Date Requested:March 30, 2005
Time Requested:12:49 PM
Agency: State Tax Department
CBD Number: Version: Bill Number: Resolution Number:
Intro HB3358
CBD Subject: Reduce Severance Tax on Natural Gas
FUND(S)
General Revenue Fund and Forestry Tax Fund
Sources of Revenue
General Fund,Other Fund Forestry Tax 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 tax rate on natural gas from five percent to four percent for wells drilled on or after July 1, 2005; to reduce the severance tax rate on timber from three and twenty-two hundredths percent to one and twenty-two hundredths percent on December 1, 2005; to remove the five-year severance tax exemption for coalbed methane wells drilled on or after July 1, 2005; and to reduce the severance tax rate on coalbed methane wells on or after July 1, 2005, from five to four percent.
    
    According to our interpretation and based upon available data, passage of this bill would result in a net gain of $550,000 in 2006 to the General Revenue Fund, and net losses to the General Revenue Fund of approximately $250,000 in 2007, and $750,000 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 4 percent rate. At current levels of prices and production, the annual net loss to the General Revenue Fund will ultimately approach $6.5 million. An annual increase of roughly $1.6 million in coal-bed methane tax revenues partially offsets a decrease in natural gas severance tax receipts associated with the rate reduction that eventually tops out at roughly $8.1 million.
    
    
    Passage of this bill will result in a net loss to the Forestry Tax Fund of approximately $800,000 in 2006, and $2.0 million each year thereafter due to the decrease in the Timber Severance Tax Rate.
    
    In addition to the net loss to the General Revenue and Forestry Tax Funds, passage of this bill would adversely affect distributions to local governments. The net loss to local governments would be approximately $50,000 in 2006, $150,000 in 2007, and $230,000 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 4 percent rate. At current levels of prices and production, the annual net loss to local governments will ultimately approach $900,000.
    
    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 -300,000 -9,400,000
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 of $550,000 in 2006 to the General Revenue Fund, and net losses to the General Revenue Fund of approximately $250,000 in 2007, and $750,000 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 4 percent rate. Passage of this bill would ultimately result in all natural gas production being taxed at the 4 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 4 percent will be approximately $6.5 million.
    
    Passage of this bill would remove the five-year severance tax exemption for new coal-bed methane wells. At the expected 2005 level of price and production, the total annual gain to general revenue from all coal-bed methane well production being taxed at 4 percent will be approximately $1.6 million. The additional revenue from taxes on coal-bed methane gas partially offsets a State General Revenue Fund revenue decrease attributable to a reduced tax rate for new gas wells that gradually rises from slightly less than $1 million in the first year to a maximum of roughly $8.1 million per year.
    
    Passage of this bill will result in a net loss to the Forestry Tax Fund of approximately $800,000 in 2006, and $2.0 million each year thereafter due to the decrease in the Timber Severance Tax Rate.
    
    In addition to the net losses to the General Revenue and Forestry Tax Funds, passage of this bill would adversely affect distributions to local governments. The net loss to local governments would be approximately $50,000 in 2006, $150,000 in 2007, and $230,000 in 2008. The net loss to local governments will continue to increase over time as a greater proportion of production becomes taxable under the 4 percent rate. Passage of this bill would ultimately result in all natural gas production being taxed at the 4 percent rate. At the expected 2005 level of price and production, the total annual loss to local governments from all production being taxed at 4 percent would be approximately $0.9 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