FISCAL NOTE
Date Requested: February 17, 2020
Time Requested: 10:23 AM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2332 |
Comm. Sub. |
HB4439 |
|
|---|
| 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 further clarify how a taxpayer can meet the requirement that aggregate total production from all mines operated by the taxpayer or by members of the taxpayer’s controlled or affiliated groups has increased. In determining whether a taxpayer has demonstrated the requisite increase in total production, only coal production that would qualify for the severance tax rebate shall be included in calculating the taxpayer’s aggregate base production.
According to our interpretation, the provisions of this bill would make increased severance taxes the primary factor in calculating the severance tax offset by the 35% rebate tax credit. This change minimizes the current Statute’s focus on increased coal production by the controlled group in order to calculate the amount of severance tax rebate. The program involves an unusually large 35% investment tax credit for new investment in a coal mine. Such a program differs from other general investment tax credits such as the 5% Manufacturing Investment Tax Credit designed to encourage additional capital investment for all qualified taxpayers through a tax credit pro-rated over 10 years. The Coal Severance Tax Rebate Statute as enacted in 2019 includes highly complex provisions attempting to limit this tax credit to net increases in coal production associated with new capital investment. The complex provisions were deemed necessary by policymakers in their effort to limit a highly generous tax credit to special net expansion efforts by the coal industry. All coal companies normally make additional capital investments each year as part of their normal business plans with new mine developments often replacing older operations with reserve depletion. However, the Coal Severance Tax Rebate would only apply to net expansionary activities.
The Tax Department has drafted rules designed to largely preserve employment levels of tax credit recipients by limiting the use of the tax credit to amount of severance tax owed on additional net coal production increase of the coal company and its controlled group. The provisions of this bill would potentially reward a coal company with as little as one ton of increased production with a generous 35% investment tax credit against 80% of its increase in State coal severance tax collections over a base year. Metallurgical coal market price changes would play a bigger role in determination of annual tax credit benefits and overall coal production would play a smaller role. Net employment loss for the controlled group tax rebate beneficiary is more likely to occur with this proposed change. The Rebate Program would further promote industry consolidation in West Virginia.
The current market conditions for the demand for West Virginia steam and metallurgical coal will determine who is mostly likely to use this tax rebate when making capital investments. According to data provided by the Energy Information Agency, the demand for steam coal mined in West Virginia is predicted to continue to decline over the next few years. This decline in demand can mostly be attributed to the closure of coal-fired power plants in favor of power generated from natural gas. This trend seems irreversible in the short and long term due to the abundance of cheap natural gas produced mostly from horizontal fracking wells in the Marcellus and Utica shale formations located in the northern portion of the state.
At the current time, there is still a present and foreseeable demand for West Virginia metallurgical coal in both domestic and international markets. Some current members of the West Virginia coal industry also recognize this fact and have made decisions to invest in new mines or rehabilitate existing operations to produce metallurgical coal within the State. According to various articles dating as far back February 2019 in Coal Age magazine, the following West Virginia coal companies plan to make such investments:
• Arch Coal’s investment of $360 million to $390 million into the Leer South Mine located in Barbour County
• CONSOL’s investment of $65 million to $80 million into the Itmann Mine located in Wyoming County
• Contura’s investment of $30 million into the Lynn Branch Mine located in Logan County.
The bill rewards an investing company potentially larger benefits for even minor increases in coal production, based on changes in coal price, with greater reward when prices rise and less when prices fall. The tax rebate may promote consolidation of the West Virginia coal industry by rewarding more productive mines over the less productive ones.
Additional administrative costs to the Tax Department would be $25,000 in FY2021.
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 |
25,000 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
25,000 |
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 make increased severance taxes the primary factor in calculating the severance tax offset by the 35% rebate tax credit. This change minimizes the current Statute’s focus on increased coal production by the controlled group in order to calculate the amount of severance tax rebate. The program involves an unusually large 35% investment tax credit for new investment in a coal mine. Such a program differs from other general investment tax credits such as the 5% Manufacturing Investment Tax Credit designed to encourage additional capital investment for all qualified taxpayers through a tax credit pro-rated over 10 years. The Coal Severance Tax Rebate Statute as enacted in 2019 includes highly complex provisions attempting to limit this tax credit to net increases in coal production associated with new capital investment. The complex provisions were deemed necessary by policymakers in their effort to limit a highly generous tax credit to special net expansion efforts by the coal industry. All coal companies normally make additional capital investments each year as part of their normal business plans with new mine developments often replacing older operations with reserve depletion. However, the Coal Severance Tax Rebate would only apply to net expansionary activities.
The Tax Department has drafted rules designed to largely preserve employment levels of tax credit recipients by limiting the use of the tax credit to amount of severance tax owed on additional net coal production increase of the coal company and its controlled group. The provisions of this bill would potentially reward a coal company with as little as one ton of increased production with a generous 35% investment tax credit against 80% of its increase in State coal severance tax collections over a base year. Metallurgical coal market price changes would play a bigger role in determination of annual tax credit benefits and overall coal production would play a smaller role. Net employment loss for the controlled group tax rebate beneficiary is more likely to occur with this proposed change. The Rebate Program would further promote industry consolidation in West Virginia.
The current market conditions for the demand for West Virginia steam and metallurgical coal will determine who is mostly likely to use this tax rebate when making capital investments. According to data provided by the Energy Information Agency, the demand for steam coal mined in West Virginia is predicted to continue to decline over the next few years. This decline in demand can mostly be attributed to the closure of coal-fired power plants in favor of power generated from natural gas. This trend seems irreversible in the short and long term due to the abundance of cheap natural gas produced mostly from horizontal fracking wells in the Marcellus and Utica shale formations located in the northern portion of the state.
At the current time, there is still a present and foreseeable demand for West Virginia metallurgical coal in both domestic and international markets. Some current members of the West Virginia coal industry also recognize this fact and have made decisions to invest in new mines or rehabilitate existing operations to produce metallurgical coal within the State. According to various articles dating as far back February 2019 in Coal Age magazine, the following West Virginia coal companies plan to make such investments:
• Arch Coal’s investment of $360 million to $390 million into the Leer South Mine located in Barbour County
• CONSOL’s investment of $65 million to $80 million into the Itmann Mine located in Wyoming County
• Contura’s investment of $30 million into the Lynn Branch Mine located in Logan County.
The bill rewards an investing company potentially larger benefits for even minor increases in coal production, based on changes in coal price, with greater reward when prices rise and less when prices fall. The tax rebate may promote consolidation of the West Virginia coal industry by rewarding more productive mines over the less productive ones.
Additional administrative costs to the Tax Department would be $25,000 in FY2021.
Memorandum
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov