FISCAL NOTE

Date Requested: February 26, 2019
Time Requested: 04:43 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
3365 Introduced HB3144
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Creates New 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 establish the North Central Appalachian Coal Tax Rebate, which would be allowed for capital investment in new machinery and equipment directly used in severing coal for sale, profit or commercial use and coal preparation and processing facilities placed in service or use on or after the effective date of this article. The rebate amount would be 35% of the cost of the new machinery and equipment. The rebate amount is limited to 80% of the State portion of the severance taxes attributable to the additional coal produced as a result of the new machinery and equipment. Rules are provided to protect the existing severance tax base attributable to the production of coal.
    
    According to our interpretation, the provisions of this bill would create a 35% investment tax credit for the coal industry in a form of a tax rebate that would offset up to 80 percent of coal severance tax liability in excess of base year coal severance tax liability. The base year for existing coal companies would be tax year 2018. Any new company would have to be engaged in coal production for a period of two years prior to possibly qualifying for this investment tax credit. Any unused tax credit for any single year of investment would be carried forward for a period not to exceed ten years.
    The coal industry is capital intensive. Nearly all companies would annually qualify for an investment credit based on new investment in machinery and equipment with a useful life of at least five years. However, use of the tax credit would depend on growth in pre-credit tax liability above the amount of tax liability for a base year. In a normal market year, some companies may produce more coal or incur a higher tax liability and other companies may face either an unchanged tax liability or a incur lower tax liability. The tax credit program would reward those companies with expanded tax liability.
    
    We are unable to provide an accurate estimate of cost associated with the provisions of this bill. The size of the tax credit program would partially depend on the future fortunes of this industry. In the past, the coal industry has always experienced peaks and valleys. The following is a summary of pre-credit coal severance tax liability associated with annual coal severance tax return filings over the past decade:
    
    Coal Severance Tax: Annual Return Data
    
    Tax Year 2008—Pre-Credit Tax $416.8 million, 24% increase from prior year
    Tax Year 2009—Pre-Credit Tax $391.4 million, -6% increase from prior year
    Tax Year 2010—Pre-Credit Tax $412.4 million, 5% increase from prior year
    Tax Year 2011—Pre-Credit Tax $484.2 million, 17% increase from prior year
    Tax Year 2012—Pre-Credit Tax $421.4 million, -13% increase from prior year
    Tax Year 2013—Pre-Credit Tax $354.8 million, 16% increase from prior year
    Tax Year 2014—Pre-Credit Tax $335.9 million, -5% increase from prior year
    Tax Year 2015—Pre-Credit Tax $252.9 million, -25% increase from prior year
    Tax Year 2016—Pre-Credit Tax $203.0 million, -20% increase from prior year
    Tax Year 2017—Pre-Credit Tax $259.0 million, 28% increase from prior year
    Tax Year 2018*—Pre-Credit Tax $290.0 million, 12% increase from prior year
    
    
    *Preliminary Estimates
    
    Given the amount of tax credit offered by the State in this proposed legislation at 35 percent of cost of new machinery and equipment, the proposed tax credit should generally result in the rebate of 80 percent of any future coal severance tax collections in future years that amount to more than the base amount of industry tax liability for 2018. In this case, if industry pre-credit tax liability exceeds $290 million in any future year beginning in Tax Year 2019, the State would rebate roughly 80% of the overage back to the industry. Current projections over the next five years do not currently indicate any significant upside beyond tax collection levels for Tax Year 2018. Even if there is no upside on future overall collections, there could be some tax credit costs related to growth within some coal markets of benefit to some taxpayers offset by decline in other market segments involving unrelated taxpayers.
    
    Additional administrative costs to the State Tax Department would be $70,000 in FY2020 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 70,000 40,000
Personal Services 0 20,000 40,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 50,000 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 create a 35% investment tax credit for the coal industry in a form of a tax rebate that would offset up to 80 percent of coal severance tax liability in excess of base year coal severance tax liability. The base year for existing coal companies would be tax year 2018. Any new company would have to be engaged in coal production for a period of two years prior to possibly qualifying for this investment tax credit. Any unused tax credit for any single year of investment would be carried forward for a period not to exceed ten years.
    The coal industry is capital intensive. Nearly all companies would annually qualify for an investment credit based on new investment in machinery and equipment with a useful life of at least five years. However, use of the tax credit would depend on growth in pre-credit tax liability above the amount of tax liability for a base year. In a normal market year, some companies may produce more coal or incur a higher tax liability and other companies may face either an unchanged tax liability or a incur lower tax liability. The tax credit program would reward those companies with expanded tax liability.
    
    We are unable to provide an accurate estimate of cost associated with the provisions of this bill. The size of the tax credit program would partially depend on the future fortunes of this industry. In the past, the coal industry has always experienced peaks and valleys. The following is a summary of pre-credit coal severance tax liability associated with annual coal severance tax return filings over the past decade:
    
    Coal Severance Tax: Annual Return Data
    
    Tax Year 2008—Pre-Credit Tax $416.8 million, 24% increase from prior year
    Tax Year 2009—Pre-Credit Tax $391.4 million, -6% increase from prior year
    Tax Year 2010—Pre-Credit Tax $412.4 million, 5% increase from prior year
    Tax Year 2011—Pre-Credit Tax $484.2 million, 17% increase from prior year
    Tax Year 2012—Pre-Credit Tax $421.4 million, -13% increase from prior year
    Tax Year 2013—Pre-Credit Tax $354.8 million, 16% increase from prior year
    Tax Year 2014—Pre-Credit Tax $335.9 million, -5% increase from prior year
    Tax Year 2015—Pre-Credit Tax $252.9 million, -25% increase from prior year
    Tax Year 2016—Pre-Credit Tax $203.0 million, -20% increase from prior year
    Tax Year 2017—Pre-Credit Tax $259.0 million, 28% increase from prior year
    Tax Year 2018*—Pre-Credit Tax $290.0 million, 12% increase from prior year
    
    
    *Preliminary Estimates
    
    Given the amount of tax credit offered by the State in this proposed legislation at 35 percent of cost of new machinery and equipment, the proposed tax credit should generally result in the rebate of 80 percent of any future coal severance tax collections in future years that amount to more than the base amount of industry tax liability for 2018. In this case, if industry pre-credit tax liability exceeds $290 million in any future year beginning in Tax Year 2019, the State would rebate roughly 80% of the overage back to the industry. Current projections over the next five years do not currently indicate any significant upside beyond tax collection levels for Tax Year 2018. Even if there is no upside on future overall collections, there could be some tax credit costs related to growth within some coal markets of benefit to some taxpayers offset by decline in other market segments involving unrelated taxpayers.
    
    A survey of other states indicates that Illinois also offers an investment tax credit for investment in coal mining machinery. The tax credit in Illinois is a much more modest 0.5% of qualified investment with the tax credit applicable against State income tax liability.
    
    Additional administrative costs to the State Tax Department would be $70,000 in FY2020 and $40,000 per year in fiscal years thereafter.
    



Memorandum


    



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