FISCAL NOTE

Date Requested: January 21, 2020
Time Requested: 04:14 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2332 Introduced HB4439
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Decreases Existing Revenue, Increases Existing Expenses



Fiscal Note Summary


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


    The stated purpose of this bill is to further clarify how a taxpayer can meet the requirement that aggregate total production from all mines operated by the taxpayer or by members of the taxpayer’s controlled or affiliated groups has increased. In determining whether a taxpayer has demonstrated the requisite increase in total production, only coal production that would qualify for the severance tax rebate shall be included in calculating the taxpayer’s aggregate base production.
    
    According to our interpretation, passage of this bill would limit the measurement of increased coal production only to coal subject to the 4.65% State severance tax rate. This proposed change would effectively allow coal companies to decrease their total coal production and total coal employment in the State and still claim rebate tax credits for increased coal production at the same time. When this legislation was first introduced last year, the proposed 35% tax rebate credit was strictly designed only to award benefits to companies as defined on a controlled group basis that demonstrated increased net total coal production in any given year over a base year level. Separate legislation actually reduced the tax rate on steam coal to less than 4.65%. The intent was to limit the tax rebate only to tax associated with net overall coal production increase. The proposed amendment in this bill would effectively remove the requirement for increased production in the State by limiting the measure to just coal subject to the 4.65% tax rate. The State would potentially lose a significant amount of tax revenue under the fiction of a net production increase requirement while industry reduces total coal production and total coal employment. In addition, the companies awarded such benefits could gain a significant competitive advantage over their competition within the State due to their unique circumstances and not necessarily due to a net increase in coal production on their part.
    
    The current market conditions for the demand for West Virginia steam and metallurgical coal will determine who is mostly likely to use this tax rebate when making capital investments. According to data provided by the Energy Information Agency, the demand for steam coal mined in West Virginia is predicted to continue to decline over the next few years. This decline in demand can mostly be attributed to the closure of coal-fired power plants in favor of power generated from natural gas. This trend seems irreversible in the short and long term due to the abundance of cheap natural gas produced mostly from horizontal fracking wells in the Marcellus and Utica shale formations located in the northern portion of the state.
    
    At the current time, there is still a present and foreseeable demand for West Virginia metallurgical coal in both domestic and international markets. Some current members of the West Virginia coal industry also recognize this fact and have made decisions to invest in new mines or rehabilitate existing operations to produce metallurgical coal within the State. According to various articles dating as far back February 2019 in Coal Age magazine, the following West Virginia coal companies plan to make such investments:
    
    • Arch Coal’s investment of $360 million to $390 million into the Leer South Mine located in Barbour County
    • CONSOL’s investment of $65 million to $80 million into the Itmann Mine located in Wyoming County
    • Contura’s investment of $30 million into the Lynn Branch Mine located in Logan County.
    
    The intent of the original bill was to offer a tax rebate of the severance tax to coal operators as an incentive to invest capital into new or existing operations with the goal of having an overall net increase in coal production. However, the proposed bill modification will allow coal operators who have a decrease in overall net coal production to claim the tax rebate by narrowing the base comparison of coal production to only coal taxed at 4.65% while excluding all other types of coal production. The scenario where this is likely to occur is where a company has several steam coal mine operations that are decreasing in overall production and the company decides to invest in a metallurgical mine. The company can then exclude the steam coal production (declining production ) from the initial metallurgical one (increasing production) which is then used to establish eligibility for the tax rebate
    
    Additional administrative costs to the Tax Department would be $71,000 in FY 2020, $92,500 in FY 2021, and $90,000 in subsequent fiscal years.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2020
Increase/Decrease
(use"-")
2021
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 71,000 92,500 90,000
Personal Services 50,000 90,000 90,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 1,000 2,500 0
Other 20,000 0 0
2. Estimated Total Revenues 0 0 -3,000,000


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


    According to our interpretation, passage of this bill would limit the measurement of increased coal production only to coal subject to the 4.65% State severance tax rate. This proposed change would effectively allow coal companies to decrease their total coal production and total coal employment in the State and still claim rebate tax credits for increased coal production at the same time. When this legislation was first introduced last year, the proposed 35% tax rebate credit was strictly designed only to award benefits to companies as defined on a controlled group basis that demonstrated increased net total coal production in any given year over a base year level. Separate legislation actually reduced the tax rate on steam coal to less than 4.65%. The intent was to limit the tax rebate only to tax associated with net overall coal production increase. The proposed amendment in this bill would effectively remove the requirement for increased production in the State by limiting the measure to just coal subject to the 4.65% tax rate. The State would potentially lose a significant amount of tax revenue under the fiction of a net production increase requirement while industry reduces total coal production and total coal employment. In addition, the companies awarded such benefits could gain a significant competitive advantage over their competition within the State due to their unique circumstances and not necessarily due to a net increase in coal production on their part.
    
    The current market conditions for the demand for West Virginia steam and metallurgical coal will determine who is mostly likely to use this tax rebate when making capital investments. According to data provided by the Energy Information Agency, the demand for steam coal mined in West Virginia is predicted to continue to decline over the next few years. This decline in demand can mostly be attributed to the closure of coal-fired power plants in favor of power generated from natural gas. This trend seems irreversible in the short and long term due to the abundance of cheap natural gas produced mostly from horizontal fracking wells in the Marcellus and Utica shale formations located in the northern portion of the state.
    
    At the current time, there is still a present and foreseeable demand for West Virginia metallurgical coal in both domestic and international markets. Some current members of the West Virginia coal industry also recognize this fact and have made decisions to invest in new mines or rehabilitate existing operations to produce metallurgical coal within the State. According to various articles dating as far back February 2019 in Coal Age magazine, the following West Virginia coal companies plan to make such investments:
    
    • Arch Coal’s investment of $360 million to $390 million into the Leer South Mine located in Barbour County
    • CONSOL’s investment of $65 million to $80 million into the Itmann Mine located in Wyoming County
    • Contura’s investment of $30 million into the Lynn Branch Mine located in Logan County.
    
    The intent of the original bill was to offer a tax rebate of the severance tax to coal operators as an incentive to invest capital into new or existing operations with the goal of having an overall net increase in coal production. However, the proposed bill modification will allow coal operators who have a decrease in overall net coal production to claim the tax rebate by narrowing the base comparison of coal production to only coal taxed at 4.65% while excluding all other types of coal production. The scenario where this is likely to occur is where a company has several steam coal mine operations that are decreasing in overall production and the company decides to invest in a metallurgical mine. The company can then exclude the steam coal production (declining production ) from the initial metallurgical one (increasing production) which is then used to establish eligibility for the tax rebate
    
    Additional administrative costs to the Tax Department would be $71,000 in FY 2020, $92,500 in FY 2021, and $90,000 in subsequent fiscal years.
    



Memorandum


    



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