FISCAL NOTE
Date Requested: January 10, 2020
Time Requested: 04:35 PM |
| Agency: |
Tax & Revenue Department, WV State |
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| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1488 |
Introduced |
HB4090 |
|
|---|
| CBD Subject: |
Natural Resources, Taxation |
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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:
Decreases Existing Revenue, Creates New Expense, Increases Existing Expenses, Creates New Program
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to reduce the severance tax on marginal oil and natural gas wells, excluding wells utilizing horizontal drilling techniques targeting shale formations, to 2.5% from 5% and to provide that the 2.5% tax paid on such wells is to be used by the Secretary of the Department of Environmental Protection to plug abandoned oil and gas wells without a responsible operator through the use of operator through the use of a new fund called the Oil and Gas Abandoned Well Plugging Fund.
The vertical oil and gas wells which are effected by the severance tax reduction produce on average more than 5,000 cubic feet of natural gas or one – half barrel of oil per day and on average less than 60,000 cubic feet of natural gas or 10 barrels of oil per day.
According to our interpretation, passage of this bill would reduce the 5.0 percent severance tax rate on vertical natural gas wells with average daily production between 5,000 cubic feet and 60,000 cubic feet and the 5.0 percent tax rate on vertical oil wells with average daily production between one-half barrel and 10 barrels to 2.5 percent effective January 1, 2020. The provisions of the bill would also redirect the net proceeds from the reduced tax from the State General Revenue Fund to the Oil and Gas Abandoned Well Plugging Fund. Depending on the market price of natural gas and oil, we would expect current revenues from the 5.0 percent tax to initially decrease between $5 million and $10 million in the first year with the impact declining in future years along with the anticipated gradual decline of production volumes from such vertical wells. The additional revenue for the Oil and Gas Abandoned Well Plugging Fund should initially range somewhere between $2 million and $4 million in the first year with the impact declining in future years along with the anticipated gradual decline of production volumes from such vertical wells.
The provisions of the bill require the Tax Commissioner to certify on July 1, 2023 and each July thereafter, the tax rate relating to the Oil and Gas Abandoned Well Plugging Fund for the following year beginning on January 1, with the tax rate going to zero in any year following a year when the balance in the Fund is equal or greater than $6 million.
The revenue estimate associated with the Oil and Gas Abandoned Well Plugging Well Fund was developed with the following assumptions in mind:
1. The 10 percent dedication of oil and gas severance tax for benefit of counties and municipalities as specified in Section 11-13A-5a(a) of the West Virginia Code would continue to apply even though proposed Section 11-13A-3a(e) of the West Virginia Code provides that the proceeds are dedicated to the Oil and Gas Abandoned Well Plugging Fund.
2. The 5 percent coalbed methane severance tax imposed under Section 11-13-13A-3d(b) of the West Virginia Code would continue to apply to wells with average daily production between 5,000 cubic feet and 60,000 cubic feet because such tax is in lieu of the tax imposed by Section 11-13A-3(a) of the West Virginia Code.
3. Natural gas from horizontal wells with average daily production between 5,000 cubic feet and 60,000 cubic feet and oil from horizontal wells with average daily production between one half barrel and 10 barrels remains taxed at the 5.0 rate.
The anticipated revenue impact by fund follows:
• State General Revenue Fund collections would decrease by between $1.2 million and $2.4 million in FY 2020 and by between $4.5 million and $9.0 million in FY2021 with gradually smaller decreases each year, thereafter
• The Oil and Gas Abandoned Well Plugging Fund revenues would increase by between $0.5 million and $1.0 million in FY2020 and by between $2.0 million and $4.0 million in FY2021 with gradually smaller increases each year, thereafter.
• Local government revenue distributions would decrease between $0.3 million and $0.6 million in FY2022 with gradually smaller decreases each year, thereafter.
Additional administrative costs to the State Tax Department would be $20,000 in FY2020, $60,000 in FY2021, and $20,000 in the 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 |
20,000 |
60,000 |
20,000 |
| Personal Services |
0 |
20,000 |
20,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
20,000 |
40,000 |
0 |
| 2. Estimated Total Revenues |
-1,200,000 |
-4,500,000 |
0 |
Explanation of above estimates (including long-range effect):
The vertical oil and gas wells which are effected by the severance tax reduction produce on average more than 5,000 cubic feet of natural gas or one – half barrel of oil per day and on average less than 60,000 cubic feet of natural gas or 10 barrels of oil per day.
According to our interpretation, passage of this bill would reduce the 5.0 percent severance tax rate on vertical natural gas wells with average daily production between 5,000 cubic feet and 60,000 cubic feet and the 5.0 percent tax rate on vertical oil wells with average daily production between one-half barrel and 10 barrels to 2.5 percent effective January 1, 2020. The provisions of the bill would also redirect the net proceeds from the reduced tax from the State General Revenue Fund to the Oil and Gas Abandoned Well Plugging Fund. Depending on the market price of natural gas and oil, we would expect current revenues from the 5.0 percent tax to initially decrease between $5 million and $10 million in the first year with the impact declining in future years along with the anticipated gradual decline of production volumes from such vertical wells. The additional revenue for the Oil and Gas Abandoned Well Plugging Fund should initially range somewhere between $2 million and $4 million in the first year with the impact declining in future years along with the anticipated gradual decline of production volumes from such vertical wells.
