LEGISLATIVERESEARCHCOMMISSIONLOCALMANDATEFISCALIMPACTESTIMATEONHB1“IncentivesforEnergyIndependenceAct”

PURPOSE/MECHANICS

HB1createssubchapter27ofKRSChapter154,knownasthe"IncentivesforEnergyIndependenceAct".Thesubchaptersetsforthdefinitions,purpose,applicationprocess,taxincentives,andmonitoringprocedures.Itestablishesaminimuminvestmentrequirementof:

1.      $100millionforalternativefuelfacilitiesandgasificationfacilitiesthatusecoalasaprimaryfeedstock;

2.      $25millionforalternativefuelfacilitiesandgasificationfacilitiesthatusebiomassresourcesasaprimaryfeedstock;and,

3.      $1millionforrenewableenergyfacilities.

Itestablishesthemaximumrecoverycapof50%ofthecapitalinvestmentintheeligibleproject.ThebillrequiresthatallincentivesbenegotiatedwiththeKentuckyEconomicDevelopmentFinanceAuthority.IncentivesfortheEnergyIndependenceActinclude:

1.      Upto80%oftheseverancetaxespaidoncoalusedasfeedstockinanalternativefuelfacilityorgasificationfacility;

2.      Upto100%ofthesalesandusetaxpaidonthepurchaseoftangiblepersonalpropertyusedtoconstruct,retrofit,orupgradeanalternativefuelfacility,agasificationfacility,orarenewableenergyfacility;

3.      Upto100%oftheKentuckyincometaxandlimitedliabilityentitytaxattributabletotheeligibleproject;and,

4.      Upto4%wageassessmentsagainstemployeeswhosejobsarecreatedasaresultoftheeligibleproject.

Additionalincentivesincludethefollowing: InSection17,asalestaxincentiveforinvestmentinmachineryorequipmentthatincreasesenergyefficiencybyatleast15%,whilemaintainingorincreasingthenumberofunitsproduced.InSection18,thecoaltaxcreditinKRS141.0405isamendedtoexpandtoentitiesthatqualifyasalternativefuelfacilitiesandgasificationfacilitiesthatdonotreceiveincentivesundertheIncentivesforEnergyIndependenceAct.InSection20,thebillexpandsthebiodieseltaxcreditcapfrom$1.5milliontoupto$10million,andestablishesanethanolproductioncreditandacellulosicethanolproductioncreditofupto$5million.

ThebillcreatesanewsectionofKRS56.770to56.784toencouragetheFinanceandAdministrationCabinettoemployenergysavingstrategies,andestablishestheGovernor'sOfficeofEnergyPolicy.ItattachestheGovernor'sOfficeofEnergyPolicytotheOfficeoftheGovernor.ItrequirestheFinanceandadministrationCabinettodevelopastrategytoreplaceatleast50%ofthestateownedpassengervehiclesandlightdutytruckswithenergyefficientvehicles.

HB1createstheKentuckyAlternativeFuelandRenewableEnergyProgramandfund;establishesastudentloanforgivenessprogram;andestablishesanenergytechnologycareertrackprogram.Itestablishesanengineeringscholarshipprogramandprovidescriteriaforqualifications.

Thebillappropriatesthefollowinginfiscalyear2007-2008fromtheGeneralFund:

1.      $5milliontotheGovernor'sOfficeofEnergyPolicy; 

2.      $2milliontotheUniversityofKentucky,CenterforAppliedEnergyResearch;and,

3.      $300,000totheKentuckyDevelopmentofEducationfortheEnergyTechnologyCareerTrackProgram.

Additionally,thebillappropriates$100milliontotheCabinetforEconomicDevelopment,DepartmentofFinancialIncentives,EconomicDevelopmentBondPooltobeusedbyKEDFAforadvanceddisbursementsofaportionofthepost-constructionperiodincentives,asauthorizedinSection9.

FISCALEXPLANATION/BILLPROVISIONS:

HB1wouldprimarilyimpactthosecountiesthatbenefitfromcoalseverancetaxrevenues,asthebillincludescoalseverancetaxesaspartofanapprovedcompany'slong-termincentivepackage.However,thefiscalimpactoftheincentiveprogrammaynoteffectthosecountiesforseveralyears,asthepermittingprocessmaytakeuptotwoyears,thebuildingphasethreeyears,andthedelayinincentivepaymentoneyearafteroperationsbegin. 

Apositiverevenueflowcouldbeanticipatedtooccurineconomicdevelopmenttoanylocalgovernmentcenterednearafacilitysite.Acoal-to-naturalgasplantisestimatedtocreate1,750constructionjobs,250permanentjobsforskilledworkersataplant,and550additionaljobsforminerstoproducethecoalforthefeedstock.

ChangeInTheDistributionofCoalSeveranceFunds

CoalproducingandcoalimpactcountiesbenefitfromcoalseverancetaxallocationsthroughtheLocalGovernmentEconomicDevelopmentFund(LGEDF)andtheLocalGovernmentEconomicAssistanceFund(LGEAF).Thistax,underKRS143.020, imposesataxattherateof4.5%ofthegrossvalueofallcoalseveredandorprocessedwithaminimumtaxsetat$.50perton.(Seethetableattheendofthisdiscussionforalistofthespecificcountiesaffected).

Thebill'sprovisionsallowanincentiveof80%ofthecoalseverancetaxespaidbyanapprovedcompanyonthepurchaseofcoalspecificallyusesasfeedstock.IncentivepaymentsmadepursuanttotheincentivesinSection6willbeoff-the-topappropriationsearmarksfromstatutoryformulas.One-halfthe20%remainingrevenueswouldgototheGeneralFund,andtheotherone-half(or10%ofthenewrevenues)wouldbeavailabletocountiesthroughLGEDFandLGEAF.

LocalImpact

Iftheamountofcoalseveredforusebyanoperationalfacilityisgreaterthanexistingcoaloutput,thenthesecountieswillbenefitbynewrevenues,andwillparticipateinashareofthe20%taxrevenuescollectedaftertheincentive.Theincentiveswouldlikelyleadtoincreaseddemandforcoal,whichwouldleadtohigherlocaldistributionsfromcoalseverancetax.However,ifthecoalusedasfeedstockusedbythesefacilitiesdisplacesotherpurchasesofKentuckycoal,someoftheincreasecouldbeeroded,andcoalseverancedistributionstoallrecipientsmaydeclinenegligibly.

PreparedbyMaryC.Yeager,KentuckyLegislativeResearchCommission