FISCAL NOTE

Date Requested: January 19, 2018
Time Requested: 11:45 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1836 Introduced HB4205
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 entitle natural resource producers to the economic opportunity tax credit. The bill allows the credit to be used to offset the severance tax. The bill establishes conditions. The bill modifies definitions.
    
    The West Virginia Economic Opportunity Tax Credit (WV/EOTC) is an investment tax credit tied to job creation that generally yields large amounts of tax credit for eligible Taxpayers with tax liability being the ultimate limitation on the dollar amount of credit utilized. The credit generally applies against income tax for eligible taxpayers and results in an overall ratio of tax credit per new job that falls within a range that might approximate the amount of economic tax feedback related to the new job created.
    
    A similar credit in place between 1985 and 2002 was initially allowed to apply against Severance Tax. The generous amount of tax credit generated by operation of the investment credit formula produced considerable amounts of tax credit, particularly for the coal industry (and, to a lesser extent, the natural gas industry) that significantly eroded Severance Tax yield, particularly between 1987 and 1990 as tax credit offsets against the Severance Tax rose from less than $2 million in 1986 to roughly $52 million by 1990. During this period, overall coal industry employment contracted significantly. Even among tax credit beneficiaries, there was a net loss of roughly 1,000 jobs as several claims involved jobs saved through bankruptcy or other related determinations.
    
    Tax credit benefits enjoyed by some industry players created a highly unlevel fiscal playing field within the State as similarly situated taxpayers had significantly different Severance Tax liabilities. The overall effective Severance Tax rate decreased at a rapid rate and the State budget was under increasing stress. The ratio of tax credits to General Revenue Fund collections exceeded 5 percent, a very high ratio relative to other states. The State Legislature responded by increasing various business tax rates, including Severance Tax rates by an average of roughly 25 percent in 1989. By early 1990, the Legislature enacted legislation eliminating the ability of taxpayers to use future tax credits against Severance Tax due to concerns about lack of employment increase and erosion of the tax base. The Legislature also enacted a minimum State Severance Tax to help limit potential tax credit exposure. Due to various grandfather rules and a long tail related to the timing of tax credit benefits, the total aggregate cost of the jobs creation tax credit against Severance Tax alone was nearly $841 million over a period of 26 years between 1985 and 2010.
    
    Based on experience, the proposed extension of the WV/EOTC program to the Severance Tax would likely also result in a significant loss of Severance Tax collections and significant fiscal budgetary pressures within a few short years. This tax credit is a bit less generous than its predecessor but would still generate significant amounts of tax credit relative to any associated job creation along with an unlevel tax playing field for those not receiving such tax benefits. It is expected that the natural gas industry would be a much larger participant in the proposed broadening of the WV/EOTC program than in the prior credit, given recent expansion in that industry, which would contribute to the impact such credits could have on Severance Tax collections. When the cost of the previous tax credit, which was terminated after just a few years of existence, peaked against severance tax at roughly $67 million in 1991, the total net yield of the Severance Tax was roughly $177 million. By contrast, the estimated total yield of the Severance Tax in FY2019 is over $400 million.
    
    Additional administrative costs incurred by the State Tax Department would be $46,000 in FY2019 and $35,000 in fiscal years thereafter.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2018
Increase/Decrease
(use"-")
2019
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 46,000 35,000
Personal Services 0 35,000 35,000
Current Expenses 0 0 0
Repairs and Alterations 0 1,000 0
Assets 0 0 0
Other 0 10,000 0
2. Estimated Total Revenues 0 0 0


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


    The West Virginia Economic Opportunity Tax Credit (WV/EOTC) is an investment tax credit tied to job creation that generally yields large amounts of tax credit for eligible Taxpayers with tax liability being the ultimate limitation on the dollar amount of credit utilized. The credit generally applies against income tax for eligible taxpayers and results in an overall ratio of tax credit per new job that falls within a range that might approximate the amount of economic tax feedback related to the new job created.
    
    A similar credit in place between 1985 and 2002 was initially allowed to apply against Severance Tax. The generous amount of tax credit generated by operation of the investment credit formula produced considerable amounts of tax credit, particularly for the coal industry (and, to a lesser extent, the natural gas industry) that significantly eroded Severance Tax yield, particularly between 1987 and 1990 as tax credit offsets against the Severance Tax rose from less than $2 million in 1986 to roughly $52 million by 1990. During this period, overall coal industry employment contracted significantly. Even among tax credit beneficiaries, there was a net loss of roughly 1,000 jobs as several claims involved jobs saved through bankruptcy or other related determinations.
    
    Tax credit benefits enjoyed by some industry players created a highly unlevel fiscal playing field within the State as similarly situated taxpayers had significantly different Severance Tax liabilities. The overall effective Severance Tax rate decreased at a rapid rate and the State budget was under increasing stress. The ratio of tax credits to General Revenue Fund collections exceeded 5 percent, a very high ratio relative to other states. The State Legislature responded by increasing various business tax rates, including Severance Tax rates by an average of roughly 25 percent in 1989. By early 1990, the Legislature enacted legislation eliminating the ability of taxpayers to use future tax credits against Severance Tax due to concerns about lack of employment increase and erosion of the tax base. The Legislature also enacted a minimum State Severance Tax to help limit potential tax credit exposure. Due to various grandfather rules and a long tail related to the timing of tax credit benefits, the total aggregate cost of the jobs creation tax credit against Severance Tax alone was nearly $841 million over a period of 26 years between 1985 and 2010.
    
    Based on experience, the proposed extension of the WV/EOTC program to the Severance Tax would likely also result in a significant loss of Severance Tax collections and significant fiscal budgetary pressures within a few short years. This tax credit is a bit less generous than its predecessor but would still generate significant amounts of tax credit relative to any associated job creation along with an unlevel tax playing field for those not receiving such tax benefits. It is expected that the natural gas industry would be a much larger participant in the proposed broadening of the WV/EOTC program than in the prior credit, given recent expansion in that industry, which would contribute to the impact such credits could have on Severance Tax collections. When the cost of the previous tax credit, which was terminated after just a few years of existence, peaked against severance tax at roughly $67 million in 1991, the total net yield of the Severance Tax was roughly $177 million. By contrast, the estimated total yield of the Severance Tax in FY2019 is over $400 million.
    
    Additional administrative costs incurred by the State Tax Department would be $46,000 in FY2019 and $35,000 in fiscal years thereafter.
    



Memorandum


    The stated purpose of this bill is to entitle natural resource producers to the economic opportunity tax credit. The bill allows the credit to be used to offset the severance tax. The bill establishes conditions. The bill modifies definitions.
    
    The phrase “the amount of §11-13A-1 et seq. of this code taxes” needs further clarification.
    
    



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