The provisions of the bill require the Tax Commissioner to certify on July 1, 2023 and each July thereafter, the tax rate relating to the Oil and Gas Abandoned Well Plugging Fund for the following year beginning on January 1, with the tax rate going to zero in any year following a year when the balance in the Fund is equal or greater than $6 million.
The revenue estimate associated with the Oil and Gas Abandoned Well Plugging Well Fund was developed with the following assumptions in mind:
1. The 10 percent dedication of oil and gas severance tax for benefit of counties and municipalities as specified in Section 11-13A-5a(a) of the West Virginia Code would continue to apply even though proposed Section 11-13A-3a(e) of the West Virginia Code provides that the proceeds are dedicated to the Oil and Gas Abandoned Well Plugging Fund.
2. The 5 percent coalbed methane severance tax imposed under Section 11-13-13A-3d(b) of the West Virginia Code would continue to apply to wells with average daily production between 5,000 cubic feet and 60,000 cubic feet because such tax is in lieu of the tax imposed by Section 11-13A-3(a) of the West Virginia Code.
3. Natural gas from horizontal wells with average daily production between 5,000 cubic feet and 60,000 cubic feet and oil from horizontal wells with average daily production between one half barrel and 10 barrels remains taxed at the 5.0 rate.
The anticipated revenue impact by fund follows:
• State General Revenue Fund collections would decrease by between $1.2 million and $2.4 million in FY 2020 and by between $4.5 million and $9.0 million in FY2021 with gradually smaller decreases each year, thereafter
• The Oil and Gas Abandoned Well Plugging Fund revenues would increase by between $0.5 million and $1.0 million in FY2020 and by between $2.0 million and $4.0 million in FY2021 with gradually smaller increases each year, thereafter.
• Local government revenue distributions would decrease between $0.3 million and $0.6 million in FY2022 with gradually smaller decreases each year, thereafter.
It should also be noted that production from qualified wells fell by more than 17 percent from 2017 to 2018 and is expected to continue falling over time due to the migration toward horizontal wells.
Additional administrative costs to the State Tax Department would be $20,000 in FY2020, $60,000 in FY2021, and $20,000 in the subsequent fiscal years.
Memorandum
The stated purpose of this bill is to reduce the severance tax on marginal and natural gas wells, excluding wells utilizing horizontal drilling techniques targeting shale formations, to 2.5% from 5% and to provide that the 2.5% tax paid on such wells is to be used by the Secretary of the Department of Environmental Protection to plug abandoned oil and gas wells which are effected by the severance tax reduction produce on average more than 5,000 cubic feet of natural gas or one – half barrel of oil per day and on average less than 60,000 cubic feet of natural gas or 10 barrels of oil per day.
The bill title does not clearly explain that there is a change in the severance tax rate. The bill title also does not mention the internal effective date. The bill title also does not mention that the rate may be zero based upon the amount of in the Oil and Gas Plugging Fund or that the Tax Commissioner mush publish the rate by Administrative Notice.
As written, the bill removes the severance tax on producers using horizontal drilling techniques targeting shale formations if they produce an average between 5,000 cubic feet of gas and 60,000 cubic feet of gas and an average between one-half barrel and 10 barrels per day during a calendar year immediately preceding the beginning date of a given year because such wells are not included in subdivision 1 and are excluded in subdivision 2.
Under current law, 10 percent of the severance tax attributable to the severance of oil and gas is dedicated to the use and benefit of the counties and municipalities in this State. W. Va. Code §11-13A-5a. Of that amount 75 percent is to go to the oil and gas producing counties and the remaining 25 percent is distributed to all counties and municipalities. This bill would affect the amount available for these distributions. It appears that 100 percent of the revenue from the 2.5 percent severance tax rate goes to a special revenue fund and does not appear to the part of the 10 percent dedication, although that could be clarified in the bill.
There may be an issue regarding how to treat coalbed methane. The bill does not amend W. Va. Code §11-13A-3d, regarding the imposition of the tax on the privilege of severing coalbed methane, and therefore, the tax rate on coalbed methane may stay at 5 percent. However, the taxpayers may argue that coalbed methane should be subject to this new rate change under W. Va. Code §11-13A-3d(e ), which provides that, except as specifically provided in this section, the application of the provisions of the Severance tax apply to natural gas. Otherwise, taxpayers might have an equal protection question under the U.S. Constitution, because the bill would treat producers of methane from coal seams differently than other similarly situated gas producers. Furthermore, the taxes attributable to coalbed methane are dedicated to local governments under W.Va. Code §11-13A-20a, and therefore, even if the coalbed receives the lower rate, there is a secondary question as to how those funds should be dedicated in light of this bill.
The distinction between horizontal and vertical drilling may run afoul of the West Virginia Constitution. Article X of the State of the West Virginia requires that taxation “be equal and uniform throughout the state…” Also, the proposed bill may arguably violate Section 10 of Article III of the West Virginia Constitution, which is the state’s equal protection clause. The state legislature “ may make reasonable classifications in enacting statues provided the classifications are based on some real and substantial relation to the objects sought to be accomplished by the legislation, and any person who assails any such classification has the burden of showing that its essentially arbitrary and unreasonable.”
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov