Date Requested:March 23, 2005
Time Requested:03:17 PM
Agency: State Tax Department
CBD Number: Version: Bill Number: Resolution Number:
2005R1771 Intro SB688
CBD Subject: Economic Development Districts
FUND(S)
General Revenue Fund, local governments
Sources of Revenue
General Fund,Other Fund local governments
Legislation creates:
A New Program

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 First Class Economic Development Act, giving tax credits to businesses which invest in revitalizing deteriorated property in cities.
    
    According to our interpretation, this bill would establish the “First Class Cities Economic Development District Program.” The program would provide tax exemptions, deductions, abatements or credits to residents and qualified businesses located in designated economic development districts. Also, persons who own interests in qualified pass-through entities would be eligible for the tax benefits. The bill provides that the Governor will propose the designation of deteriorated property within cities as economic development districts and the period of time for which the tax exemptions, deductions, abatements or credits may be granted. The aggregate amount of property designated as economic development districts may not exceed 85 acres and the tax exemptions, deductions, abatements or credits cannot extend beyond December 31, 2018. In addition, the bill specifies the requirements for annual certification by businesses and the residency requirement for individuals. The West Virginia Economic Development Authority and the Department of Revenue are required to report annually to the Legislature on the economic effects of this article.
    
    Absent the identification of potential economic development districts, the number and type of businesses within the districts and the number of residences within the districts, we are unable to accurately estimate the potential revenue impact of this bill, However, the revenue reduction to the State and to local governments could be significant.
    
    Additional administrative costs to the Tax Department associated with this bill would be roughly $54,000 in FY 2006 and roughly $41,000 in FY 2007 and each year thereafter. Additionally, the West Virginia Economic Development Authority and local governments may experience increased costs due to this bill.
    

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 0 54,000 41,000
Personal Services 0 41,000 41,000
Current Expenses 0 5,000 0
Repairs and Alterations 0 0 0
Assets 0 8,000 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0
3. Explanation of above estimates (including long-range effect):
    Passage of this bill would establish the “First Class Cities Economic Development District Program.” The program would provide tax exemptions, deductions, abatements or credits to residents and qualified businesses located in designated economic development districts. Also, persons who own interests in qualified pass-through entities would be eligible for the tax benefits. The bill provides that the Governor will propose the designation of deteriorated property within cities as economic development districts and the period of time for which the tax exemptions, deductions, abatements or credits may be granted. The aggregate amount of property designated as economic development districts may not exceed 85 acres and the tax exemptions, deductions, abatements or credits cannot extend beyond December 31, 2018. In addition, the bill specifies the requirements for annual certification by businesses and the residency requirement for individuals. The West Virginia Economic Development Authority and the Department of Revenue are required to report annually to the Legislature on the economic effects of this article.
    
    Absent the identification of potential economic development districts, the number and type of businesses within the districts and the number of residences within the districts, we are unable to accurately estimate the potential revenue impact of this bill, However, the revenue reduction to the State and to local governments could be significant.
    
    Additional administrative costs to the Tax Department associated with this bill would be roughly $54,000 in FY 2006 and roughly $41,000 in FY 2007 and each year thereafter. The additional costs include the hiring of one employee to monitor applicants’ current tax liabilities, research the tax exemptions, deductions, abatements or credits claimed and to compile the required annual report for the Department of Revenue (Tax Department). Additionally, the West Virginia Economic Development Authority and local governments may experience increased costs due to this bill.
    
    
    


Memorandum
Person submitting Fiscal Note:
Mark Muchow
Email Address:
kpetry@tax.state.wv.us
    The stated purpose of this bill is to establish the First Class Economic Development Act, giving tax credits to businesses which invest in revitalizing deteriorated property in cities.
    
    As written, the bill indicates that net income from the operation of a qualified business within an economic development district is generally exempt from the Personal Income Tax. However, businesses which operate both within and outside the State “shall first determine its West Virginia activity over its activity everywhere by applying the three-factor apportionment formula as set forth in the Department of Revenue personal income tax rules...” However, there are no such three-factor apportionment rules for the Personal Income Tax.
    
    In proposed W. Va. Code §11-28-12, the bill states “a corporation which is a qualified business may claim a credit against the tax imposed for tax liability attributable to business activity conducted within the economic development district in the taxable year. No credit may be claimed for activities in the taxable year.” The intended meaning of the previous statements is unclear. In addition, the bill provides for a credit for the Corporation Net Income Tax and an exemption for the Personal Income Tax. The terms “tax credit” and “exemption” are not necessarily equivalent. Also, the bill indicates that a corporation shall apportion its taxable income to the economic development district using a three-factor apportionment formula with equal weights (i.e, 33.3%) for the property factor, payroll factor and the sales factor. The “three-factor double-weighted sales” general apportionment formula for the Corporation Net Income Tax provides for the following weights: property - 25%, payroll - 25%, and sales 50%.