. Thin seam coal is excluded from both computations.
    
    According to our interpretation, the proposed bill would impose a tiered severance tax on both metallurgical and steam coal beginning July 1, 2017, exclusive of thin seam coal. The graduated rate is determined based on the price per ton of coal sold for each type. Data sufficient for adequately assessing the revenue impact of the proposed structure is limited. Further, influences including demand, supply, and policy changes contribute to the volatility of pricing within the industry. Based on recent trends and anticipated prices in the near term, it is unlikely the proposed severance tax structure would result in a significant impact on current revenue estimates. Steam coal prices remain under some downward pressure with a small chance of a tax rate reduction for some producers. Metallurgical coal is the most likely type to experience substantial price fluctuations, with some coal possibly taxed at a rate higher than 5 percent. However, given that the majority of such coal mined in the State is thin seam, the resulting impact on revenues is likely to be minimal in the short term.
    
    Additional administrative costs incurred by the State Tax Department would be $25,000 for the remainder of FY2017, $79,000 in FY2018, and $73,000 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 25,000 79,000 73,000
Personal Services 0 32,000 32,000
Current Expenses 0 0 0
Repairs and Alterations 0 1,000 0
Assets 0 0 0
Other 25,000 46,000 41,000
2. Estimated Total Revenues 0 0 0


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


    According to our interpretation, the proposed bill would impose a tiered severance tax on both metallurgical and steam coal beginning July 1, 2017, exclusive of thin seam coal. The graduated rate is determined based on the price per ton of coal sold for each type. Data sufficient for adequately assessing the revenue impact of the proposed structure is limited. Further, influences including demand, supply, and policy changes contribute to the volatility of pricing within the industry. Based on recent trends and anticipated prices in the near term, it is unlikely the proposed severance tax structure would result in a significant impact on current revenue estimates. Steam coal prices remain under some downward pressure with a small chance of a tax rate reduction for some producers. Metallurgical coal is the most likely type to experience substantial price fluctuations, with some coal possibly taxed at a rate higher than 5 percent. However, given that the majority of such coal mined in the State is thin seam, the resulting impact on revenues is likely to be minimal in the short term.
    
    Additional administrative costs incurred by the State Tax Department would be $25,000 for the remainder of FY2017, $79,000 in FY2018, and $73,000 for each year thereafter.
    



Memorandum


    The stated purpose of this bill is to impose that severance tax on the privilege of producing coal at graduated rates depending upon the gross income of the taxpayer derived from sales of coal during the reporting period divided by tons of coal produced and sold by the taxpayer during the reporting period. Thin seam coal is excluded from both computations.
    
    Language used for the determination of rate (i.e., “sales of all coal”) in the proposed bill is ambiguous. Using terminology such as “sales of all metallurgical coal” and “sales of steam coal” would improve clarity. Without such explanation, it is possible the Taxpayer could aggregate income and tons of both metallurgical and steam coal an apply an incorrect rate as a result.
    
    Subsection (a) of the proposed bill states that the tax is an annual tax. Presumably, there will need to be an annual adjustment as rates may vary during the year. Further, the bill does not clearly state that the tax due in a reporting period is the gross income from the sales of either type of coal during that period multiplied by the determined tax rate. If sales of metallurgical and steam coal are mixed, the determination of separate rates for each type of coal fails.
    
    The effective date of July 1, 2017 does not allow the Tax Department sufficient time to make necessary form and programming changes or to provide notice to Taxpayers. This could lead to administrative difficulty.
    
    There is a possible title defect. The proposed bill title does not indicate there is a change in severance tax or that there are separate tiered rates for metallurgical and steam coal.
    
    



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@yahoo.com