FISCAL NOTE
Date Requested: January 31, 2023
Time Requested: 05:04 PM |
| Agency: |
Parkways Authority, WV |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 3156 |
Introduced |
HB3169 |
|
|---|
| CBD Subject: |
Taxation |
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|
FUND(S):
Tax Credit
Sources of Revenue:
Other Fund Uncertain from the text of House Bill 3169
Legislation creates:
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
Summarize in a clear and concise manner what impact this measure will have on costs and revenues of state government.
House Bill 3169 would (i) impose significant costs on the West Virginia Parkways Authority (the “Authority”), both in terms of actual dollars and administrative burden, and (ii) risk violating Federal law, the Authority’s existing Amended and Restated Agreement with the Federal Highway Administration, Department of Transportation and the Authority’s contractual obligations owed to current bondholders, all as further described in the Memorandum section set forth below. The tax credits proposed by this Bill would decrease the general revenue and/or increase the costs of the State of West Virginia. Finally, this Bill would impose significant administrative burden and expense on the Authority. The specific adverse impacts, and how they would be paid and funded, could vary depending on this Bill’s implementation and the final rules promulgated by the State Tax Department and West Virginia Parkways Authority. Such rules are authorized and contemplated by this Bill.
Based on the text of this Bill, it is difficult to estimate a maximum dollar amount on the aggregate amount of tax credits that would be allowed under this Bill. Specifically, the term “qualified distribution centers” used in this bill is not clearly defined. It could be broadly construed to include thousands of businesses. Consequently, it is difficult, if not impossible, to estimate what the maximum cost of this credit would be upon implementation. Further, because of the way the term “qualified distribution centers” is defined in this Bill, and the burdensome enforcement and administration challenges this Bill would impose on the Authority, it could encourage many otherwise ineligible businesses to claim the credit. In this regard, it will be difficult and expensive, and to an extent not technologically feasible, for the Authority to monitor, enforce and administer this credit in the way outlined in this Bill.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2023
Increase/Decrease
(use"-") |
2024
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
0 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
0 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
Please explain increases and decreases in personal services, current expenses, repairs and alterations, assets, other costs and revenues, including assumptions and data sources and delineation between start-up and ongoing costs. Please also include a long-range schedule of costs and revenues if fiscal impact is expected to vary in future years.
See Fiscal Note Summary above for information regarding the fiscal impact of this bill on the State of West Virginia.
Memorandum
Please identify any areas of vagueness, technical defects, reasons a bill would not have a fiscal impact, and/or any special issues not captured elsewhere on this form.
The following contains the Authority’s questions and concerns with the new article contained within this Bill:
• Passage and enactment of House Bill 3169 would likely put the Authority in the untenable position of having to choose between (i) violating State law or (ii) violating Federal law, violating its contractual obligations with the Federal Highway Administration, Department of Transportation and violating its contractual obligations to the holders of the Bonds.
• The Authority is restricted by Federal law and the Tri-Partite Agreement (as defined below) as to the expenditure of toll revenues. The Authority has entered into that certain Amended and Restated Agreement dated June 1, 2018, among the West Virginia Division of Highways, the Authority and the Federal Highway Administration, Department of Transportation (the “Tri-Partite Agreement”). Under Section 4 of the Tri-Partite Agreement, the “toll revenues from the operation of the West Virginia Turnpike will be used on the West Virginia Turnpike for amounts necessary for operation and maintenance; debt service; reasonable return on investment of any private person or entity that may be authorized by the State to operate and maintain the facility; and any cost necessary for improvement, including reconstruction, resurfacing, restoration, and rehabilitation. Further, Section 5 of the Tri-Partite Agreement states “that the use of excess toll revenues (i.e., the toll revenues in excess of the herein stated costs in item number 4, above) are authorized to be used for any other purpose for which Federal funds may be obligated under Title 23 of the United States Code, provided that the [Authority] and [DOH] certify annually that the West Virginia Turnpike is being adequately maintained and is in compliance with the audit requirements in section 129(a)(3)(B) of Title 23 of the United States Code.”
• Using toll revenues to pay for the tax credit envisioned by this bill would involve spending toll revenues in a way that is not permitted by the Tri-Partite Agreement and related Federal law. It would not be lawful.
• House Bill 3169 does not include an express requirement for the Authority to reimburse the State for such tax credits. It is not clear how the credits will be funded. However, any such requirement to use toll revenues would violate the existing Tri-Partite Agreement.
