FISCAL NOTE

Date Requested: January 24, 2019
Time Requested: 01:33 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2575 Introduced HB2659
CBD Subject:


FUND(S):

General Revenue Fund & West Virginia PEIA Reserve Fund

Sources of Revenue:

General Fund West Virginia PEIA Reserve Fund

Legislation creates:

Increases Revenue From Existing Sources, Creates New Expense, Increases Existing Expenses, Creates New Program, Creates New Fund: West Virginia PEIA Reserve Fund



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    The stated purpose of this bill is to provide for a new fee on each MFC of natural gas produced to fully fund PEIA benefits at current levels; allow a tax credit for value added jobs in West Virginia for persons paying this fee; and creating a special reserve account to assume that sufficient moneys are collected to preserve the existing insurance program for a 5-year period, then allowing proceeds to be directed into the general reference fund.
    
    Based upon our interpretation, the passage of the bill will result in a user fee of $0.47 applied to every MCF of natural gas produced from a well in West Virginia. The user fee will be additionally collected along with the current Severance Taxes. The user fee will be used to fund a special revenue account, designated the West Virginia PEIA Reserve Fund. The West Virginia PEIA Reserve Fund will be used as means of conserving a portion of the state’s revenue derived from increasing revenue proceeds received by the state as a result of natural gas production to supplement funding for the state Public Employees Insurance Agency. If implemented, the user fee could initially generate approximately $700 million in revenue for the West Virginia PEIA Reserve Fund beginning in FY2020. Assuming a market price range between $2.00 and $3.00 per 1000 cubic feet, the new fee would represent an effective tax rate of roughly 15 percent to 20 percent on natural gas in addition to the current 5 percent Severance Tax. This level of additional burden on the natural gas industry would result in unintended long-term negative consequences for gas production in West Virginia and overall economic activity within the State. Longer term revenues for the West Virginia PEIA Reserve Fund would decrease as a result.
    
    In addition to these economic concerns, there may be constitutional issues with fees not tied directly to cost of services received.
    
    Additionally, the bill also provides a tax credit for value added products derived from the natural gas industry against one cent of the volume fee. The credit will be applied to either the Personal Income Tax liability or Corporation Net Income Tax liability. Absent clear and unambiguous definitions of the types of value-added products from the natural gas industry, the revenue loss to the General Revenue Fund could not be accurately estimated as a result of the tax credit.
    
    If the user fee is deemed constitutional, additional administrative costs would be $70,000 in FY2019, $137,500 in FY2020 and $176,000 in subsequent fiscal years.
    
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 70,000 137,500 176,000
Personal Services 20,000 75,000 125,000
Current Expenses 0 60,000 35,000
Repairs and Alterations 0 0 0
Assets 0 2,500 1,000
Other 50,000 0 15,000
2. Estimated Total Revenues 0 0 0


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


    Based upon our interpretation, the passage of the bill will result in a user fee of $0.47 applied to every MCF of natural gas produced from a well in West Virginia. The user fee will be additionally collected along with the current Severance Taxes. The user fee will be used to fund a special revenue account, designated the West Virginia PEIA Reserve Fund. The West Virginia PEIA Reserve Fund will be used as means of conserving a portion of the state’s revenue derived from increasing revenue proceeds received by the state as a result of natural gas production to supplement funding for the state Public Employees Insurance Agency. If implemented, the user fee could initially generate approximately $700 million in revenue for the West Virginia PEIA Reserve Fund beginning in FY2020. Assuming a market price range between $2.00 and $3.00 per 1000 cubic feet, the new fee would represent an effective tax rate of roughly 15 percent to 20 percent on natural gas in addition to the current 5 percent Severance Tax. This level of additional burden on the natural gas industry would result in unintended long-term negative consequences for gas production in West Virginia and overall economic activity within the State. Longer term revenues for the West Virginia PEIA Reserve Fund would decrease as a result.
    
    In addition to these economic concerns, there may be constitutional issues with fees not tied directly to cost of services received.
    
    Additionally, the bill also provides a tax credit for value added products derived from the natural gas industry against one cent of the volume fee. The credit will be applied to either the Personal Income Tax liability or Corporation Net Income Tax liability. Absent clear and unambiguous definitions of the types of value-added products from the natural gas industry, the revenue loss to the General Revenue Fund could not be accurately estimated as a result of the tax credit.
    
    If the user fee is deemed constitutional, additional administrative costs would be $70,000 in FY2019, $137,500 in FY2020 and $176,000 in subsequent fiscal years.
    
    



Memorandum


    The stated purpose of this bill is to provide for a new fee on each MFC of natural gas produced to fully fund PEIA benefits at current levels; allow a tax credit for value added jobs in West Virginia for persons paying this fee; and creating a special reserve account to assume that sufficient moneys are collected to preserve the existing insurance program for a 5-year period, then allowing proceeds to be directed into the general reference fund.
    
    The W.Va. Supreme Court has held that the primary reason for a fee is to cover the expense of providing a service or regulation and supervision of certain activities. The fee provides no service to those paying the fee. The fee acts more like a tax.
    
    The U.S. Supreme Court has ruled that fees, as opposed to taxes, are subject to a three-prong analysis in order to determine whether they comport with the Commerce Clause of the U.S. Constitution: they cannot be discriminatory; the amount of the fee must approximate the value of the benefit received by the party that is charged with paying the fee; and the fee should not collect more than the cost of the services provided.
    
    The fee does not discriminate among the gas producers; however, gas producers do not use PEIA and are being asked to provide funds for PEIA. Others who do not use PEIA and the users of PEIA are not being assessed a fee. Since gas producers do not receive a benefit, there is no value and no benefit received by the gas producers.
    
    Most importantly, the fee collected is more than the cost of the benefit (to PEIA users). After the fee adequately funds PEIA, it becomes an undesignated funding source for the legislature, bearing no relationship to its original purpose.
    
    The bill title does not mention the tax credit. The last phrase of the title does not adequately state at what point the Legislature may appropriate funds other than to supplement PEIA.
    
    
    



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