Date Requested:March 22, 2005
Time Requested:05:01 PM
Agency: State Tax Department
CBD Number: Version: Bill Number: Resolution Number:
2005R1895 Intro SB684
CBD Subject: Severance Tax from 5% to 3% on Natural G
FUND(S)
General Revenue Fund
Sources of Revenue
General Fund
Legislation creates:
Neither Program nor Fund

Fiscal Note Summary

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

    The stated purpose of this bill is to reduce the severance rate on natural gas from five percent to three percent for wells drilled on or after December 1, 2005; to remove the five-year severance tax exemption for coalbed methane wells drilled on or after December 1, 2005; and to reduce the severance tax rate on coalbed methane to three percent.
    
    According to our interpretation and based upon available data, passage of this bill would result in a net gain to the General Revenue Fund of approximately $150,000 in 2006 and net losses to the General Revenue Fund of roughly $1.2 million in 2007 and $2.6 million in 2008. The annual net loss to the General Revenue Fund will continue to increase over time as a greater proportion of production becomes taxable under the 3 percent rate. At current levels of prices and production, the annual net loss to the General Revenue Fund will ultimately exceed $15.0 million.
    
    In addition to the net loss to the General Revenue Fund, passage of this bill would adversely affect distributions to local governments. The net loss to local governments would be approximately $15,000 in 2006, $200,000 in 2007, and $400,000 in 2008. The annual net loss to local governments will continue to increase over time as a greater proportion of production becomes taxable under the 3 percent rate. At current levels of prices and production, the annual net loss to local governments will ultimately exceed $1.8 million.
    
    Additional administrative costs to the State Tax Department associated with this bill would be minimal.

Fiscal Note Detail
Over-all effect
Effect of Proposal Fiscal Year
2005
Increase/Decrease
(use"-")
2006
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 4,000 0 0
Personal Services 0 0 0
Current Expenses 4,000 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 150,000 -15,000,000
3. Explanation of above estimates (including long-range effect):
    According to our interpretation and based upon available data, passage of this bill would result in a net gain to the General Revenue Fund of approximately $150,000 in 2006 and net losses to the General Revenue Fund of roughly $1.2 million in 2007 and $2.6 million in 2008. The net loss to the General Revenue Fund will continue to increase over time as a greater proportion of production becomes taxable under the 3 percent rate. Passage of this bill would ultimately result in all natural gas production being taxed at the 3 percent rate. At the expected 2005 level of price and production, the total annual loss to the General Revenue Fund from all production being taxed at 3 percent will be approximately $16.5 million.
    
    Passage of this bill would remove the five-year severance tax exemption for new coalbed methane wells. At the expected 2005 level of price and production, the total annual gain to the General Revenue Fund from all coalbed methane well production being taxed at 3 percent will be approximately $1.2 million when fully phased-in. The combination of revenue impacts ultimately results in an annual net loss of over $15.0 million to the General Revenue Fund.
    
    In addition to the net loss to the General Revenue Fund, passage of this bill would adversely affect distributions to local governments. The net loss to local governments would be approximately $15,000 in 2006, $200,000 in 2007, and $400,000 in 2008. The net loss to local governments will continue to increase over time as a greater proportion of production becomes taxable under the 3 percent rate. Passage of this bill would ultimately result in all natural gas production being taxed at the 3 percent rate. At the expected 2005 level of price and production, the total annual loss to local governments from all production being taxed at 3 percent will be approximately $1.8 million.
    
    Additional administrative costs to the State Tax Department associated with this bill would be due to the printing and promotional expense of notifying taxpayers.
    


Memorandum
Person submitting Fiscal Note:
Mark Muchow
Email Address:
kpetry@tax.state.wv.us