FISCAL NOTE

Date Requested: January 20, 2020
Time Requested: 03:38 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2126 Introduced HB4421
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 encourage development, transportation and use of natural gas liquids for the benefit of natural gas projects in the state by providing certain tax credits related to the production, transportation, storage, use and consumption of natural gas liquids. According to our interpretation, the provisions of this bill would give an eligible business a State tax credit equal to the amount of local West Virginia property taxes paid on equipment and inventory from their business activities. The tax credit would apply against the Corporation Net Income Tax, the Personal Income Tax related to business income and the Severance Tax. Eligible taxpayer is generally defined to be any natural gas liquids producer, natural gas liquids storer, natural gas liquids user or natural gas liquids transporter who owns or operates pipeline facilities used for the transportation and delivery of natural gas liquids for storage, use in manufacturing or consumption. The definition of eligible taxpayer for purposes of tax credit utilization is expanded in the case of businesses operating as a unitary group to all separate filers of such unitary group, including members who do not use natural gas liquids in their business activities. The potential loss of State General Revenue would be significant give the broad definition of eligible taxpayers. Numerous businesses use at least one natural gas liquid for general heating purposes or general operation purposes such as fueling fork-lift vehicles. West Virginia businesses collectively pay more than $400 million each year in local personal property taxes, mainly on machinery, equipment and inventory. The proposed legislation may provide significant property tax relief to any business user of even small amounts of natural gas liquids without necessarily providing any incentive at the margin for expansion of the use of natural gas liquids in manufacturing industry in the State. Under current policy, the Tax Department does not impose severance tax on natural gas liquids because such liquids are separated from natural gas at a later stage than at the well-head. However, this tax credit would apply to the severance tax as well as income taxes. The severance tax is imposed on the value of natural gas at the well-head. Allowing tax credits against severance tax potentially expands revenue loss to an amount equal to a large portion of severance taxes paid. In the natural gas industry, the amount of local property taxes paid each year often equals or exceeds the amount of severance tax paid. Even without the proposed property tax payment relief, natural gas liquids and natural gas already have a competitive price advantage over the use of coal for heating purposes. Additional administrative costs incurred by the State Tax Department would be $61,000 in FY2021 and $40,000 in subsequent fiscal years. Administrative costs incurred by the State Property Tax Division would be minimal, as this division would only be involved in providing the inventory and equipment values for calculations of the proposed tax credit.  



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 0 61,000 40,000
Personal Services 0 40,000 40,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 1,000 0
Other 0 20,000 0
2. Estimated Total Revenues 0 0 0


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


According to our interpretation, the provisions of this bill would give an eligible business a State tax credit equal to the amount of local West Virginia property taxes paid on equipment and inventory from their business activities. The tax credit would apply against the Corporation Net Income Tax, the Personal Income Tax related to business income and the Severance Tax. Eligible taxpayer is generally defined to be any natural gas liquids producer, natural gas liquids storer, natural gas liquids user or natural gas liquids transporter who owns or operates pipeline facilities used for the transportation and delivery of natural gas liquids for storage, use in manufacturing or consumption. The definition of eligible taxpayer for purposes of tax credit utilization is expanded in the case of businesses operating as a unitary group to all separate filers of such unitary group, including members who do not use natural gas liquids in their business activities. The potential loss of State General Revenue would be significant give the broad definition of eligible taxpayers. Numerous businesses use at least one natural gas liquid for general heating purposes or general operation purposes such as fueling fork-lift vehicles. West Virginia businesses collectively pay more than $400 million each year in local personal property taxes, mainly on machinery, equipment and inventory. The proposed legislation may provide significant property tax relief to any business user of even small amounts of natural gas liquids without necessarily providing any incentive at the margin for expansion of the use of natural gas liquids in manufacturing industry in the State. Under current policy, the Tax Department does not impose severance tax on natural gas liquids because such liquids are separated from natural gas at a later stage than at the well-head. However, this tax credit would apply to the severance tax as well as income taxes. The severance tax is imposed on the value of natural gas at the well-head. Allowing tax credits against severance tax potentially expands revenue loss to an amount equal to a large portion of severance taxes paid. In the natural gas industry, the amount of local property taxes paid each year often equals or exceeds the amount of severance tax paid. Even without the proposed property tax payment relief, natural gas liquids and natural gas already have a competitive price advantage over the use of coal for heating purposes. Additional administrative costs incurred by the State Tax Department would be $61,000 in FY2021 and $40,000 in subsequent fiscal years. Administrative costs incurred by the State Property Tax Division would be minimal, as this division would only be involved in providing the inventory and equipment values for calculations of the proposed tax credit.



Memorandum


The stated purpose of this bill is to encourage development, transportation and use of natural gas liquids for the benefit of natural gas projects in the state by providing certain tax credits related to the production, transportation, storage, use and consumption of natural gas liquids. There is an apparent inconsistency in the definitions for “eligible taxpayer” and “natural gas liquids inventory and equipment.” While “eligible taxpayer” means a producer, storer, user or transporter of natural gas liquids, only “production”, “transport”, and “storage” are included in the definition of “natural gas liquids inventory and equipment” (neglecting usage and consumption). This inconsistency causes uncertainty about whether property tax paid regarding inventory and equipment used in downstream natural gas manufacturing qualifies for this proposed tax credit. While this credit applies first to income tax, very few producers or processors of natural gas have income tax liabilities, they may have substantial Severance tax liabilities. As nearly 4,000 taxpayers pay the Severance Tax that would also be eligible for this proposed credit, significant review of the property tax information would be necessary to determine whether the tax paid on inventory and equipment, and whether it was actually paid in the taxable year where the credit was claimed. There is an effective date for the Corporation Net Income Tax. but no effective date for the Severance Tax. The effective date for the Business Franchise tax would need to be amended, as the Business Franchise Tax was terminated on January 1, 2015. This presumes that the bill will be effective for Severance Tax beginning in 2021. The bill provides that the credit be taken first against either the Personal Income Tax or the Corporation Net Income Tax, and any available credit against the Severance Tax. The order of taking the credit may be difficult, as the Severance Tax is typically allowed as a deduction when calculating the Personal Income Tax or Corporation Net Income Tax. The bill creates doubt as to the continued viability of W.Va. Code §§11-24-13a(g) and 11-24-13c(b)(2). Section 11-24-13a(g) limits application of a credit to the single entity that earned the credit and to the entity’s proportionate share, while section 11-24-13c(b)(2) provides that no tax credit earned by one member of a unitary group, but not fully used or allowed to that member, may be used by another member of the group or applied against the total income of the combined group. In contrast, the bill defines “eligible taxpayer” to include those members of an affiliated group of taxpayers engaged in a unitary business, in which one or more members of the affiliated group is a person subject to the Corporation Net Income Tax or Personal Income Tax. The Tax Commissioner is required to file an annual report with the Joint Committee on Government and Finance detailing the amount of credit claimed and breaking out the amounts claimed against the Business Franchise Tax (expired January 1, 2015), the Corporation Net Income Tax, and the Severance Tax. The bill does not include that the amount of credit claimed against the Personal Income Tax should be included in the report. While the bill’s title states that the bill “authorizes the Tax Commissioner to promulgate rules,” no such explicit authorization can be found in the bill, unless it can be inferred by the bill’s provision, that taxpayers claiming the credit must provide information required by the Tax Commissioner.



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