FISCAL NOTE

Date Requested: January 10, 2020
Time Requested: 10:51 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1190 Introduced SB198
CBD Subject:


FUND(S):

General Revenue Fund, Oil & Gas Abandoned Well Plugging Fund

Sources of Revenue:

General Fund Oil & Gas Abandoned Well Plugging Fund

Legislation creates:

Decreases Existing Revenue, Creates New Expense, 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 low volume oil and gas wells from severance tax, and to provide a special use of fee from oil and gas wells which produce more than 5,000 cubic feet of natural gas or one-half barrel of oil per day but less than 60,000 cubic feet of natural gas or for oil produced from any well which produced an average between ½ barrel per day 10 barrels of oil per day. The special use of fee shall be used by the Secretary of the Department of Environmental Protection to plug abandoned oil and gas wells. According to our interpretation of the bill, passage of the bill would exclude natural gas production from wells that produce between 5,000 cubic feet and 60,000 cubic feet per day and oil wells that produce one-half barrel and 10 barrels of oil per day from the current 5.0 percent severance tax. The Severance Tax on this excluded range of natural gas and oil shall be 2.5 percent effective January 1, 2020. The revenue will be deposited into the Oil and Gas Abandoned Well Plugging Fund. The Department of Environmental Protection (DEP) will only receive 90% of the revenue with the other 10% being distributed to the counties and municipalities. 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 $5.2 million and $10.4 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 additional revenue for the Oil and Gas Abandoned Well Plugging Fund should initially range somewhere between $2.1 million and $4.2 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 beginning on July 1, 2022 and each year, thereafter, that the tax rate relating to the Oil and Gas Abandoned Well Plugging Fund for the following year beginning January 1, 2023, with the tax rate going to zero in any year following a year when the balance in the Fund is equal or greater than $4 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. The anticipated revenue impact by fund follows: • State General Revenue Fund collections would decrease by between $1.3 million and $2.5 million in FY2020 and by between $4.7 million and $9.4 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 $2.1 million and $4.2 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 -1,300,000 -4,600,000 0


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


According to our interpretation of the bill, passage of the bill would exclude natural gas production from wells that produce between 5,000 cubic feet and 60,000 cubic feet per day and oil wells that produce one-half barrel and 10 barrels of oil per day from the current 5.0 percent severance tax. The Severance Tax on this excluded range of natural gas and oil shall be 2.5 percent effective January 1, 2020. The revenue will be deposited into the Oil and Gas Abandoned Well Plugging Fund. The Department of Environmental Protection (DEP) will only receive 90% of the revenue with the other 10% being distributed to the counties and municipalities. The 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. 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 $5.2 million and $10.4 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 additional revenue for the Oil and Gas Abandoned Well Plugging Fund should initially range somewhere between $2.1 million and $4.2 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 beginning on June 1, 2022 and each year, thereafter, that the tax rate relating to the Oil and Gas Abandoned Well Plugging Fund for the following year beginning January 1, 2023, with the tax rate going to zero in any year following a year when the balance in the Fund is equal or greater than $4 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. The anticipated revenue impact by fund follows: • State General Revenue Fund collections would decrease by between $1.3 million and $2.5 million in FY2020 and by between $4.7 million and $9.4 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 $2.1 million and $4.2 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 exempt low volume oil and gas wells from severance tax, and to provide a special use of fee from oil and gas wells which produce more than 5,000 cubic feet of natural gas or one-half barrel of oil per day but less than 60,000 cubic feet of natural gas or for oil produced from any well which produced an average between ½ barrel per day 10 barrels of oil per day. The special use of fee shall be used by the Secretary of the Department of Environmental Protection to plug abandoned oil and gas wells. The bill does not add a special use fee, but, rather, reduces the severance tax on certain low volume wells and dedicates those severance tax proceeds to a special revenue fund. This is not clearly explained in the bill title or note. The bill states that the bill has rulemaking authority but does not appear to provide such authority. The bill title also does not mention the internal effective date or that it has changed the tax rate. The bill title also does not mention that the rate may be zero based upon the amount in the Oil and Gas Plugging Fund or that the Tax Commissioner must publish this rate by Administrative Notice. Since the new rate change begins January 1, 2020, this bill is essentially retroactive. Severance taxpayers file monthly and quarterly estimates with the Tax Department and, therefore, will have already started making payments for the 2020 Tax Year by the time this bill becomes effective. Under current law, 10% of the severance tax attributable to the severance of oil and gas is dedicated for use and benefit of the counties and municipalities in this State. W. Va. Code §11-13A-5a. Of that amount 75% is to go to the oil and gas producing counties and the remaining 25% is distributed to all counties and municipalities. This bill would affect the amount of available for these distributions. It appears that 100% of the revenue from the 2.5% severance tax rate goes to the special revenue fund and does not appear to be part of the 10% dedication., although that could be clarified in the bill. There maybe an issue regarding how to treat coalbed methane. The bill does not amend W. Va. Code §11-13A-3d, regarding the imposition on the tax on the privilege of the severing of coalbed methane, and therefore, the tax rate on coalbed methane may stay at 5%. However, 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 the section, the application of the provisions of the Severance Tax Article apply to coalbed methane in the same manner and with the like effect as the provisions apply to natural gas. Otherwise, taxpayers might have an equal protection 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 tax attributable   to coalbed methane are dedicated to local governments under W. Va. Code §11-13A-20a and, therefore, even if coalbed methane receives the lower rate, there is a secondary question as to how those funds should be dedicated in the light of this bill.



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