Date Requested:January 18, 2012
Time Requested:11:43 AM
Agency: State Tax Department
CBD Number: Version: Bill Number: Resolution Number:
2012R1151 Comm. Sub. SB104
CBD Subject: CORPORATION NET INCOME 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 provide a different procedure for determining the credit for utility taxpayers with net operating loss carryovers relating to the corporation net income tax.
    
    According to our interpretation, passage of this bill would update a one-time tax credit for electric power utilities with net operating losses incurred on or before January 1, 2007 to match subsequent statutory changes in the Corporation Net Income Tax rate. In a regulated environment, public utilities treat net operating losses as assets rather than a liability with a net value equal to the current federal and state effective tax rate multiplied by the amount of the net operating loss. When West Virginia enacted laws reducing its corporation net income tax rate, the implementation of those rate reductions effectively reduced the asset value of the public utility’s net operating loss. The Section 11-24-11b Tax Credit was initially enacted in in 2007 with a credit of 0.25% to match the reduction in the State Corporation Net Income Tax rate from 9.0% to 8.75%. The proposed changes would allow the tax credit to adjust to the actual tax rate differential for each year that net operating losses from pre-2007 are used to offset current taxable income. For example, if the NOL was consumed in 2011, then the tax credit would equal the difference between the actual tax rate for 2011 (8.5%) and the original 9.0% rate or 0.5% times the amount of pre-2007 NOL consumed. If the NOL is used in 2012, then the tax credit would be 1.25% (9.0 % minus 7.75%) times the amount of NOL consumed. If the NOL is used in 2013 or 2014, the tax credit rate would be 2.0% in 2013 and 2.5% in 2014. Unless subsequent legislation is enacted to further lower the Corporation Net Income Tax rate below 6.5%, the maximum rate of tax credit would be 2.5%. The total expenditure value of this one-time tax credit depends upon the amount of NOL consumed each year from 2007 forward and the tax rate difference in place those years in comparison with the original 9.0% tax rate. The total amount of one-time tax credit cannot be readily quantified due to the variability in future tax rates and the timing of the use of the NOL carryovers. The maximum one-time tax credit would be 2.5 percent of the value of the public utility’s total pre-2007 net operating loss. The actual use of this one-time tax credit would not occur until the earliest year in which all pre-2007 NOLs have been fully consumed and possibly at least one year beyond that time.
    
    There would be no additional administrative costs to the State Tax Department associated with passage of this bill.
    

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):
    According to our interpretation, passage of this bill would update a one-time tax credit for electric power utilities with net operating losses incurred on or before January 1, 2007 to match subsequent statutory changes in the Corporation Net Income Tax rate. In a regulated environment, public utilities treat net operating losses as assets rather than a liability with a net value equal to the current federal and state effective tax rate multiplied by the amount of the net operating loss. When West Virginia enacted laws reducing its corporation net income tax rate, the implementation of those rate reductions effectively reduced the asset value of the public utility’s net operating loss. The Section 11-24-11b Tax Credit was initially enacted in in 2007 with a credit of 0.25% to match the reduction in the State Corporation Net Income Tax rate from 9.0% to 8.75%. The proposed changes would allow the tax credit to adjust to the actual tax rate differential for each year that net operating losses from pre-2007 are used to offset current taxable income. For example, if the NOL was consumed in 2011, then the tax credit would equal the difference between the actual tax rate for 2011 (8.5%) and the original 9.0% rate or 0.5% times the amount of pre-2007 NOL consumed. If the NOL is used in 2012, then the tax credit would be 1.25% (9.0 % minus 7.75%) times the amount of NOL consumed. If the NOL is used in 2013 or 2014, the tax credit rate would be 2.0% in 2013 and 2.5% in 2014. Unless subsequent legislation is enacted to further lower the Corporation Net Income Tax rate below 6.5%, the maximum rate of tax credit would be 2.5%. The total expenditure value of this one-time tax credit depends upon the amount of NOL consumed each year from 2007 forward and the tax rate difference in place those years in comparison with the original 9.0% tax rate. The total amount of one-time tax credit cannot be readily quantified due to the variability in future tax rates and the timing of the use of the NOL carryovers. The maximum one-time tax credit would be 2.5 percent of the value of the public utility’s total pre-2007 net operating loss. The actual use of this one-time tax credit would not occur until the earliest year in which all pre-2007 NOLs have been fully consumed and possibly at least one year beyond that time.
    
    There would be no additional administrative costs to the State Tax Department associated with passage of this bill.
    


Memorandum
Person submitting Fiscal Note:
Mark Muchow
Email Address:
kerri.r.petry@wv.gov
    The stated purpose of this bill is to provide a different procedure for determining the credit for utility taxpayers with net operating loss carryovers relating to the corporation net income tax.
    
    As written the bill proposes changes to W. Va. Code §11-24-11b. However, the bill did not take the opportunity to clarify the definition of “eligible taxpayer” in W. Va. Code §11-24-11b(b)(1). As in current law, “eligible taxpayer” means any person subject to the business and occupation taxes prescribed by article thirteen of this chapter and exercising any privilege under section two of this article. As written, the reference to “section two of this article” defaults to West Virginia Code Chapter 11 Article 24, while the correct reference should be to West Virginia Code Chapter 11 Article 13.