• House Bill 3169 obligates the Authority to “compile the amount of tax creditable toll payments made travelling through Parkways Authority toll facilities within the West Virginia EZ Pass system trucking only for shipments of product or inventory finished and packaged for retail sale originating from a qualified West Virginia distribution center and trucking [sic] returning to a qualified West Virginia distribution center.” At this time, it is unclear to the Authority how it would determine and confirm (i) whether a truck actually contains a shipment of product or inventory finished and packaged for retail sale and (ii) the originating and returning locations of every commercial vehicle passing through its toll plazas. To require the Authority to attempt to do this sort of auditing and confirmation would impose a significant administrative burden on the Authority. Even with such an effort and expense, and strict regulations promulgated by the State Tax Department and the Authority as authorized in this Bill, it is foreseeable that this legislation could present an opportunity for fraud and abuse of the available tax credit.
• For example, it would be very unsafe and impossible, as a practical matter, to try to require trucks to pull over to allow spot inspections of trucks to see what they are carrying or to verify where their cargoes originate or end up being delivered. Hiring and training such inspectors would be very expensive as well. Even verifying the actual existence of a distribution center in West Virginia would be very problematic, as a practical matter. It would be very expensive and unfortunately would be nearly, if not actually, impossible to accomplish these sorts of verifications. Furthermore, the RFID readers can track a vehicle through the toll barriers if properly installed and used but they cannot determine the load that vehicle may or may not be carrying. The Authority’s toll barriers are equipped with antennae to read transponders, but not with scales to determine if a vehicle is carrying a load or not.
• It is unclear whether House Bill 3169 covers either (A) cash tolls or (B) the payment of fees or penalties, or (C) both types of expenditures, and by extension it is unclear whether those sorts of payments paid by eligible businesses would qualify for the tax credit.
• Typically, tax credits are claimed by the taxpayers eligible to benefit from the tax credit, and any such taxpayer would be required to have proper records to substantiate the amount of such tax credit claimed. However, House Bill 3169 shifts the burden of the tax credit reporting, verification efforts and record keeping obligations from the eligible taxpayer to the Authority. Setting aside the significant administrative burden of the Authority that this Bill seems to create, certain existing technological limitations on the E-ZPass system currently operated by the Authority could result in a reporting system that would be vulnerable to error, fraud and abuse.
• Under current law, tolls are already deductible as a normal business expense. House Bill 3169 adds this new credit (without limiting the deductibility of tolls). In this sense, the bill effectively pays the “qualified distribution centers” to use the Turnpike - the tolls would be deductible and then, on top of the deduction the bill also would give this further tax credit against any income tax calculated for such business.
• Under House Bill 3169, the Authority is authorized “to allow for the use of RFID Tag Reader or comparable systems at qualified distribution centers as defined in §11-13MM-1 et seq. of this code in order to compile the amount of tax creditable toll payments made within the West Virginia EZ Pass system”. It is unclear whether this text obligates the Authority to install, or pay for the installation, of such RFID Tag Reader or comparable systems at businesses that are capable of meeting the requirements of this Bill. If so, the costs of procurement, installation, operation and maintenance of such RFID systems at an undetermined and potentially large number of qualifying businesses across the State could pose significant costs on the Authority, and at this time it is difficult to estimate such costs. Under the Tri-Partite Agreement, such costs could not be paid from toll revenues. Alternatively, if this burden was imposed on the “qualified distribution centers”, then for those “qualified distribution centers” that do not already have such a system in place, the costs of implementation and operation of such a system could outweigh the costs of the proposed tax credit.
• House Bill 3169 allows the tax credit to “every business that operates a distribution center in West Virginia transporting product or inventory that are finished and packaged goods for retail sale” and such tax credit is “a 100 percent tax credit for toll payments made within the West Virginia EZ Pass system registered by RFID Tag Reader or comparable tracking system by qualified distribution centers solely for West Virginia EZ Pass system tolls paid for ground transportation of product or inventory that are finished and packaged goods for retail sale originating from the qualified West Virginia distribution center and ground transport returning to the same qualified West Virginia distribution center after completion of deliveries.” This Bill effectively would give free passage on the Turnpike for certain West Virginia trucking and distribution businesses whereas non-West Virginia trucking and distribution businesses would have to pay applicable Turnpike tolls (either cash tolls or, if applicable, discounted E-ZPass tolls). This may be problematic for multiple reasons, including the following constitutional considerations:
o First, the Interstate Commerce Clause of the United States Constitution gives Congress the exclusive power to regulate commerce among the states and prohibits states from taking certain actions that favor local industry to the disadvantage of out-of-state competitors for economically protectionist reasons.
o Second, the Privileges and Immunities Clause of the United States Constitution prohibits a state from favoring its own citizens by discriminating against other states’ citizens who come within its borders. There is a risk that the favoritism proposed in this Bill could violate the Privileges and Immunities Clause.
o Third, such favoritism could constitute an unconstitutional violation of the Fourteenth Amendment’s Equal Protection Clause, which guarantees the equal protection of the laws for similarly situated businesses.
o These constitutional considerations constitute one of the primary reasons that the Single Fee Discount Plan and EZPass discount rates offered by the Authority are available to both in-state and out-of-state businesses and individuals. In analogous circumstances across the country, out of state businesses and consumers have commenced litigation to protect against violations of these constitutional protections.
o Accordingly, the passage and enactment of House Bill 3169 could violate the United States Constitution.
