FISCAL NOTE



FUND(S):

General Revenue Fund, West Virginia Future Fund

Sources of Revenue:

General Fund,Other Fund West Virginia Future 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 create the West Virginia Futures Fund. The bill provides that funding consist of twenty-five percent of the increased revenue received by the state from Marcellus Shale natural gas severance taxes and invites future legislative appropriations or designation of funding sources. Finally, the bill includes a statement of legislative intent not to encumber or otherwise use any principal or interest from the fund for a term of twenty years to the extent the Legislature cannot bind future Legislatures from actions that might otherwise use or encumber the funds. Use of the accumulated fund is left open to address future needs of the state. As written, the bill indicates that 25 percent of the increased Severance Tax on natural gas and oil (levied via W. Va. Code §11-13A-3a) as a result of Marcellus Shale production and received on or after the effective date of the bill be deposited into a newly created fund designated as the “West Virginia Future Fund.” The Severance Tax on natural gas and oil, as levied via W. Va. Code §11-13A-3a, in its basic form is a product of the volume of production times the price per unit of production times the tax rate (i.e., 5%). The volume of natural gas and oil production from the Marcellus Shale is expected to increase over the next several years. However, the price of natural gas and oil is subject to significant fluctuation. In addition, as shale gas production increases, production from traditional sources may decrease to the detriment of the State General Revenue Fund. Given all of these factors, we are unable to accurately estimate the long term decrease to the State General Revenue Fund or the long term increase to the West Virginia Future Fund. However, based on current estimates of State Severance Tax revenues, the decrease to the State General Revenue Fund in FY2014 would be roughly $6 million or more. As natural gas and oil from the Marcellus Shale becomes a larger portion of all natural gas and oil severed in West Virginia, the potential amount of revenue redirected could become significant. Since passage of this bill would require the State Tax Department to develop new returns, computer programs, and processes to determine the amount of increase in natural gas and oil Severance Tax proceeds attributable to Marcellus Shale, additional administrative costs attributable to this bill could be significant for the State Tax Department. There may also be significant compliance costs for the industry.



Fiscal Note Detail


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


Explanation of above estimates (including long-range effect):


As written, the bill indicates that 25 percent of the increased Severance Tax on natural gas and oil (levied via W. Va. Code §11-13A-3a) as a result of Marcellus Shale production and received on or after the effective date of the bill be deposited into a newly created fund designated as the “West Virginia Future Fund.” The Severance Tax on natural gas and oil, as levied via W. Va. Code §11-13A-3a, in its basic form is a product of the volume of production times the price per unit of production times the tax rate (i.e., 5%). The volume of natural gas and oil production from the Marcellus Shale is expected to increase over the next several years. However, the price of natural gas and oil is subject to significant fluctuation. In addition, as shale gas production increases, production from traditional sources may decrease to the detriment of the State General Revenue Fund. Given all of these factors, we are unable to accurately estimate the long term decrease to the State General Revenue Fund or the long term increase to the West Virginia Future Fund. However, based on current estimates of State Severance Tax revenues, the decrease to the State General Revenue Fund in FY2014 would be roughly $6 million or more. As natural gas and oil from the Marcellus Shale becomes a larger portion of all natural gas and oil severed in West Virginia, the potential amount of revenue redirected could become significant. Since passage of this bill would require the State Tax Department to develop new returns, computer programs, and processes to determine the amount of increase in natural gas and oil Severance Tax proceeds attributable to Marcellus Shale, additional administrative costs attributable to this bill could be significant for the State Tax Department. There may also be significant compliance costs for the industry.



Memorandum


The stated purpose of this bill is to create the West Virginia Futures Fund. The bill provides that funding consist of twenty-five percent of the increased revenue received by the state from Marcellus Shale natural gas severance taxes and invites future legislative appropriations or designation of funding sources. Finally, the bill includes a statement of legislative intent not to encumber or otherwise use any principal or interest from the fund for a term of twenty years to the extent the Legislature cannot bind future Legislatures from actions that might otherwise use or encumber the funds. Use of the accumulated fund is left open to address future needs of the state. The stated purpose states that bill is to create the West Virginia Futures Fund (Emphasis added). However, the new section creates the West Virginia Future Fund (Emphasis added). Proposed subsection W. Va. Code §5A-2-35(a) appears to relate only to increased revenues from Marcellus Shale production. However, subsection (b) states the legislature’s intent as being “to use the fund as a means of conserving a portion of the state’s revenue derived from the increased revenue proceeds received by the state as a result of any new oil production and Marcellus Shale and other new gas formations . . .”(Emphasis added). It appears there may be an inconsistency between subsection (a) and subsection (b). As written, the bill indicates “twenty-five percent of the increased proceeds received on and after the effective date of this section as state revenue pursuant to the provisions of section three-a, article thirteen-a, chapter eleven of this code as a result of Marcellus Shale production “ are to be deposited into the fund created in the bill. However, the bill does not provide guidance as to what period before the effective date the collections after the effective date are to be compared to determine the amount of increase.



    Person submitting Fiscal Note: Mark B. Muchow
    Email Address: Roger.D.Cox@wv.gov