By Charles Young

February 21, 2021 - One element of the plan to eliminate West Virginia’s income tax outlined by Gov. Jim Justice during his State of the State Address is to create a tiered system for severance taxes.

This system would tie severance taxes collected by the state on oil, natural gas and coal extraction to the current going rate for each commodity.

Each would be taxed at one rate as long as the price remained below a designated level, but would be taxed at increasing rates as the price rises.

Justice said the system could help offset lost revenues if the income tax is successfully eliminated, but he acknowledged it is unlikely to produce substantial money for the state.

”It won’t bring in a whole lot of dollars, but it will bring in a few,” he said.

The Justice administration supported a similar idea in 2017 when it backed Senate Bill 415, which outlined a graduated rate system for severance taxes on natural gas.

The language of SB 415 proposed that when the price of natural gas was less than $3 per thousand cubic feet, it would be taxed at 5%. As the price of gas rose, the rate would increase correspondingly, maxing out at a 10% rate when prices exceed $9 or more per thousand cubic feet.

According to a fiscal note attached to SB 415 prepared by Deputy Secretary for the Department of Revenue Mark Muchow, the bill was not expected to impact state “revenues in the near term” because of low natural gas prices.

“The proposed rate structure imposes a 5% tax on the gross value of natural gas when the price per mcf is less than $3.00,” the note reads. “Given that prices are not expected to exceed this floor in the next three years, it is anticipated that the proposed changes will not affect revenues in the near term. However, natural gas prices are highly volatile. Therefore, there is some chance of higher effective tax rates applying in any given year.”

The note also states the tiered system for severance taxes would cost the state “$25,000 for the remainder of FY2017, $79,000 in FY2018, and $73,000 for each year thereafter” in additional administrative costs.

A memorandum to the fiscal note points out errors in the introduced version of the bill’s language, saying the proposed bill does not define “annualized gross value” or provide a method for calculating it.

“This value is used to determine the rate of tax the taxpayer is to use,” the note reads. “The omission of a definition or calculation may lead to difficulty in administering the tax and could result in litigation.”

SB 415 ultimately failed to make it out of the Senate Energy, Industry and Mining Committee.

Charlie Burd, executive director of the Gas and Oil Association of West Virginia (GO-WV), said legislation relating to the governor’s plan has not yet been introduced during the current legislative session.

“We haven’t seen the legislation that he’s proposing or the proposed tiering of the severance tax numbers,” he said.

However, he remembers when SB 415 was being debated, Burd said.

“This is not exactly a new concept,” he said.

Average natural gas prices have remained “well below” the bill’s $3 per thousand cubic feet threshold, Burd said.

“So unless the tiering is constructed differently, I don’t know that it would be anything more than neutral to what’s out there now,” he said.

The cancellation of the Atlantic Coast Pipeline project and delays to the Mountain Valley Pipeline project have further contributed to depressed gas prices in the state, Burd said.

“The reality now is you’ve had the Atlantic Coast Pipeline shutdown. So there went two or more bcf (billion cubic feet) a day of production that won’t be shipped out, and Mountain Valley Pipeline is currently under construction in the late stages of completion, but again, they’ve been slowed down due to stream cross permits and that sort of thing,” he said. “So those markets that would have shipped gas out of here have been either eliminated or denied.”

Chris Hamilton, president and CEO of the West Virginia Coal Association, said his organization is also awaiting more information on the governor’s proposal.

“We haven’t seen the specifics of the governor’s proposal, but we’re very concerned over proposing increased taxes on the industry,” he said.

However, the Coal Association is generally in favor of efforts to phase out and eventually remove the state’s income tax, Hamilton said.

“We do embrace the reduction in personal income taxes as proposed by the governor,” he said. “That initiative seems to have a lot of support in the Capitol.”