Blog Posts > WV Coal Association Severance Tax Study Ignores Everything We Know About Severance Taxes
February 16, 2016

WV Coal Association Severance Tax Study Ignores Everything We Know About Severance Taxes

The West Virginia Coal Association released a report this week on the supposed economic impact of its proposed severance tax cut for coal. The Coal Association is pushing a cut in the state severance tax on coal from its current rate of 5% to 2%. I’ve talked before about how that is a pretty terrible idea that would cost the state hundreds of millions of dollars while doing little to help the coal industry.

The report claims that cutting the severance tax from 5% to 2% would create 829 coal mining and coal transportation jobs, plus an additional 1,035 in indirect and induced jobs. However, there are a number of problems with the report’s analysis.

First, the report overemphasizes the role of the severance tax on West Virginia’s coal industry. The report noted that West Virginia’s severance tax on coal is higher than its surrounding states like Maryland, Ohio, and Pennsylvania, making West Virginia coal uncompetitive. But this ignores the fact that West Virginia’s biggest competitors in the coal market aren’t Maryland and Ohio, they’re western states like Wyoming and Illinois. Since 2001, eastern states like West Virginia have lost significant market share to western states with greater productivity like Wyoming. And Wyoming’s market share has grown even with higher taxes than West Virginia.

The reality is that there are a number of factors that make West Virginia coal uncompetitive, and the severance tax just isn’t enough of one to overcome the others. That’s why West Virginia University’s Bureau of Business and Economic Research found previous proposed tax incentives for coal would have only minor effects on production and employment. 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.” It also important to recognize that the severance tax is highly exportable, meaning that is mostly paid by out-of-state producers and customers.

Next, the report grossly overestimates the elasticity of coal production based on the severance tax. The report’s estimates employment, income, and production growth are based on the assumption that a 3% cut in the severance tax rate would result in a 3% increase in production. But this estimate is not based on any empirical evidence, with nothing in the report supporting it, and is wildly different from other, evidence-based estimates.

For example, the Wyoming Legislature attempted to answer the same question in the early 2000s: how much would a severance tax cut increase production? Wyoming took a much more rigorous approach, that showed that a 2 percentage point cut in the severance tax rate (from 7% to 5%) would increase production by only 0.47%, while costing the state millions. Another study, published in the National Journal of Agricultural and Resource Economics found similar results for Pennsylvania, this time finding that increasing the severance tax would have little effect on employment and production.

The report from the Coal Association also neglects to measure any impact of the revenue lost from the severance tax cut. In FY 2015, cutting the severance tax from 5% to 2% would have cost the state about $220 million. A revenue loss of that magnitude would result in more spending cuts at the state level, offsetting any economic gain. Spending cuts of that magnitude at the state level would likely lead to job losses in both the public and private sector. For example, based on the previously linked report, roughly $50,000 in tax revenue supports 1 public sector job. If revenue falls by $220 million, that would equal a loss of 4,400 jobs, more than twice as many as the severance tax cut is alleged to create.

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 numbers in the Coal Association’s report are entirely unrealistic, which is probably why, despite their report, they don’t deny that a severance tax cut probably won’t help.

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