Date Requested: January 23, 2015
Time Requested: 09:44 AM
Agency: State Tax & Revenue Department
CBD Number: Version: Bill Number: Resolution Number:
1289 Introduced HB2166
CBD Subject: 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 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, 2014. 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 simply due to normal fluctuations in electric power sector demand for coal associated with changes in weather and changes in general economic conditions. The Department of Revenue recently commissioned a study with the West Virginia Bureau of Business and Economic Research (BBER) for additional economic analysis of this type of incentive program. BBER identified an annual average of 13.6 million tons of coal from out-of-state sources consumed in West Virginia. Out of this total, roughly 8.6 million tons were determined to be immune from influence of tax policy due to either logistical issues or significant cost advantages in excess of state tax liabilities. Of the remaining 5 million tons, the results of economic modeling suggested that the proposed $3 per ton incentive might increase in-state coal sales by roughly 500,000 tons per year. By comparison, total in-state coal sales increased by 489,220 tons between 2012 and 2013 due to normal market fluctuation. In addition, in-state sales for the first six months of 2014 were 1,781,192 tons greater than sales for the first six months of 2013 due to the need to replenish inventories following a harsh 2013-2014 winter season. If the $3 per ton tax credit would have been in effect in CY2013 and during the first half of CY2014, tax credit costs would have been more than $1.4 million related to CY2013 activity and more than $5.3 million related to the activity in the first half of CY2014. Based on the results of the BBER study and our analysis, the potential annual range of tax credits would be somewhere between $0 and generally less than $15 million per year. The net impact on coal employment and coal production would be marginal at best with some risk of decrease in General Revenue Fund collections especially during years of increased sales due to normal non-incentive related sales fluctuations.
    
    Additional administrative costs to the State Tax Department would be roughly $60,000 in FY2016 and $25,000 per year thereafter. West Virginia businesses that purchase coal may incur additional administrative costs in the issuance of certifications required by the bill.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2015
Increase/Decrease
(use"-")
2016
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 60,000 25,000
Personal Services 0 25,000 25,000
Current Expenses 0 1,000 0
Repairs and Alterations 0 0 0
Assets 0 7,000 0
Other 0 27,000 0
2. Estimated Total Revenues 0 0 0


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, 2014. 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 five year period from 2009 to 2013 were roughly 30.5 million tons, an amount that is roughly 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 nine 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 2014, West Virginia producers accounted for roughly 60% 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, 26.7% of total domestic sales in 2013, and nearly 30% of domestic sales during the first half of 2014. 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 $41 million per year based upon an additional average in-state consumption of roughly 13.6 million tons each year. However, based on other factors and the results of the BBER Study, the net annual tax credit cost to severance tax revenues would more likely range somewhere between $0 and up to $15 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. Normal changes in market conditions would be expected to produce greater tax credit yield than any gain in coal production and coal employment directly associated with this proposed tax incentive..
    
    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 $60,000 in FY2016 and $25,000 per year thereafter. 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 Muchow
    Email Address: kerri.r.petry@wv.gov