FISCAL NOTE

Date Requested: February 23, 2017
Time Requested: 01:10 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2710 Introduced SB415
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 natural gas at graduated rates depending upon the gross value taxpayer derives from the sale of the natural gas during the severance tax year.
    
    According to our interpretation, the proposed bill would impose a tiered severance tax on natural gas beginning July 1, 2017. The graduated rate is determined based on the annualized gross price per thousand cubic feet (mcf). The average price of natural gas in West Virginia has been increasing from less than $1.00 per mcf in CY2016 to a current rate of more than $2.00 per mcf after peaking at $3.45 per mcf in CY2014. Current projections suggest prices may reach $2.15 per mcf by FY2021. This slow recovery is due to many factors, including technological advances and rapid supply growth relative to demand. The proposed rate structure imposes a 5 percent tax on the gross value of natural gas when the price per mcf is less than $3.00. Given that prices are not expected to exceed this floor in the next three years, it is anticipated that the proposed changes will not affect revenues in the near term. However, natural gas prices are highly volatile. Therefore, there is some chance of higher effective tax rates applying in any given year.
    
    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 natural gas beginning July 1, 2017. The graduated rate is determined based on the annualized gross price per thousand cubic feet (mcf). The average price of natural gas in West Virginia has been increasing from less than $1.00 per mcf in CY2016 to a current rate of more than $2.00 per mcf after peaking at $3.45 per mcf in CY2014. Current projections suggest prices may reach $2.15 per mcf by FY2021. This slow recovery is due to many factors, including technological advances and rapid supply growth relative to demand. The proposed rate structure imposes a 5 percent tax on the gross value of natural gas when the price per mcf is less than $3.00. Given that prices are not expected to exceed this floor in the next three years, it is anticipated that the proposed changes will not affect revenues in the near term. However, natural gas prices are highly volatile. Therefore, there is some chance of higher effective tax rates applying in any given year.
    
    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 natural gas at graduated rates depending upon the gross value taxpayer derives from the sale of the natural gas during the severance tax year.
    
    The proposed bill retains subsection (d), which deals with reports and financial records filed by oil and gas producers with the State Tax Commissioner. As this subsection has not been in effect since July 1, 2006, the language is therefore obsolete.
    
    The proposed bill does not define “annualized gross value” or provide a method for calculating. This value is used to determine the rate of tax the Taxpayer is to use. The omission of a definition or calculation may lead to difficulty in administering the tax and could result in litigation.
    
    Severance Taxpayers typically file monthly or quarterly estimated returns. The proposed bill uses an annualized gross value that could lead to confusion absent adequate adjustments on the annual return. Also, 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 further administrative difficulty.
    
    There may be a possible title defect. The title may be too general and does not indicate that there is a change in the severance tax rate, nor does it indicate that there are tiered rates depending upon the annualized gross value of natural gas.
    
    



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