Date Requested:January 11, 2012
Time Requested:04:13 PM
Agency: State Tax Department
CBD Number: Version: Bill Number: Resolution Number:
2012R1102 Introduced SB39
CBD Subject: MARCELLUS GAS OR GAS REQUIRING FRACTURING
FUND(S)
General Revenue Fund, other
Sources of Revenue
General Fund,Other Fund unspecified
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 increase the tax on gas severed from Marcellus Shale or by fracturing if sold or transported out of the state by an additional ten percent. The bill provides that the distribution of the taxes on gas severed from Marcellus Shale or by fracturing if sold or transported out of the state is: (1) Ten percent to local county economic development; (2) ten percent for water and sewer; (3) twenty percent for roads and bridges; (4) ten percent for post-employment benefits (OPEB) debt; and (5) fifty percent to the general revenue fund.
    
    As written, this bill creates a new tax on natural gas that is severed in West Virginia and then is sold or transported out of West Virginia. According to our interpretation, the new tax of 10 percent created via proposed West Virginia Code §11-13A-3a(f) would be in addition to the 5 percent tax levied via West Virginia Code §11-13A-3a(b). The bill indicates the new tax would apply to “natural gas from the Marcellus Shale or from fracturing a well.” In addition to the use of hydraulic fracturing in horizontal wells often employed to extract natural gas from shale deposits, fracturing is many times used in standard vertical wells. Thus, the new tax may have a broader application than natural gas extracted from the Marcellus Shale. Based upon available data from recent years, the application of the additional tax only on natural gas extracted from the Marcellus Shale may yield roughly $20 million to $40 million in the initial year, assuming that the tax is constitutional and administrable. The high volatility of natural gas prices and the potential for increased utilization could result in dramatic increases or decreases in the annual tax yield. The bill provides for the dedication of the new tax revenue as follows:
    
    Local County Economic Development 10%
    $ 2 million to $ 4 million
    Water and Sewer 10%
    $ 2 million to $ 4 million
    Roads and Bridges 20%
    $ 4 million to $ 8 million
    Post-Employment Benefits 10%
    $ 2 million to $ 4 million
    General Revenue Fund 50%
    $10 million to $20 million
    
    Passage of this bill will result in significant additional administrative costs to the State Tax Department and huge compliance costs for industry given that the determination of taxability is tied to both the type of extraction technology employed and the ultimate destination of the product.
    

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 0 0 0
Personal Services 0 0 0
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 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 creates a new tax on natural gas that is severed in West Virginia and then is sold or transported out of West Virginia. According to our interpretation, the new tax of 10 percent created via proposed West Virginia Code §11-13A-3a(f) would be in addition to the 5 percent tax levied via West Virginia Code §11-13A-3a(b). The bill indicates the new tax would apply to “natural gas from the Marcellus Shale or from fracturing a well.” In addition to the use of hydraulic fracturing in horizontal wells often employed to extract natural gas from shale deposits, fracturing is many times used in standard vertical wells. Thus, the new tax may have a broader application than natural gas extracted from the Marcellus Shale. Based upon available data from recent years, the application of the additional tax only on natural gas extracted from the Marcellus Shale may yield roughly $20 million to $40 million in the initial year, assuming that the tax is constitutional and administrable. The high volatility of natural gas prices and the potential for increased utilization could result in dramatic increases or decreases in the annual tax yield. The bill provides for the dedication of the new tax revenue as follows:
    
    Local County Economic Development 10%
    $ 2 million to $ 4 million
    Water and Sewer 10%
    $ 2 million to $ 4 million
    Roads and Bridges 20%
    $ 4 million to $ 8 million
    Post-Employment Benefits 10%
    $ 2 million to $ 4 million
    General Revenue Fund 50%
    $10 million to $20 million
    
    Passage of this bill will result in significant additional administrative costs to the State Tax Department and huge compliance costs for industry given that the determination of taxability is tied to both the type of extraction technology employed and the ultimate destination of the product. One-time costs would be incurred for tax form revisions, computer program changes, and the notification of affected Taxpayers. Additionally, if the State Tax Department will be required to determine the specific county and/or city allocation of the 10 percent of the additional tax to be dedicated to “local county economic development,” there will be additional significant annual costs for the development and maintenance of data and programs for the allocation.
    


Memorandum
Person submitting Fiscal Note:
Mark Muchow
Email Address:
kerri.r.petry@wv.gov
    The stated purpose of this bill is to increase the tax on gas severed from Marcellus Shale or by fracturing if sold or transported out of the state by an additional ten percent. The bill provides that the distribution of the taxes on gas severed from Marcellus Shale or by fracturing if sold or transported out of the state is: (1) Ten percent to local county economic development; (2) ten percent for water and sewer; (3) twenty percent for roads and bridges; (4) ten percent for post-employment benefits (OPEB) debt; and (5) fifty percent to the general revenue fund.
    
    As written, this bill would levy a new tax on natural gas that is sold or transported out of the State. Since the tax treats natural gas going out of state differently than the natural gas used in the state, the new tax would seem to unconstitutionally burden interstate commerce.
    
    The bill may present administrative challenges for both the Taxpayers and the State Tax Department. The point of taxation of the natural gas subject to the new tax would likely be at the point of sale. Since natural gas producers often sell their natural gas to other businesses with transmission capabilities, the producer would generally not know which gas is sold or used in-state versus the gas that is sold or transported out of state.
    
    The bill also provides for the dedication of the new tax proceeds as follows:
    
    Local County Economic Development 10%
    Water and Sewer 10%
    Roads and Bridges 20%
    Post-Employment Benefits 10%
    General Revenue Fund 50%
    
    However, the bill neither referenced any specific funds, other than the General Revenue Fund, nor provided any additional guidance on how the distribution should be administered. For example, it is unclear whether the funds for “Local County Economic Development” are to be distributed based upon some pro-rated formula or based upon a distribution of equal amounts. Also, the references to “Water and Sewer” and “Roads and Bridges” do not indicate whether the intent is for local use or state-wide development.