Blog Posts > Replacing the Coal Severance Tax?
June 22, 2010

Replacing the Coal Severance Tax?

Sorry for not posting over the last two weeks, but I’ve been out of the country.  I am just now catching up on the news.

Howard Swint had a thought provoking op-ed in the Gazette this past Friday advocating for a 40% profits tax on coal to replace the coal severance tax. As many may know, the severance tax on coal is a gross receipts tax of 5% (with reduced rates for underground thin-seam coal and waste coal).  Not to pick on Swint – and I agree with him in spirit – but this is not a good idea unless it’s in addition to the coal severance tax. Let me explain why.

Higher Volatility.  In 2009, the severance tax on coal generated $371 million compared to $416.5m in 2008, $341m in 2007 and $328m in 2006. While these revenue fluctuations are volatile, a revenue from a profits tax would be even worse.  For example, Massey Energy reported $137m in pre-tax profits in 2009, $49m in 2008 and $129m in 2007. As you can see, the profit variations are more volatile than coal severance tax collections.

Less Revenue. In 2009, Massey Energy mined 22% or 31 million tons of coal in West Virginia (Consol 21.5%, Patriot 12.4%). As shown above, Massey had $137million per-tax profits and would pay $54.8 million under a 40% profits tax in 2009. If we applied Massey’s profits per ton to all coal companies (which is very generous given Massey’s economy of scale), the total yield would be about $250 million, or about $121 million less. If we applied this in 2008, it would be only $89 million or almost 80% less than what the state received in coal severance tax collection in 2008.

Profit’s Over People. This proposal would also set a bad moral precedent by making children (K-12 education, Medicaid, etc.) and disabled and low-income residents (Medicaid, TANF, etc.) subject to the profits of the coal industry. This means that these groups will be forced to rooting for high profits in the coal industry, especially when it appears the industry may be declining. In some ways, this means many residents will be asking coal companies to maximize profits instead of dealing with their externalities.

Faulty Foundation. The argument given to swap these two taxes rests on the time honored argument that it’s a tax on capital formation. Every business tax is a tax on capital formation, so this doesn’t hold any water. Taxes are a small part of doing business – 2-3% – and pale in comparison to labor, rent, energy costs. Never mind that the coal is in WV and the mineral economics is primary based on demand and scarcity, not marginal tax rates.

This all being said, I do think there is room for such a tax if it’s on top of the coal severance tax. Although many see these taxes as punitive, usually implemented because of price gouging, or a because of large external costs, or because a certain industry played a big role in wrecking the world economy.

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