• House Bill 3169 “will be treated as effective as of July 1, 2023, but apply to all toll payments made within the West Virginia EZ Pass system in Tax Year 2023 as defined in this article.” Tax Year 2023 has already commenced and there is currently no mechanism to track, compile, report or otherwise administer the tax credits described in this Bill, nor have there been any rules or regulations promulgated by the State Tax Department or Authority as authorized by this Bill.
• On August 14, 2018, the Authority issued its $166,370,000.00 Senior Lien Turnpike Toll Revenue Bonds, Series 2018 (the “Series 2018 Bonds”) in connection with the Roads to Prosperity highway program.
• On June 23, 2021, the Authority issued its $333,630,000.00 Senior Lien Turnpike Toll Revenue Bonds, Series 2021 (the “Series 2021 Bonds”, and together with the Series 2018 Bonds, (the “Bonds”) in connection with the Roads to Prosperity highway program.
• Collectively, the issuance of the Bonds resulted in deposits of over $594 Million to the State Road Construction Account that financed the construction, maintenance, improvement and repair of certain parkway projects in southern West Virginia as part of Governor Justice’s Roads to Prosperity program.
• The Bonds are secured by and payable solely from net Turnpike toll revenues, which accordingly are very important to the holders of the Bonds. Net Turnpike toll revenues are thus pledged to secure the Bonds.
• Specifically, in connection with the issuance of the Bonds, the Authority and United Bank, as Trustee, entered into a Master Trust Indenture dated August 1, 2018 (the “Master Trust Indenture”), under which the Series 2018 Bonds and Series 2021 Bonds are issued, containing a number of contractual obligations for the benefit and protection of the holders of the Bonds.
• Importantly, and understandably, some of these contractual obligations are specifically for the protection of net Turnpike toll revenues. These contractual obligations of the Authority for the benefit and protection of the holders of the Bonds are also very important to the rating agencies that rated the Bonds.
• Thus, any violation, erosion or impairment of any of these contractual obligations and protections may be viewed negatively by the rating agencies. Any negative rating action, in turn, would likely have a material impact on existing holders of the Bonds and could negatively impact the Authority’s future borrowing costs and reduce its future bonding capacity, potentially by millions of dollars.
• Sections 511(a) and 511(c) of the Master Trust Indenture state as follows:
“(a) The Authority covenants and agrees that it has and shall maintain so long as any Bonds remain Outstanding and until all other obligations under this Indenture have been satisfied, the exclusive right and lawful power to establish, charge and collect Tolls, user fees and other charges for the use of the Turnpike. The Authority further covenants and agrees that it will take all reasonable measures permitted by law to enforce prompt payment to it of such Tolls, user fees and other charges when and as due.”
“(c) The Authority covenants and agrees that at no time will it subject its exclusive right to establish, charge and collect Tolls and other user fees and charges for the use of the Turnpike to the approval or consent of any other individual or entity, governmental or otherwise. None of the State or any other individual or entity, governmental or otherwise, shall have any rights or responsibilities pursuant to this Indenture.”
• To the extent that the tax credit provided under House Bill 3169 prevents or impairs the Authority’s strict adherence to the existing Tolling Policy and Toll Rate Schedule (which could be deemed to be a reduction of tolls), by effectively giving free passage on the Turnpike through the allowance of tax credits for certain West Virginia trucking and distribution businesses, House Bill 3169 violates Section 512(g) of the Master Trust Indenture, which states “[t]he Authority shall not reduce tolls unless and until the Toll Road Consultant certifies that the Toll Rate Covenant will be achieved, after the application of such reduction, in the current Fiscal Year and all future Fiscal Years Bonds are then Outstanding.”
• Passage of House Bill 3169 could violate the (i) United States Constitution, Article I, Section 10 prohibiting the impairment of contracts, stating in relevant part that “[n]o State shall . . .pass any Bill of attainder, ex post facto Law, or Law impairing the Obligation of Contracts . . .” and (ii) West Virginia Constitution, Article III, Section 4 prohibiting laws that would impair existing contracts, stating in relevant part that “[n]o bill of attainder, ex post facto law, or law impairing the obligation of a contract, shall be passed.”
While we can appreciate the well-intentioned purpose of House Bill 3169, we are legally compelled under the circumstances to oppose its passage for the foregoing reasons.
Person submitting Fiscal Note: Robin Shamblin
Email Address: rshamblin@wvturnpike.com