Date Requested:February 17, 2013
Time Requested:12:13 PM
Agency: State Tax & Revenue Department
CBD Number: Version: Bill Number: Resolution Number:
2013R1608 Introduced HB2435
CBD Subject: SEVERANCE TAX ON OIL & GAS
FUND(S)
General Revenue Fund, Marcellus Development Account, County Special Revenue
Sources of Revenue
General Fund,Other Fund Marcellus Development Acc
Legislation creates:
A New 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 source of funding for infrastructure projects in those counties that produce natural gas from the marcellus or utica shale formations. The bill sets a baseline of tax collections at $64.8 million from oil and gas. The bill provides that ten percent of those funds collected in excess of that baseline will continue to be for the benefit of counties and municipalities. The bill provides that the remaining ninety percent be deposited equally between the General Revenue Fund and the newly created Marcellus Development Account. The moneys from the Marcellus Development Account shall be distributed to counties based on their pro rata share of the gas produced from the marcellus or utica shale formations. The bill provides that funds from the Marcellus Development Account may only be used for infrastructure projects.
    
     As written, this bill establishes a baseline of collections of the Severance Tax on oil and natural gas deposited in the General Revenue Fund and distributed to counties and municipalities of $64.8 million. Any oil and natural gas Severance Tax collections in excess of the baseline figure are to be dedicated and distributed as follows: (1) ten percent to counties and municipalities distributed in the same manner as provided in W. Va. Code §11-13A-5a; (2) one-half of the remaining excess after the distribution specified in (1) above to the General Revenue Fund; and (3) one-half of the remaining excess after the distribution specified in (1) above to the newly created Marcellus Development Account with distribution to counties based upon their pro-rata share of shale gas production. The bill provides that funds from the Marcellus Development Account to counties may only be expended for the cost of infrastructure projects, for which the bill provides definitions.
    
     According to our interpretation of this bill and assuming the current dedications of Severance Tax (e.g., to the State Infrastructure Fund) are unaffected, passage of this bill will provide roughly $13.4 million to the Marcellus Development Account in FY2014 at the expense of General Revenue Fund collections since the baseline figure is well below current projections of oil and natural gas Severance tax revenue to be deposited to the General Revenue Fund. The continued increase in production from Marcellus Shale and Utica Shale formations and likely continuing price declines will make the revenue changes attributable to passage of the bill highly volatile. If the current low level of natural gas prices rise to prior levels from recent years, the additional local tax distribution could grow to roughly $30 million to $40 million per year with corresponding reductions in the State General Revenue Fund.
    
     Passage of this bill will require additional reporting by shale gas producers so as to identify the county where the production occurred. Additional administrative costs to the State Tax Department associated with passage of this bill will be significant. The implementation of this bill will require significant modification to tax returns so the tax attributable to shale gas and the county from which the production occurred can be separately identified. Also, new computer programs to tabulate the return information will need to be developed.
    

Fiscal Note Detail
Over-all effect
Effect of Proposal Fiscal Year
2013
Increase/Decrease
(use"-")
2014
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 establishes a baseline of collections of the Severance Tax on oil and natural gas deposited in the General Revenue Fund and distributed to counties and municipalities of $64.8 million. Any oil and natural gas Severance Tax collections in excess of the baseline figure are to be dedicated and distributed as follows: (1) ten percent to counties and municipalities distributed in the same manner as provided in W. Va. Code §11-13A-5a; (2) one-half of the remaining excess after the distribution specified in (1) above to the General Revenue Fund; and (3) one-half of the remaining excess after the distribution specified in (1) above to the newly created Marcellus Development Account with distribution to counties based upon their pro-rata share of shale gas production. The bill provides that funds from the Marcellus Development Account to counties may only be expended for the cost of infrastructure projects, for which the bill provides definitions.
    
     According to our interpretation of this bill and assuming the current dedications of Severance Tax (e.g., to the State Infrastructure Fund) are unaffected, passage of this bill will provide roughly $13.4 million to the Marcellus Development Account in FY2014 at the expense of General Revenue Fund collections since the baseline figure is well below current projections of oil and natural gas Severance tax revenue to be deposited to the General Revenue Fund. The continued increase in production from Marcellus Shale and Utica Shale formations and likely continuing price declines will make the revenue changes attributable to passage of the bill highly volatile. If the current low level of natural gas prices rise to prior levels from recent years, the additional local tax distribution could grow to roughly $30 million to $40 million per year with corresponding reductions in the State General Revenue Fund.
    
     Passage of this bill will require additional reporting by shale gas producers so as to identify the county where the production occurred. Additional administrative costs to the State Tax Department associated with passage of this bill will be significant. The implementation of this bill will require significant modification to tax returns so the tax attributable to shale gas and the county from which the production occurred can be separately identified. Also, new computer programs to tabulate the return information will need to be developed.
    


Memorandum
Person submitting Fiscal Note:
Mark B. Muchow
Email Address:
Roger.D.Cox@wv.gov
     The stated purpose of this bill is to provide a source of funding for infrastructure projects in those counties that produce natural gas from the marcellus or utica shale formations. The bill sets a baseline of tax collections at $64.8 million from oil and gas. The bill provides that ten percent of those funds collected in excess of that baseline will continue to be for the benefit of counties and municipalities. The bill provides that the remaining ninety percent be deposited equally between the General Revenue Fund and the newly created Marcellus Development Account. The moneys from the Marcellus Development Account shall be distributed to counties based on their pro rata share of the gas produced from the marcellus or utica shale formations. The bill provides that funds from the Marcellus Development Account may only be used for infrastructure projects.
    
     Proposed §11-13A-5b(a) contains the phrase “levied by section five of this article when the correct reference probably should be to section 3a.
    
     As written, proposed W. Va. Code §11-13A-5b establishes “a baseline for collections of severance tax on the privilege of producing oil and gas . . .” However, in discussing the distribution of funds from the Marcellus Development Account, the bill indicates that the distribution to counties is to be based upon pro-rata shares of shale gas produced. It is not clear if the exclusion of oil production or natural gas production from non-shale sources from the distribution methodology was the intent or an inadvertent omission. Additionally, the bill states “for fiscal years beginning July 1, 2013...”While the intent may be to have the provisions in the bill apply to successive fiscal years, the fact that there is only one fiscal year that begins July 1, 2013 could lead to an interpretation other than intended.