Date Requested: February 25, 2015
Time Requested: 12:10 PM
Agency: State Tax & Revenue Department
CBD Number: Version: Bill Number: Resolution Number:
3280 Introduced HB3006
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 the bill is to eliminate the eight percent floor of the adjusted rate established by the Tax Commissioner and to require it to be adjusted to equal the adjusted prime rate charged by banks in the administration of tax deficiencies and underpayments for tax years beginning after December 31, 2016.
    
    According to our interpretation, passage of this bill would eliminate the 8% floor interest rate beginning on and after January 1, 2017. Section 11-10-17(a) provides that interest on underpayments is to be set at 1.5% above the annual rate established in Section 11-10-17a(a). Based on current interest rates, the new interest rate would be 4.75% on underpayments and 3.25% on overpayments. This change would result in a net annual reduction in State revenue collections of roughly $6.7 million at current interest rates beginning in CY2017. The reduction in FY2017 may be closer to $2.8 million. Current interest rates are at historical lows. If current interest rates rise between now and the end of CY2016, the net loss in State revenues would be smaller than the calculated $6.7 million per year.
    
    The bill proposes that the interest rates set on January 1st each year be based on interest rates in effect on November 1st of the prior year. The short time frame between measurement and effective date of change would result in very short notice to Taxpayers in comparison with current Law and in the need for a very quick turnaround on the publication of interest rate changes on tax forms and implementation of computer system updates necessary for proper tax administration.
    
    Additional administrative costs to the State Tax Department are estimated to be $20,000 per year beginning in FY2017.
    



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 0 20,000
Personal Services 0 0 0
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 20,000
2. Estimated Total Revenues 0 0 0


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


    According to our interpretation, passage of this bill would eliminate the 8% floor interest rate beginning on and after January 1, 2017. Section 11-10-17(a) provides that interest on underpayments is to be set at 1.5% above the annual rate established in Section 11-10-17a(a). Based on current interest rates, the new interest rate would be 4.75% on underpayments and 3.25% on overpayments. This change would result in a net annual reduction in State revenue collections of roughly $6.7 million at current interest rates beginning in CY2017. The reduction in FY2017 may be closer to $2.8 million. Current interest rates are at historical lows. If current interest rates rise between now and the end of CY2016, the net loss in State revenues would be smaller than the calculated $6.7 million per year.
    
    The bill proposes that the interest rates set on January 1st each year be based on interest rates in effect on November 1st of the prior year. The short time frame between measurement and effective date of change would result in very short notice to Taxpayers in comparison with current Law and in the need for a very quick turnaround on the publication of interest rate changes on tax forms and implementation of computer system updates necessary for proper tax administration.
    
    Additional administrative costs to the State Tax Department are estimated to be $20,000 per year beginning in FY2017.
    



Memorandum


    The stated purpose of the bill is to eliminate the eight percent floor of the adjusted rate established by the Tax Commissioner and to require it to be adjusted to equal the adjusted prime rate charged by banks in the administration of tax deficiencies and underpayments for tax years beginning after December 31, 2016.
    
    If interest rates become volatile, the proposed bill of establishing the interest rate once annually does not provide flexibility.
    
    The proposed amendment requires the Tax Commissioner to determine the adjusted prime rate on January 1, (presumably it will already be published) to be effective immediately. The rate is to be based on November 1 rate. This does not allow for any notice prior to the effective date.
    



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov