FISCAL NOTE
Date Requested: February 08, 2022
Time Requested: 03:09 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2314 |
Introduced |
SB596 |
|
|---|
| 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 exempt taxing capital gains on either personal income of corporate income.
According to our interpretation, this bill would exempt short-term and long-term net capital gains from the Personal Income Tax and the Corporation Net Income Tax. Per W. Va. Code §11-10-5p, since the bill has no internal effective date, the legislation, if passed, would become effective January 1, 2023. The bill does not clarify how capital losses would be treated; therefore, it is assumed that the exemption would exclude Net Capital Gain Income as shown on the Individual’s or Corporation’s Federal Return from West Virginia Adjusted Gross Income. West Virginia is a federal conformity state, so this exemption would likely be treated as a decreasing modification to federal adjusted gross income.
The income derived from net capital gains would vary considerably from year to year based on the state of the economy. Per our interpretation, the proposed legislation could potentially result in a decrease in General Revenue Fund collections of more than $31 million in FY2023, $85 million in FY2024, and increasing amounts in subsequent fiscal years. If it is determined that the intent of the bill is to exclude all capital gains without regard to any capital losses, then the negative impact to the General Revenue Fund collections could potentially double.
In the American Rescue Plan Act of 2021, Congress added a maintenance of effort (MOE) requirement for State source revenues for purposes of using State Fiscal Recovery Fund allocations to replace lost revenues. The MOE generally provides for minimum State-source revenue growth of 5.2% per year in comparison with Fiscal Year 2019 baseline revenues. For measurement purposes, actual baseline Fiscal Year 2019 revenue is subject to annual compounded growth of 5.2% to arrive at minimum revenue requirements in future years. If actual revenue growth falls below the MOE required revenue growth, then there is a risk of a claw back of federal funds to the extent such funds were used for revenue replacement, but only if a State enacted a tax reduction after March 3, 2021, of some significance. Any such claw back risk only increases with the size of the actual enacted tax reduction. U.S. Treasury has not yet supplied complete reporting requirements for States regarding this MOE requirement.
Additional administrative costs incurred by the State Tax Department would be $10,000 in FY2023.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2022
Increase/Decrease
(use"-") |
2023
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
10,000 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
10,000 |
0 |
| 2. Estimated Total Revenues |
0 |
-31,000,000 |
-85,000,000 |
Explanation of above estimates (including long-range effect):
According to our interpretation, this bill would exempt short-term and long-term net capital gains from the Personal Income Tax and the Corporation Net Income Tax. Per W. Va. Code §11-10-5p, since the bill has no internal effective date, the legislation, if passed, would become effective January 1, 2023. The bill does not clarify how capital losses would be treated; therefore, it is assumed that the exemption would exclude Net Capital Gain Income as shown on the Individual’s or Corporation’s Federal Return from West Virginia Adjusted Gross Income. West Virginia is a federal conformity state, so this exemption would likely be treated as a decreasing modification to federal adjusted gross income.
The income derived from net capital gains would vary considerably from year to year based on the state of the economy. Per our interpretation, the proposed legislation could potentially result in a decrease in General Revenue Fund collections of more than $31 million in FY2023, $85 million in FY2024, and increasing amounts in subsequent fiscal years. If it is determined that the intent of the bill is to exclude all capital gains without regard to any capital losses, then the negative impact to the General Revenue Fund collections could potentially double.
In the American Rescue Plan Act of 2021, Congress added a maintenance of effort (MOE) requirement for State source revenues for purposes of using State Fiscal Recovery Fund allocations to replace lost revenues. The MOE generally provides for minimum State-source revenue growth of 5.2% per year in comparison with Fiscal Year 2019 baseline revenues. For measurement purposes, actual baseline Fiscal Year 2019 revenue is subject to annual compounded growth of 5.2% to arrive at minimum revenue requirements in future years. If actual revenue growth falls below the MOE required revenue growth, then there is a risk of a claw back of federal funds to the extent such funds were used for revenue replacement, but only if a State enacted a tax reduction after March 3, 2021, of some significance. Any such claw back risk only increases with the size of the actual enacted tax reduction. U.S. Treasury has not yet supplied complete reporting requirements for States regarding this MOE requirement.
Additional administrative costs incurred by the State Tax Department would be $10,000 in FY2023.
Memorandum
The stated purpose of this bill is to exempt taxing capital gains on either personal income or corporate income.
West Virginia is a federal conformity state, so this exemption should be codified as a decreasing modification. The bill is not clear on how capital losses will be treated. The new sections, §§11-21-80 and 11-24-27, are placed in the “Procedures and Administration” parts of their respective articles, which may cause confusion.
Despite the provisions of W.Va. Code §11-21-9 adopting Internal Revenue Code definitions, definitions of “capital gains,” “short-term,” and “long-term” would be helpful, even if the definition is merely a cite to the I.R.C. There is no internal effective date; therefore, some aggressive taxpayers might file amended returns seeking refunds for prior tax periods.
There are several references to capital gains in Chapter 11 and the Tax Department’s rules and publications so there is potential for conflict that should be addressed in the bill. Articles and sections that specifically reference “capital gains” include: §11-21-37a, allocation and apportionment of income of nonresidents from multistate business activity; §11-21-71b, withholding tax on West Virginia source income of nonresidents; §11-24-7, allocation and apportionment; §11-21-5, optional tax for certain resident individuals; §11-25-2 definitions, which pertain to Tax relief for elderly homeowners and renters; and Article 21A, additional income taxes due to federal partnership adjustments.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov