Last week the House Finance committee originated legislation to reduce the state’s severance tax on metallurgical coal (coal used for the production of steel) by 30 percent, from 5 percent to 3.5 percent over the next three years. While the bill was advanced by the committee without a fiscal note, testimony during the debate suggested that the tax cut would cost the state $15 million in its first year, and a total of $180 million over five years. The proposed tax cut would be costly for the state in lost revenue–especially amid increasing needs in public education, infrastructure, and other budget priorities–but it would likely do little to increase coal production and mining employment in West Virginia.
While initially proposed as a temporary rate cut to the coal severance tax, an amendment in the House Finance committee makes the coal severance tax reduction permanent once phased in. According to the Morrisey administration, West Virginia already faces significant budget deficits in upcoming years which would be worsened if this legislation goes into effect.
There are a number of factors at play affecting West Virginia’s metallurgical coal industry that offering a severance tax break simply won’t overcome, including global competition from China, Australia, and India, as well as retaliatory tariffs from China in response to tariffs enacted by the Trump administration, which have hurt metallurgical coal exports.
Given those global factors affecting the industry, there is little evidence that severance taxes play a significant role in determining production and employment. Instead, reserve location, market demand, and logistics all play a much greater part in driving production and employment. When the West Virginia Bureau of Business and Economic Research (BBER) studied the impact of government incentives to increase coal production and employment, including reductions in the severance tax, they found that cutting the severance tax would only result in minor increases in production.
One reason for the ineffectiveness of severance tax cuts is the volatility of metallurgical coal prices. Over the past decade metallurgical coal export prices have ranged from $68.4 per ton to $334.1 per ton. A 5 percent severance tax is minor compared to the considerable swings metallurgical coal prices experience. For example, in 2019, pre-pandemic metallurgical coal prices averaged $133.5 per ton, with a total of 70.7 million tons produced. In 2024, the average price had increased to $173.3 per ton, but production remained flat, at 71.5 million tons. While prices changed by nearly 30 percent, production remained the same. Even a full 5 percent reduction in the severance tax during this time would have made little difference.
It is worth nothing that metallurgical coal already enjoys a substantial tax break in West Virginia. “Thin-seam” coal refers to coal deriving from seams less than 45 inches, and much thin-seam coal in the state is metallurgical. Coal from seams less than 45 inches qualifies for a reduced severance tax rate, with a rate of 2 percent for coal mined from seams between 37 and 45 inches, and a rate of 1 percent for coal mined from seams less than 37 inches. The special tax break for thin-seam coal totaled $84 million in 2022.
The severance tax is one of the most effective ways to ensure West Virginia benefits from its natural resource wealth. As a low-income state that is rich in natural resources, the revenue collected through the severance tax on resources like metallurgical coal plays an important role in funding education, health care, infrastructure, and other essential services provided at both the state and local levels. Cutting the tax in a misguided attempt to incentivize production will only hurt the state’s ability to make those investments in our state and its people.
