Blog Posts > A Severance Tax Cut Would Be Coal in West Virginia’s Stocking

A Severance Tax Cut Would Be Coal in West Virginia’s Stocking

Written by Sean O'Leary on December 26, 2018

One year after celebrating the repeal of the Clean Power Plan, the West Virginia Coal Association, apparently unhappy with the results of the “most impactful decision to date for the nation’s energy security and stability,” is back asking for more, once again calling for a reduction in the coal severance tax.

The Coal Association argues that the industry, despite getting just what it wanted with the repeal of the Clean Power Plan, is still “fragile,” and a reduction in the severance tax is needed.

The current severance tax on coal is five percent of gross value (which is includes the 4.65 percent state rate and the 0.35 percent local rate). The Coal Association is once again asking for the rate to be cut from 5 percent to 2 percent. And once again, it is worth asking, is a tax cut the solution to coal’s problems, or will it lead to even more trouble for West Virginia?

First the cost. A bill was introduced last year to reduce the severance tax on coal from five percent to two percent. According to the bill’s fiscal note, this would have cost the state $117 million per year. And while the state’s budget picture is better than it has been in previous years, the coal industry is asking for a $117 million tax cut at a time when the state can’t figure out how to pay for PEIA, the business community is asking for property tax cut that could potentially cost hundred of millions of dollars, and budget officials are warning that the state’s recent positive revenue numbers aren’t likely to last.

So while cutting the severance tax would be costly to the state budget, it would also be largely ineffective at increasing production or employment. There are a number of factors at play affecting West Virginia’s coal industry that offering a severance tax break just won’t overcome. Chief among those is the fact that there is little evidence that the severance tax plays a big role in determining production and employment. Instead, reserve location, market demand, and logistics all play a much greater part in driving production and employment. That’s why when the Wyoming Legislature modeled the effect of a substantial severance tax cut for coal, it found only a minor increase in production but a large decrease in revenues. And last year, in West Virginia, the West Virginia Bureau of Business and Economic Research (BBER) found that the various proposed tax incentives for coal would offer only small increases in production. As BBER director economist John Deskins put it, “It would be hard for a 5% price change to overcome those logistical systems that these companies have put in place over years and years.”

There’s little evidence to support a severance tax cut for coal as a tool to increase production and employment. Overall, the state has little ability to influence the forces affecting the coal industry, be they competition from natural gas, environmental regulations, productivity, or transportation issues. The severance tax is important to West Virginia’s budget, and it’s important that we keep it. While the coal industry has long provided important benefits to the state and local economies, it also has created its share of costs. And while the coal industry is struggling, it doesn’t mean it should be let off the hook with a dubious tax cut.

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