FISCAL NOTE

Date Requested: January 21, 2019
Time Requested: 01:35 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1528 Introduced HB2543
CBD Subject: Taxation


FUND(S):

General Revenue Fund, Oil & Gas Counties Revenue Fund, All Counties & Municipalities Revenue Fund

Sources of Revenue:

General Fund General Revenue Fund, OIl & Gas Counties Revenue Fund, All Counties & Municipalities Revenue Fund

Legislation creates:

Increases Revenue From Existing Sources, Increases Existing Expenses



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    The stated purpose of the bill is to increase the tax on the privilege of severing natural gas and oil from 5 percent to 7 and one-half percent.
    
    Increasing the Severance Tax on natural gas from 5 percent to 7½ percent would initially result in a revenue increase of roughly $107 million in the first full year. Under current law, 10 percent of the Severance Tax attributable to severance of oil and gas is dedicated for the use and benefit of the counties and municipalities in this State. Revenues for counties and associated municipalities would increase by roughly $10.7 million or more per year beginning as early as FY2022. The remaining 90 percent of net proceeds would accrue to the State General Revenue Fund. Given the lack of an internal effective date, we assume that the proposed tax changes would first become effective as of January 1, 2020. FY2020 General Revenues would increase by roughly $44 million if the effective date is January 1, 2020.
    
    Additional administrative costs to the Tax Department would be $25,000 in FY2019, $65,000 in FY2020 and $10,000 in subsequent fiscal years
    



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 25,000 65,000 10,000
Personal Services 0 40,000 10,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 25,000 25,000 0
2. Estimated Total Revenues 0 44,000,000 107,000,000


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


    Increasing the Severance Tax on natural gas from 5 percent to 7½ percent would initially result in a revenue increase of roughly $107 million in the first full year. Under current law, 10 percent of the Severance Tax attributable to severance of oil and gas is dedicated for the use and benefit of the counties and municipalities in this State. Revenues for counties and associated municipalities would increase by roughly $10.7 million or more per year beginning as early as FY2022. The remaining 90 percent of net proceeds would accrue to the State General Revenue Fund. Given the lack of an internal effective date, we assume that the proposed tax changes would first become effective as of January 1, 2020. FY2020 General Revenues would increase by roughly $44 million if the effective date is January 1, 2020.
    
    Additional administrative costs to the Tax Department would be $25,000 in FY2019, $65,000 in FY2020 and $10,000 in subsequent fiscal years
    



Memorandum


    The stated purpose of the bill is to increase the tax on the privilege of severing natural gas and oil from 5 percent to 7 and one-half percent.
    
    Pursuant to W. Va. Code §11-10-5p, the bill does not have an internal effective date for the change. Therefore, any rate change will first apply to taxpayers for taxable years beginning after the effective date of the bill. This may cause some issues because some severance taxpayers file their annual return on a calendar year, while others file their annual returns on a fiscal year in accordance with W. Va. Code §11-13A-8. As a result, some taxpayers have the increased rate to apply to them earlier than other taxpayers. This may cause administrative and programming issues for the Tax Department. It would be cleaner if there is an internal effective date for the change.
    
    It is also possible that a taxpayer may raise an equal protection argument under Section 10 of Article III of the West Virginia Constitution, because this bill raises the severance tax on natural gas under W. Va. Code §11-13-3a but does not raise the rate on coalbed methane under W. Va. Code §11-13A-3d. Coalbed methane stays at 5% rate under this bill. The state legislature “may make reasonable classifications in enacting statues provided the classifications are based upon some real and substantial relationship to the objects sought to be accomplished by the legislation, and any person who assails any such classification has the burden of showing that it is essentially arbitrary and unreasonable.” Sylb. Pt. 5, United Fuel Gas Co. v. Battle, 153 W. Va. 222, 167 S.E. 2d 890 (1969). Therefore, there must be some basis for placing an increased tax on natural gas extracted from drilling wells and not on the natural gas extracted from coal beds.
    
    The bill also makes a change to W. Va. Code §11-13A-3a(b) which is not underlined as a change and is incorrect. Under correct law, W. Va. Code §11-13A-3a(b), states: The tax imposed in subsection (a) of this section shall be…” In this bill, W. Va. Code §11-13A-3a(b) states: “The tax imposed in §11-13A-3a(b) of this code shall be …” This is a typographical error. The tax is imposed in subsection (a), and not (b). Furthermore, it does not make sense for a subsection to refer to itself.
    
    
    



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