Date Requested:January 11, 2012
Time Requested:03:02 PM
Agency: State Tax Department
CBD Number: Version: Bill Number: Resolution Number:
2012R1047 Introduced SB15
CBD Subject: TAX CREDIT AGAINST BUSINESS FRANCHISE TAX
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 authorize a tax credit against business franchise tax, corporate net income tax or personal income tax for eligible expenditures incurred in placing in service a residential or nonresidential energy-efficient building.
    
    According to our interpretation, this bill would create the Energy Efficient Building Property Tax Credit, a tax credit to taxpayers who are the owners of a residential or commercial building which the US Environmental Protection Agency has awarded the ENERGY STAR® label, or taxpayers owning building plans which have earned the Designed to Earn the ENERGY STAR® label. The proposed bill requires taxpayers claiming the credit based upon ownership of eligible building plans to complete construction of the eligible building and obtain ENERGY STAR® certification within three years from the time the credit was initially taken. The credit, the greater of 1.5 percent of eligible expenditures, or $1 per square foot of the eligible building as constructed or as designed and portrayed on the building plan, may be used to offset Business Franchise Tax, Corporation Net Income Tax, or Personal Income Tax. The new credit would be effective for tax years beginning on or after January 1, 2012, but with eligible expenditures occurring on or after July 1, 2012.
    
    Due to the current low market penetration (i.e., less than 3 percent for West Virginia) of qualifying homes as reported via the Qualified New Homes Market Indices for States for 2010 (an index comparing the number of ENERGY STAR® qualified new homes built to the number of privately owned housing units permitted) as posted on the ENERGY STAR® web site, the potential exists for rapid escalation of qualifying homes. The acceleration of qualifying homes will rapidly increase the potential costs of the credit. While the State Tax Department does not have sufficient data to estimate the potential revenue impact of this proposed credit, the rapid increase in qualifying homes could result in a substantial amount of potential credit that would in turn result in a substantial reduction in the General Revenue Fund.
    
    As written, the bill requires the State Tax Department to develop application forms, to review and approve applications for the credit, to provide for the sale or transfer of unused credit, and to prepare an annual report on the credit. Additional administrative costs to the State Tax Department associated with passage of this bill would be at least $50,000 per year.
    
    

Fiscal Note Detail
Over-all effect
Effect of Proposal Fiscal Year
2012
Increase/Decrease
(use"-")
2013
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 50,000 50,000 50,000
Personal Services 5,000 50,000 50,000
Current Expenses 10,000 0 0
Repairs and Alterations 0 0 0
Assets 35,000 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0
3. Explanation of above estimates (including long-range effect):
    As written, this bill would create the Energy Efficient Building Property Tax Credit, a tax credit to taxpayers who are the owners of a residential or commercial building which the US Environmental Protection Agency has awarded the ENERGY STAR® label, or taxpayers owning building plans which have earned the Designed to Earn the ENERGY STAR® label. The proposed bill requires taxpayers claiming the credit based upon ownership of eligible building plans to complete construction of the eligible building and obtain ENERGY STAR® certification within three years from the time the credit was initially taken. The credit, the greater of 1.5 percent of eligible expenditures, or $1 per square foot of the eligible building as constructed or as designed and portrayed on the building plan, may be used to offset Business Franchise Tax, Corporation Net Income Tax, or Personal Income Tax. The new credit would be effective for tax years beginning on or after January 1, 2012, but with eligible expenditures occurring on or after July 1, 2012.
    
    Design projects that receive a rating of 75 or higher are eligible for designation as Designed to Earn the ENERGY STAR®, and projects that achieve 50 percent or better than an average building meet Architecture 2030 and AIA goals. All eligible designs must be at least 95 percent complete with construction documents. Buildings that have generated utility bills are not eligible for Designed to Earn the ENERGY STAR ®. To earn the ENERGY STAR®, a home must meet guidelines for energy efficiency set by the U.S. Environmental Protection Agency. These homes are at least 15% more energy efficient than homes built to the 2004 International Residential Code (IRC), and include additional energy-saving features that typically make them 20–30% more efficient than standard homes.
    
    Due to the current low market penetration (i.e., less than 3 percent for West Virginia) of qualifying homes as reported via the Qualified New Homes Market Indices for States for 2010 (an index comparing the number of ENERGY STAR® qualified new homes built to the number of privately owned housing units permitted) as posted on the ENERGY STAR® web site, the potential exists for rapid escalation of qualifying homes. The acceleration of qualifying homes will rapidly increase the potential costs of the credit. While the State Tax Department does not have sufficient data to estimate the potential revenue impact of this proposed credit, the rapid increase in qualifying homes could result in a substantial amount of potential credit that would in turn result in a substantial reduction in the General Revenue Fund.
    
    Assuming that the market share of new homes qualifying as energy efficient rises to 20 percent of all new homes, the average size of a new home is 2,500 square feet, and the average tax credit is $1 per square foot ($2,500 per home), the residential portion of the tax credit could rise to the neighborhood of $1 million or more per year. It would be more difficult to place a ball park estimate on the non-residential portion of the tax credit program.
    
    As written, the bill requires the State Tax Department to develop application forms, to review and approve applications for the credit, to provide for the sale or transfer of unused credit, and to prepare an annual report on the credit. Additional administrative costs to the State Tax Department associated with passage of this bill would be at least $50,000 per year. The additional administrative costs include the hiring of one or two additional employees to perform the review and reporting requirements as stated in the proposed bill.
    


Memorandum
Person submitting Fiscal Note:
Mark Muchow
Email Address:
kerri.r.petry@wv.gov
    The stated purpose of this bill is to authorize the creation of a new tax credit for eligible expenditures incurred in placing in service residential or nonresidential energy efficient building property. The bill’s incentive will encourage the construction of energy efficient buildings, thereby reducing the total amount of energy consumed in the state.
    
    As written, the bill provides for the creation of a new credit, but many of the terms used in the proposed bill are not fully defined and some definitions may be inconsistent. For example, the bill defines “eligible expenditures” as including expenses incurred for the planning, construction or rehabilitation of energy efficient building property. However, excluded are expenditures for architectural, engineering or other professional fees related to construction or remodeling. There appears to be an internal inconsistency because it would seem that architectural, engineering or other professional fees related to construction or remodeling would at least be part of the planning, construction or rehabilitation of energy efficient building property. Additionally, the bill provides that when the credit is based upon approved building plans, the construction must be completed within three years or the credit must be redetermined and amended returns filed. However, the bill does not clearly indicate how the credit should be redetermined and how much of the credit must be recaptured.
    
    The bill also provides that any proceeds from the assignment or sale of the credit are exempt from Consumers Sales and Service Tax, Use Tax, Corporation Net Income Tax, and Personal Income Tax. This would seem to provide a complete exemption from taxation for any proceeds from the sales of the credit.