FISCAL NOTE
Date Requested: February 11, 2021
Time Requested: 02:37 PM |
| Agency: |
Tax & Revenue Department, WV State |
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| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1576 |
Introduced |
HB2282 |
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| CBD Subject: |
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FUND(S):
West Virginia PEIA Reserve Fund, General Revenue Fund
Sources of Revenue:
General Fund West Virginia PEIA Reserve Fund
Legislation creates:
Creates New Revenue, Decreases Existing Revenue, 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 excess proceeds to be directed to general revenue.
Based on 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, a supplement for the state Public Employees Insurance Agency. If implemented, the proposed user fee would generate revenues that would likely decrease significantly over time due to a very high effective tax rate. The natural gas industry produced more than 2.5 trillion cubic feet of natural gas in West Virginia in CY2000. However, the average taxable price reported by the industry was less than $1.00 per MCF. This additional fee would impose an additional effective tax rate of roughly 50% on the activity of natural gas production. Such a high tax rate would likely result in no additional well drilling in the State with volumes from any non-capped existing wells depleting over time with some additional negative externalities for overall employment and economic activity. Even though the mathematical yield of a $0.47 fee would be in excess of $1.17 billion, the actual yield would be far less over time.
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 tax credit provisions are poorly defined and suggest both a credit against a portion of the fee and some sort of credit against state income tax as well. We are unable to measure the impact of such a tax credit as proposed.
Additional administrative costs incurred by the State Tax Department would be $35,000 in FY2021 and $45,000 in FY2022 and subsequent fiscal years.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2021
Increase/Decrease
(use"-") |
2022
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
35,000 |
45,000 |
45,000 |
| Personal Services |
0 |
45,000 |
45,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
35,000 |
0 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
Based on 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, a supplement for the state Public Employees Insurance Agency. If implemented, the proposed user fee would generate revenues that would likely decrease significantly over time due to a very high effective tax rate. The natural gas industry produced more than 2.5 trillion cubic feet of natural gas in West Virginia in CY2000. However, the average taxable price reported by the industry was less than $1.00 per MCF. This additional fee would impose an additional effective tax rate of roughly 50% on the activity of natural gas production. Such a high tax rate would likely result in no additional well drilling in the State with volumes from any non-capped existing wells depleting over time with some additional negative externalities for overall employment and economic activity. Even though the mathematical yield of a $0.47 fee would be in excess of $1.17 billion, the actual yield would be far less over time.
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 tax credit provisions are poorly defined and suggest both a credit against a portion of the fee and some sort of credit against state income tax as well. We are unable to measure the impact of such a tax credit as proposed.
Additional administrative costs incurred by the State Tax Department would be $35,000 in FY2021 and $45,000 in FY2022 and 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 excess proceeds to be directed to general revenue.
This bill does not accomplish its purpose. The bill title is insufficient. There are also technical defects with this bill. The proposed credit and fee are established under different code sections making it difficult to administer. It is also not clear whether those who are eligible for the proposed tax credit are the same entities that are paying the proposed fee.
The effective date of the proposed credit is not clear. The bill mentions that the tax credit is effective for taxable years beginning after July 1, 2021, but that the credit would apply to fees collected after December 31, 2021.
According to the language in the bill, the rate of the proposed fee is 47 cents per mcf of natural gas produced after July 1, 2021, determined at the point where the production privilege ends “for the purpose of the fee imposed”. This language is ambiguous, as it is unclear if the proposed volume tax is on the volume at the wellhead or the volume of natural gas that is sold. Those will result in different volumes and fee amounts.
The definition of “value added products” is too vague to be administered. For example, it is unclear if natural gas liquids processed out of the natural gas would be considered a value-added product under this bill.
The U.S Supreme Court has ruled that fees, as opposed to taxes, are subject to a three-prong analysis in determining whether they validate the Commerce Clause of the U.S Constitution. First, the fee cannot be discriminatory, second the amount of the fee must approximate the value of the benefit received by the party that is charged with paying the fee, and third, the fee should not collect more than the cost of the service provided.
The proposed fee does not discriminate among the natural gas producers, however natural 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 natural gas producers do not receive a benefit, there is no value and no benefit received by the natural gas producers. The proposed fee acts more like a tax.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov