Date Requested:February 18, 2014
Time Requested:09:59 AM
Agency: State Tax & Revenue Department
CBD Number: Version: Bill Number: Resolution Number:
2014R2379 Introduced SB604
CBD Subject: TAX CREDIT TO COAL PRODUCERS
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 tax credit to coal producers who sell coal to taxpayers who increase their consumption of West Virginia coal in this state for the purpose of increasing coal production and coal related employment in West Virginia.
    
     As written, this bill would create a tax credit in an amount equal to $3 per ton multiplied by the number of tons of qualified coal. The bill defines “qualified coal” as the number of tons of eligible coal consumed at a power plant or industrial facility located in West Virginia during the tax year that are in excess of the number of tons of eligible coal consumed at the power plant or industrial facility during the base year. The term “base year” means the calendar year ending on December 31, 2013. And, the bill defines “eligible coal” as coal produced from a mine located in West Virginia and upon which the Severance Tax imposed by W.Va. Code §11-13A-3(b) was paid. The bill provides for an adjustment in the credit allowed per ton of coal when the Severance Tax paid by a Taxpayer is less than $3 per ton. The proposed tax credit would be available to reduce the Severance Tax of eligible Taxpayers. Purchasers of eligible coal are to certify the number of tons of qualified coal purchased from eligible Taxpayers. The bill also establishes penalty and statute of limitation provisions regarding the proposed tax credit.
    
     According to our interpretation, the amount of the proposed tax credit may vary substantially from one year to the next. Due to the expected fluctuation in the amount of available tax credit, we are unable to accurately estimate the potential annual reduction in the General Revenue Fund resulting from use of the proposed tax credit. However, the reduction could be significant given the volume of coal potentially consumed in West Virginia.
    
     Additional administrative costs to the State Tax Department would be roughly $50,000 per year. West Virginia businesses that purchase coal may incur additional administrative costs in the issuance of certifications required by the bill.
    

Fiscal Note Detail
Over-all effect
Effect of Proposal Fiscal Year
2014
Increase/Decrease
(use"-")
2015
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 50,000
Personal Services 0 0 35,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 5,000
Other 0 0 10,000
2. Estimated Total Revenues 0 0 0
3. Explanation of above estimates (including long-range effect):
     As written, this bill would create a tax credit in an amount equal to $3 per ton multiplied by the number of tons of qualified coal. The bill defines “qualified coal” as the number of tons of eligible coal consumed at a power plant or industrial facility located in West Virginia that are in excess of the number of tons of eligible coal consumed at the power plant or industrial facility during the base year. The term “base year” means the calendar year ending on December 31, 2013. And, the bill defines “eligible coal” as coal produced from a mine located in West Virginia and upon which the Severance Tax imposed by W.Va. Code §11-13A-3(b) was paid. The bill provides for an adjustment in the credit allowed per ton of coal when the Severance Tax paid by a Taxpayer is less than $3 per ton.
    
     Since 1990, annual coal purchases by the West Virginia electric power generation industry have varied from a low of less than 28.2 million tons in 1991 to a high of 38.1 million tons in 2002. Average annual coal sales to West Virginia electric power producers over the four year period from 2009 to 2012 were roughly 30.8 million tons, an amount that is nearly 20% below peak sales set in 2002. Lower electric power generation from coal and the pending retirement of more than 15% of all coal-fired generation capacity in West Virginia are to blame for the decreased use of coal in this State.
    
     Over the past eight years, the share of West Virginia electric power generation steam coal attributable to west Virginia coal producers has also varied from a low of 53% in 2011 to a high of 73% in 2007. During the first half of 2013, West Virginia producers accounted for roughly 56% of total sales. Domestic steam coal sales by West Virginia producers to West Virginia electric power producers accounted for 18.7% of total domestic sales in 2011, 23.6% of total domestic sales in 2012 and more than 25% of domestic sales during the first half of 2013. Sales to other states and other countries represent the largest markets for West Virginia coal. These sales are more threatened by price competition than are sales within the State.
    
     There is also significant normal variation in sales of West Virginia coal products to other users in West Virginia. For example, sales of coking coal from West Virginia producers to West Virginia consumers rose from roughly 838,000 tons in 2009 to more than 1.14 million tons in 2011.
    
     If the tax credit were to result in a migration to 100% use of West Virginia coal by West Virginia consumers, then the maximum value of the tax credit would approach $45 million per year based upon an additional average in-state consumption of roughly 15 million tons each year. However, based on other factors, the net annual tax credit cost would more likely range somewhere between $6 million and $30 million each year. The cost of the tax credit would be split between the State General Revenue Fund and local county and municipal governments. The State share of cost would be roughly 88% or more of the total.
    
     According to our interpretation, the amount of the proposed tax credit may vary substantially from one year to the next. Due to the expected fluctuation in the amount of available tax credit, we are unable to accurately estimate the potential annual reduction in the General Revenue Fund resulting from use of the proposed tax credit. However, the reduction could be significant given the volume of coal potentially consumed in West Virginia.
    
     Use of the proposed tax credit will not guarantee that West Virginia coal sales increase. The tax credit may result in the shift of some coal sales to in-State users while sales outside West Virginia decline. Although the bill states as a legislative finding that “other coal producing states in the region offer incentives to business to consume coal produced in those states.” the proposed tax credit may actually result in additional states implementing retaliatory legislation that would reduce the consumption of West Virginia coal in those states. Since West Virginia produces more coal than is consumed in the State, the strength of the West Virginia coal industry largely depends upon free trade and exports to other states and foreign countries.
    
     Additional administrative costs to the State Tax Department would be roughly $50,000 per year. The additional costs would be for the development of new tax forms, the development of new computer programs for the tax credit, and the review and audit of tax credit claims. West Virginia businesses that purchase coal may incur additional administrative costs in the issuance of certifications required by the bill.


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 tax credit to coal producers who sell coal to taxpayers who increase their consumption of West Virginia coal in this state for the purpose of increasing coal production and coal related employment in West Virginia.
    
     As written, the bill provides that purchasers of eligible coal are to certify the number of tons of qualified coal purchased from eligible Taxpayers. However, the bill does not provide any guidance on how a purchaser determines the amount of coal consumed in excess of that consumed in the base year of 2013. Absent guidelines different purchasers may use different methods to determine the excess coal. For example, one purchaser may use a methodology that only considers the latest coal purchased while another purchaser use a methodology that considers coal purchased throughout the year for determining the excess purchases.
    
     The ten percent penalty imposed where the coal tax credit was improperly taken is not mentioned in the title section of the bill which might render the bill unconstitutional. Further, there is no language requiring the eligible Taxpayer to be current in their tax liability with the State.