Date Requested:March 19, 2013
Time Requested:02:28 PM
Agency: State Tax & Revenue Department
CBD Number: Version: Bill Number: Resolution Number:
2013R2738 Introduced HB2962
CBD Subject: TAX EXEMPTION FOR NATURAL GAS & OIL WELLS
FUND(S)
General Revenue Fund, Local Government Funds, Workers’ Compensation Debt Reduction
Sources of Revenue
General Fund,Other Fund Local Government Funds, W
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 terminate a severance tax exemption for the production of natural gas and oil. The bill provides an exemption and specifies a controlling effective date.
    
     As written, this bill proposes to terminate a tax exemption for all natural gas and oil produced from any well which has not produced marketable quantities of natural gas or oil for five consecutive years immediately preceding the year in which a well is placed back into production. The bill would terminate the exemption for wells placed back into production on or after July 1, 2013. The bill also provides that for any well placed back into service on or before June 30, 2013 the exemption would continue for the remainder of the ten-year period for which the exemption was originally applicable.
    
     According to our interpretation, passage of this bill will potentially prevent a significant future increase in the value of the shut-in well exemption with potential adverse consequences for the General Revenue Fund, local distribution funds and the Workers’ Compensation Debt Reduction Fund (assuming the Additional Severance Tax to pay down the unfunded liability in the Workers’ Compensation Debt Reduction Fund has not expired). The use of the current exemption has been increasing over time and there is concern that a provision originally intended for marginal wells may be potentially used to shield higher producing wells from future taxation.
    
     Additional administrative costs to the State Tax Department associated with passage of this bill would be minimal.
    

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 proposes to terminate a tax exemption for all natural gas and oil produced from any well which has not produced marketable quantities of natural gas or oil for five consecutive years immediately preceding the year in which a well is placed back into production. The bill would terminate the exemption for wells placed back into production on or after July 1, 2013. The bill also provides that for any well placed back into service on or before June 30, 2013 the exemption would continue for the remainder of the ten-year period for which the exemption was originally applicable.
    
     According to our interpretation, passage of this bill will potentially prevent a significant future increase in the value of the shut-in well exemption with potential adverse consequences for the General Revenue Fund, local distribution funds and the Workers’ Compensation Debt Reduction Fund (assuming the Additional Severance Tax to pay down the unfunded liability in the Workers’ Compensation Debt Reduction Fund has not expired). The use of the current exemption has been increasing over time and there is concern that a provision originally intended for marginal wells may be potentially used to shield higher producing wells from future taxation.
    
     The share of the natural gas Severance Tax base excluded from taxation due to the combination of low-volume well exemptions and the shut-in well exemption has increased from 6.0 percent in 2008 to 6.4 percent in 2009, 7.1 percent in 2010, and 8.7 percent in 2011. Normally, the share of the tax base subject to exemption would have been expected to either remain relatively constant or to decrease with growing overall production associated with shale gas activities. According to available data from the Department of Environmental Protection, the share of total production associated with low-volume wells (i.e., those averaging 1,825,000 cubic feet or less per year) has decreased from 6.4 percent of total production in 2008 to 6.0 percent in 2009, 5.9 percent in 2010, and 4.4 percent in 2011. These wells account for roughly 45 percent of total producing wells in the State with annual total output of roughly 17 million mcf. Most of these wells would remain exempt from tax due to the low-volume well tax exclusion. The recent growth in share of tax base excluded from taxation is due to the 10-year tax exemption for shut-in wells and not due to the other low-volume well exclusions.
    
     Additional administrative costs to the State Tax Department associated with passage of this bill would be minimal.
    


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