FISCAL NOTE
Date Requested: March 15, 2021
Time Requested: 11:46 AM |
| Agency: |
Tax & Revenue Department, WV State |
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| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1372 |
Introduced |
HB3147 |
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| CBD Subject: |
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FUND(S):
General Revenue Fund, Oil and Gas Abandoned Well Plugging Fund
Sources of Revenue:
General Fund Oil and Gas Abandoned Well Plugging Fund
Legislation creates:
Creates New Revenue
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to double the tax on the privilege of severing natural gas and oil.
According to our interpretation of this bill, the regular Severance Tax on natural gas and oil would increase from 5 percent to 10 percent and the Severance Tax on marginal natural gas and oil wells would increase from 2.5 percent to 5 percent. Marginal natural gas wells produce between 5,000 to 60,000 cubic feet per day while marginal oil wells produce between one-half barrel to 10 barrels per day. Proceeds from the current and proposed Severance Tax on marginal natural gas and oil wells are allocated to the Oil and Gas Abandoned Well Plugging Fund. This bill would eliminate the proposed 5 percent Severance Tax on marginal natural gas and oil wells if on or after June 1, 2023 the fund balance of the Oil and Gas Abandoned Well Plugging Fund equals or exceeds $6.0 million.
Passage of this bill would result in gains in the range of $3.0 million to $5.0 million in FY2023 to the Oil and Gas Abandoned Well Plugging Fund with no gains in subsequent fiscal years, while the General Revenue Fund would gain in the range of $55.0 million to $65.0 million in FY2022 and anywhere from $105.0 million to $120.0 million in FY2023 and thereafter. Passage of this bill would also result in corresponding gain of $8.0 million to $12.0 million in oil and natural gas distributions to local governments in FY2022, increasing anywhere from $15.0 million to $20.0 million in FY2023 and subsequent fiscal years.
Additional administrative costs incurred by the State Tax Department would be $81,500 in FY2022 and $45,000 in FY2023 and thereafter.
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 |
0 |
81,500 |
45,000 |
| Personal Services |
0 |
45,000 |
45,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
1,500 |
0 |
| Other |
0 |
35,000 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
According to our interpretation of this bill, the regular Severance Tax on natural gas and oil would increase from 5 percent to 10 percent and the Severance Tax on marginal natural gas and oil wells would increase from 2.5 percent to 5 percent. Marginal natural gas wells produce between 5,000 to 60,000 cubic feet per day while marginal oil wells produce between one-half barrel to 10 barrels per day. Proceeds from the current and proposed Severance Tax on marginal natural gas and oil wells are allocated to the Oil and Gas Abandoned Well Plugging Fund. This bill would eliminate the proposed 5 percent Severance Tax on marginal natural gas and oil wells if on or after June 1, 2023 the fund balance of the Oil and Gas Abandoned Well Plugging Fund equals or exceeds $6.0 million.
This bill provides a tax benefit to lower producing vertical natural gas and oil wells while creating a tax burden for higher producing horizontal natural gas and oil wells. Data from the State Department of Environmental Protection shows that in CY2019 roughly 2.1 trillion cubic feet of natural gas was produced in West Virginia, an increase of 21 percent from the prior calendar year. The price of Marcellus shale natural gas in FY2020 was $1.69 per MCF and much of this decline was due to the COVID-19 pandemic and the cancellation of the Atlantic Coast pipeline project. Through February 2021, the average FY2021 year to date Marcellus shale natural gas price is running at $1.82 per MCF with some temporary improvement due to a much colder winter this year. Due to declining demand of State coal fired power plants and minimal competition from renewable resources, natural gas consumption in West Virginia is expected to increase with a gradual increase in prices.
Passage of this bill would result in gains in the range of $3.0 million to $5.0 million in FY2023 to the Oil and Gas Abandoned Well Plugging Fund with no gains in subsequent fiscal years, while the General Revenue Fund would gain in the range of $55.0 million to $65.0 million in FY2022 and anywhere from $105.0 million to $120.0 million in FY2023 and thereafter. Passage of this bill would also result in corresponding gains of $8.0 million to $12.0 million in oil and natural gas
distributions to local governments in FY2022, increasing anywhere from $15.0 million to $20.0 million in FY2023 and subsequent fiscal years.
Additional administrative costs incurred by the State Tax Department would be $81,500 in FY2022 and $45,000 in FY2023 and thereafter.
Memorandum
The stated purpose of this bill is to double the tax on the privilege of severing natural gas and oil.
There are several concerns with this bill. The bill only states that the tax rate is 10 percent prior to January 1, 2021, which could lead one to argue that this bill is retroactively changing the rate.
Not having the tax rates set forth in the statute lacks some clarity as these tax years are still within the statute of limitations. A taxpayer may amend their return for those years or receive an assessment or be subject to an audit for those tax years.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov