FISCAL NOTE

Date Requested: February 15, 2017
Time Requested: 01:59 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1730 Introduced HB2487
CBD Subject: Taxation


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 reallocate and dedicate three percent of oil and gas severance tax revenues up to $20 million annually to the oil and gas producing counties of origin and their respective municipalities. The bill establishes state and local oil and gas county reallocated severance tax funds and provides for distribution of the moneys to the county commissions and governing bodies of the municipalities by the State Treasurer. The bill establishes a procedure for determining the amounts of each oil and gas producing county and their respective municipalities are to receive and requires the creation of local funds into which moneys are to be deposited. The bill requires the funds to be used solely for economic development projects and infrastructure projects. The bill also provides restrictions on fund expenditures. The bill sets forth duties of the State Tax Commissioner. The bill requires a report of expenditures to Joint Committee on Government and Finance. The bill also provides for audits of distributed funds when authorized by the Joint Committee on Government and Finance. The bill authorizes legislative and emergency rules. As written, this bill provides, effective July 1, 2017, that two percent of the tax attributable to the severance of oil and gas is to be transferred to the county commissions of the oil and gas producing counties, and one percent of the tax attributable to the severance of oil and gas is to be transferred to the governing bodies of municipalities within the oil and gas producing counties. The bill also establishes a new State fund named the Oil and Gas County and Municipality Reallocated Severance Tax Fund and requires counties and cities to establish a special account for the deposit of the reallocated revenue. Additionally, the bill provides the methodology for allocating the amounts to be transferred among the governing bodies and specifies that the transfers are to occur quarterly. According to our interpretation, passage of this bill will not result in any change in total revenue, but a reallocation of revenue. While the Oil and Gas County and Municipality Reallocated Severance Tax Fund will receive roughly $4.3 million in FY 2018 (with roughly $2.9 million to be allocated to oil and gas producing counties and roughly $1.4 million to be allocated to the municipalities within the oil and gas producing counties), the General Revenue Fund would be reduced by the same $4.3 million. The fall in oil prices and continued instability in oil and natural gas markets will make the revenue changes attributable to passage of this bill highly volatile. The current 10 percent oil and natural gas revenue sharing program with local governments is based on annual production data collected by the Department of Environmental Protection (DEP) from more than 50,000 wells and finalized more than seven months following the conclusion of a calendar year. The Tax Department distribution to local governments occurs once a year around October 1st for activity of the prior calendar year based on each county’s share of total production for oil and each county’s share of total production of natural gas as determined by DEP. If the provisions of this bill contemplate an accurate accounting of oil and natural gas on a current quarterly basis, the proper administration of this new additional general revenue reallocation program would require new quarterly production reports from the more than 50,000 producing wells at significant cost to both the industry and either the State Tax Department or the Department of Environmental Protection. Additional costs to the State Tax Department will be $25,000 in FY 2017, $42,000 in FY 2018 and $35,000 in each subsequent fiscal year.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2017
Increase/Decrease
(use"-")
2018
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 25,000 42,000 35,000
Personal Services 0 35,000 35,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 25,000 7,000 0
2. Estimated Total Revenues 0 -4,300,000 -4,300,000


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


As written, this bill provides, effective July 1, 2017, that two percent of the tax attributable to the severance of oil and gas is to be transferred to the county commissions of the oil and gas producing counties, and one percent of the tax attributable to the severance of oil and gas is to be transferred to the governing bodies of municipalities within the oil and gas producing counties. The bill also establishes a new State fund named the Oil and Gas County and Municipality Reallocated Severance Tax Fund and requires counties and cities to establish a special account for the deposit of the reallocated revenue. Additionally, the bill provides the methodology for allocating the amounts to be transferred among the governing bodies and specifies that the transfers are to occur quarterly. According to our interpretation, passage of this bill will not result in any change in total revenue, but a reallocation of revenue. While the Oil and Gas County and Municipality Reallocated Severance Tax Fund will receive roughly $4.3 million in FY 2018 (with roughly $2.9 million to be allocated to oil and gas producing counties and roughly $1.4 million to be allocated to the municipalities within the oil and gas producing counties), the General Revenue Fund would be reduced by the same $4.3 million. The fall in oil prices and continued instability in oil and natural gas markets will make the revenue changes attributable to passage of this bill highly volatile. The current 10 percent oil and natural gas revenue sharing program with local governments is based on annual production data collected by the Department of Environmental Protection (DEP) from more than 50,000 wells and finalized more than seven months following the conclusion of a calendar year. The Tax Department distribution to local governments occurs once a year around October 1st for activity of the prior calendar year based on each county’s share of total production for oil and each county’s share of total production of natural gas as determined by DEP. If the provisions of this bill contemplate an accurate accounting of oil and natural gas on a current quarterly basis, the proper administration of this new additional general revenue reallocation program would require new quarterly production reports from the more than 50,000 producing wells at significant cost to both the industry and either the State Tax Department or the Department of Environmental Protection. Additional costs to the State Tax Department will be $25,000 in FY 2017, $42,000 in FY 2018 and $35,000 in each subsequent fiscal year.



Memorandum


The stated purpose of this bill is to reallocate and dedicate three percent of oil and gas severance tax revenues up to $20 million annually to the oil and gas producing counties of origin and their respective municipalities. The bill establishes state and local oil and gas county reallocated severance tax funds and provides for distribution of the moneys to the county commissions and governing bodies of the municipalities by the State Treasurer. The bill establishes a procedure for determining the amounts of each oil and gas producing county and their respective municipalities are to receive and requires the creation of local funds into which moneys are to be deposited. The bill requires the funds to be used solely for economic development projects and infrastructure projects. The bill also provides restrictions on fund expenditures. The bill sets forth duties of the State Tax Commissioner. The bill requires a report of expenditures to Joint Committee on Government and Finance. The bill also provides for audits of distributed funds when authorized by the Joint Committee on Government and Finance. The bill authorizes legislative and emergency rules. The bill does not note the internal effective date of July 1, 2017. The bill would be difficult to administer as written. The calculation to determine the amount that an oil and gas producing county or municipality is entitled to receive from the Oil and Gas County and Municipality Reallocated Severance Tax Fund lacks clarity. The bill does not state that the one percent for county commissions and the two percent for municipalities be placed in two separate funds. Instead each goes into the Oil and Gas County and Municipality Reallocated Severance Tax Fund. This potentially causes problems. The bill does not make clear how municipalities and counties are to divide the natural gas or oil that is produced within their boundaries. Further, the bill does not specify whether the State Auditor or State Tax Commissioner oversees these calculations. The bill provides that the Tax Commissioner is to draft the Legislative Rule. There are also portions of this bill that will make it difficult for the Tax Department to administer. The bill becomes effective July 1, 2017, which gives the Tax Department very little time to make these changes. If the Tax Department is the entity required to gather the necessary data for this bill, then the Severance Tax form will need to be changed. Furthermore, the bill states that the Tax Commissioner is to deposit these funds “as the proceeds are received.” This does not provide enough time for refunds or other adjustments to be made before the funds are deposited in the Oil and Gas County and Municipality Reallocated Severance Tax Fund. The bill does not indicate procedures if proceeds equal $20 million early in the year. This is also silent as to how natural gas liquids are to be taxed. In addition, the bill has a title defect.



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