FISCAL NOTE

Date Requested: February 27, 2019
Time Requested: 11:38 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
3369 Introduced HB2828
CBD Subject:


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 income derived from investments in an Opportunity Zone from personal and corporate net income taxes. According to our interpretation of this bill, in tax years beginning after January 1, 2019, a taxpayer in a Qualified Opportunity Zone business located in West Virginia would be eligible for a decreasing Personal Income Tax modification and a decreasing Corporation Net Income Tax modification during the first ten years of the Qualified Opportunity Zone’s operation in West Virginia. Opportunity Zones were created and added to the federal tax code as a provision of the Tax Cuts and Jobs Act of 2017. The Joint Committee on Taxation estimates the federal Qualified Opportunity Zones program will cost $1.6 billion per year between 2018 and 2025 but generate $8.1 billion per year in 2026 and $2.7 billion in 2027 as investors can no longer defer taxes on the capital gains reinvested in Qualified Opportunity Funds. Since West Virginia taxable income is based on federal taxable income, the federal capital gains income exclusion carries through West Virginia income; therefore, there is no State income tax on capital gain to the extent that it has been eliminated at the federal level. Qualified Opportunity Zone Fund investors can exempt 10 percent of their capital gain income if the investment is held for five years, 15 percent exemption on capital gains income for investments held for seven years and a 100 percent capital gain exemption if the Qualified Opportunity Zone investment is held for ten years. The United States Department of Treasury has certified 55 Opportunity Zones across West Virginia, with 52 of the zones classified as low-income community zones. We do not know how many West Virginia businesses would be designated as Qualified Opportunity Zone businesses or the amount of net business income to be excluded from State tax and are unable to determine the loss to the General Revenue Fund in FY2021 and thereafter. Additional administrative costs incurred by the State Tax Department would be $65,000 in FY2021 and $40,000 per year in fiscal years thereafter.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 40,000
Personal Services 0 0 40,000
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):


According to our interpretation of this bill, in tax years beginning after January 1, 2019, a taxpayer in a Qualified Opportunity Zone business located in West Virginia would be eligible for a decreasing Personal Income Tax modification and a decreasing Corporation Net Income Tax modification during the first ten years of the Qualified Opportunity Zone’s operation in West Virginia. Opportunity Zones were created and added to the federal tax code as a provision of the Tax Cuts and Jobs Act of 2017. The Joint Committee on Taxation estimates the federal Qualified Opportunity Zones program will cost $1.6 billion per year between 2018 and 2025 but generate $8.1 billion per year in 2026 and $2.7 billion in 2027 as investors can no longer defer taxes on the capital gains reinvested in Qualified Opportunity Funds. Since West Virginia taxable income is based on federal taxable income, the federal capital gains income exclusion carries through West Virginia income; therefore, there is no State income tax on capital gain to the extent that it has been eliminated at the federal level. Qualified Opportunity Zone Fund investors can exempt 10 percent of their capital gain income if the investment is held for five years, 15 percent exemption on capital gains income for investments held for seven years and a 100 percent capital gain exemption if the Qualified Opportunity Zone investment is held for ten years. The United States Department of Treasury has certified 55 Opportunity Zones across West Virginia, with 52 of the zones classified as low-income community zones. We do not know how many West Virginia businesses would be designated as Qualified Opportunity Zone businesses or the amount of net business income to be excluded from State tax and are unable to determine the loss to the General Revenue Fund in FY2021 and thereafter. Additional administrative costs incurred by the State Tax Department would be $65,000 in FY2021 and $40,000 per year in fiscal years thereafter.



Memorandum


The stated purpose of this bill is to exempt income derived from investments in an Opportunity Zone from personal and corporate net income taxes. This bill does not address the federal treatment of capital gains. There is no “pay back” provision where the business fails to remain in business for a period of 10 years. The bill fails to address apportionment or application of the exclusion where a corporation net income tax filer has one or more unitary group entities entitled to the exclusion, and others that are not. There is no provision that addresses the treatment of controlled group taxpayers and combined reporting Corporation Net Income Tax filers and other “affiliated group” taxpayers. The bill provides no mandate regarding how the “new business” requirement and the Qualified Opportunity Zone business requirements are to be applied as they relate to affiliated group taxpayers. The bill fails to address limited liability companies. The bill also fails to address the portion of partnership or limited liability company conduit income of a partner or owner/member that is attributable to a qualified opportunity zone business versus that portion of the total income of a partner or owner/member derived from other sources. The proposed West Virginia income tax exclusion applies to ordinary income and this exclusion is applied to the ordinary income of the business and not to the capital gains of the investor in the business. However, since West Virginia taxable income is based on federal taxable income, the federal capital gains income exclusion carries through West Virginia income, therefore, there is no State income tax on capital gain, to the extent that it has been eliminated at the federal level. This bill provides no methodology or provision for attribution and apportionment of the exclusion between income sources that are qualified versus income sources not qualified.



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