Blog Posts > Temporary Severance Tax Boom Not a Reason to Cut Income Tax, But it Could Transform Coal and Gas Communities
December 2, 2022

Temporary Severance Tax Boom Not a Reason to Cut Income Tax, But it Could Transform Coal and Gas Communities

Once again, West Virginia’s budget “surplus” is being used to justify a push to reduce or eliminate the state’s personal income tax. However, the state’s current surplus isn’t a sign that West Virginia’s economy is uncharacteristically strong or that tax revenues are greater than is needed for the state budget; rather, it has been driven by a combination of temporarily high energy prices, artificially low revenue estimates, and years of “flat” budgets that have left state needs unaddressed.

Majority of Surplus Due to Temporarily High Energy Prices

Through the first five months of FY 2023, West Virginia’s revenue collections are $687.5 million above the official FY 2023 revenue estimates. However, the majority of the surplus—53.8 percent—is from the severance tax, with collections coming in $370.2 million above estimates. In November alone, severance tax excess collections made up 78 percent of the surplus, while personal income tax collections came in $10 million below the estimate.

As such, the majority of West Virginia’s surplus tax collections are due to unexpectedly high energy prices combined with conservative revenue estimates. Natural gas prices have skyrocketed over the past year, from $3.76 per million BTU in December of 2021—around the time the FY 2023 revenue estimates were being made—to $8.81 per million BTU in August of 2022, an increase of 134 percent.

Energy prices—and by extension, severance tax collections—are notoriously volatile, making them one of the state’s least reliable sources of revenue. From FY 2005 to FY 2020, severance tax collections grew at an average annual rate of -0.2 percent, with multiple booms and busts. In comparison, the state’s income tax, which Governor Justice is calling to reduce or eliminate based on the state’s current surplus, grew at a steady rate of 3.5 percent per year—making the income tax a revenue source that is far more in line with average budget growth while also offsetting the more volatile severance tax. In FY 2020, severance tax collections were 3.1 percent below their FY 2005 collections, before spiking in FY 2022 to 178.9 percent above their FY 2005 collections, making recent spikes a temporary and unsustainable level of growth.

Utilizing Volatile Revenues to Justify a Permanent Tax Cut Would be a Mistake

Relying on temporarily high severance tax collections in order to finance a permanent tax cut to the personal income tax would be incredibly fiscally irresponsible. In fact, natural gas prices are already starting to decline, falling to $5.66 per million BTU in October, a 35.7 percent drop from their August peak, and are expected to decline further in 2023. This drop in energy prices will show up in severance tax collections in the coming months, as tax payments follow a couple of months behind the trends themselves.

The volatility of the severance tax, coupled with the fact that the sources of this revenue like coal and natural gas are nonrenewable, makes the revenue both unpredictable and invaluable. Increasing the state’s reliance on these highly-volatile severance tax collections—as would be the case if West Virginia lawmakers used these revenues to justify a permanent income tax cut—would pose serious threats to the long-term sustainability of the state’s budget.

Severance Tax Collections Can Pay for Long-needed Investments in Coal and Natural
Gas Counties

Instead, utilizing above-trend revenue from severance tax collections to deposit into a fund for specific uses can solve the volatility challenges and create longer-term improvements in communities that would benefit both current and future generations. Most states with significant severance tax revenues have established permanent severance tax trust funds. In these states, a portion of severance tax revenue is set aside into a fund or account to help achieve a specific public purpose or set of goals. Some examples from other states include targeted infrastructure improvements, economic development, and education investments—all of which benefit the broader population while helping to smooth out the volatility of the severance tax revenue itself.

As mentioned above, five months into FY 2023, the severance tax has already brought in $370.2 million more than the revenue estimate. Combined with FY 2022’s severance tax surplus of $439 million, over $800 million in severance tax funds above estimates are available. West Virginia should utilize these temporary severance tax collections to create a lasting legacy in our coal and natural gas communities by dedicating all of FY 2022 and 2023’s severance tax revenues above trend into a fund specifically for those counties. The fund could then pay for long-needed infrastructure projects and other investments in our coal and natural gas communities.

While these counties are great sources of resource wealth, historically that wealth has failed to reach the residents of those communities. Counties that experienced the natural gas boom in recent years continue to decline in population while their poverty levels have remained unacceptably high. Similarly, coal counties are some of the most under-resourced places in the state, with few funds available to invest in much-needed infrastructure and economic development.

But it doesn’t have to be this way. West Virginia can use the temporary severance tax boom to help those West Virginians who’ve been most impacted by coal and natural gas development and ensure they are not left behind in the next inevitable bust. In FY 2023, 46 of the state’s 55 counties have natural gas and/or coal production. West Virginia lawmakers should create a fund and place all excess severance tax revenues from FY’s 2022 and 2023 into it. Coal and natural gas counties should then be eligible to apply for funding from the excess severance tax collections, already over $800 million, to fund long-needed projects to improve life for their residents, small businesses, and future generations. This would turn temporary tax revenues into long-lasting improvements to the communities who need it most.

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