WV Center on Budget and Policy > Blog > The Impact and Future of the W.Va. Coal Economy

What is the impact of the “compromise tax proposal” on the budget and working families?

Earlier this week, the West Virginia Center on Budget and Policy examined the fiscal impact of the proposed compromise tax plan between Governor Justice and Senate leadership that will influence how the budget is finalized. It appears House leadership is saying “nope” to this plan and it is unclear how the plan would close the state’s looming budget gap of $500 million for FY 2018, since a corresponding budget plan hasn’t been put forth. As we noted in our recent report on the budget, the state budget that passed – and was later vetoed by the Governor  – included about $90 million from the Rainy Day Fund and no new revenue increases, along with significant cuts to the Governor’s proposed budget, including Medicaid, higher education, and other programs.

As Phil Kabler notes in the Gazette-Mail, it is also unclear what is currently included in the so-called compromise tax plan being advanced by Governor Justice. It has been rumored the tax plan is the same as Senator Fern’s amendment to SB 484 with the exception that the plan includes the Governor’s tiered severance tax rate changes and not the ones in the Fern’s amendment that significantly reduce severance tax collections.  If this is true, the revenue impact to the budget would be significantly reduced. (For more detailed account of the Ferns Amendment aka the proposed compromise tax plan, see our previous post here)

According to estimates provided by State Tax Department (via email), the proposed severance tax changes in  the Fern’s Amendment would result in a loss of an estimated -$135 million in severance tax collections in FY 2018 and between -$140-$150 million thereafter. Overall, the net result of the Ferns Amendment on the General Revenue Fund, according to the State Tax Department,  is an increase of +$50 million in revenues in FY 2018, and a net reduction of an estimated -$170 million in FY 2019 and FY 2020, and a reduction of -$220 million by FY 2021.

For FY 2018, this includes +$280 million in sales tax increases (7 percent rate and broader base), +$49 million in additional revenue from the new and temporary CAT or commercial activities tax (0.045 percent) and high-income tax surcharge, an increase of +$12 million from ending sales tax transfer to Road Fund from sales tax collected on highway construction, and approximately -$156 million less in personal income tax collections. (Note: The reduction in the personal income tax is -$380 million upon full impact. The income tax reductions do not begin until January 1, 2018, while the other tax changes take effect July 1, 2017 – the beginning of FY 2018 – but start June 1, 2017). It is also important to keep in mind the CAT and high-income tax surcharge expire on July 1, 2020 or the beginning of FY 2021).

If the severance tax changes in the Ferns Amendment are swapped for the Governor’s proposed severance tax rates that are estimated to be close to revenue neutral, this means that the net revenue impact on the General Revenue Fund would be an increase of +$185 million ($50m + $135m) in FY 2018, then a decrease of -$30 million in FY 2019 and FY 2020, and then a reduction of  -$70 million by FY 2021 assuming there is no phase-down of income tax rates.

While incorporating the Governor’s severance tax proposals into the tax compromise plan provides a significant revenue boost during the FY 2018 budget year, the sharp reductions in the income tax when it is fully implemented leads to revenue losses beginning in FY 2019 that will grow the state’s budget deficit and lead to additional cuts to vital programs and services. These declines will grow more over time, with the phase down of the income tax and the expiration of the CAT and high-income surcharge by July 1, 2020.

When all of the tax changes are fully implemented in their first year (not including sales tax transfer from Road Fund), it adds up to $280 million in additional sales tax increases, $49 million in increased revenues from the CAT and high-income surcharge, and $380 million in cuts to the personal income tax. This means the proposed compromise tax plan is actually reducing taxes on West Virginians upon full implementation, not increasing them when it comes to the General Revenue Fund budget.

While the compromise tax plans leads to one year of positive revenue growth for the General Revenue Fund and growing deficits thereafter,  the proposed revenue changes to the State Road Fund would increase revenues by about +$130 million in FY 2018 and +$138 million thereafter (if you do not include the transfer of sales tax collections from the Road Fund to the General Revenue Fund).

Altogether, the revenue changes in the proposed tax compromise plan – including General Revenue and State Road Funds – increase state revenues by approximately $315 million in FY 2018 and $108 million in FY 2019. To be clear, these estimates are subject to change at any time since there is no agreed upon tax bill or a full disclosure of what is being proposed between the Governor and legislative leadership.

The overall impact of these tax and revenue changes on households in West Virginia is the same as as has been reported in previous post, which did not include any severance tax changes because the tax is mostly exported out of the state and unable to be modeled because of difficulties obtaining proper information for the process.

Upon full implementation – which does not include any phase down of the income tax rates or the expiration of the CAT or high-income surcharge –  the proposed tax and revenue changes would, on average, increase taxes on 80 percent of West Virginia households making below $84,000 per year, while lowering them on the 20 percent of West Virginians that make more than $84,000 per year. Those making on average $11,000 per year would see their annual taxes rise by $121 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) per year would see an average tax cut of $3,713.

This means that the compromise tax plan – if this is in fact it – raises taxes on most West Virginians to help pay for tax reductions for higher-income West Virginians while leaving some revenue to spare in the first year.

The table below breaks out the tax changes for each income group in West Virginia. It includes the full-implementation of income tax reductions in 2018 and the high-income surcharge. While every income group sees an increase in their taxes from the proposed changes to the sales tax, motor fuel tax/DMV fees, and the new commercial activities tax, the large personal income tax reductions mostly goes to the top income groups. In fact, approximately 59 percent of the more than $364 million in income tax cuts go to the top 20 percent, according to the Institute on Taxation and Economic Policy. This is why higher income West Virginians are estimated to receive an overall reduction in taxes while low and middle-income West Virginians see an increase in taxes.

A closer look at the proposed changes to the income tax illuminate this point further. The proposed tax compromise plan condenses the state’s five income tax brackets into three brackets and reduces the rates. For example, instead of a top marginal tax rate of 6.5 percent on income over $60,000, the tax compromise proposal replaces this rate with a top rate of 5.45 percent on income over $35,000. This change will benefit those who have more income.

As the chart below highlights, the personal income tax in West Virginia is based on the ability to pay. This is largely because personal income tax rates increase as income increases. Sales taxes on the other hand, are regressive, taking a larger share of income from low- and middle-income West Virginians. And because those at the bottom and middle spend more of their income on necessities than the wealthy, shifting from the income tax to a greater reliance on sales taxes is a shift in “who pays” from those with more income to those with less income.  Phasing out West Virginia’s income tax would also make the state’s upside down state and local tax system even more regressive over time.

As discussed in a recent report, shifting from the income tax to the sales tax is a poor strategy for economic growth. Academic research and real-world evidence from other states show that there is little evidence that such a shift will significantly boost economic growth, attract more people, or grow small businesses. However, there is compelling evidence that the income tax is a more reliable source of income than the sales tax over the long-term and that the states with more regressive tax structures increase income inequality.

As the Governor and legislature work out a compromise on the budget, including tax changes, they should keep in mind that setting West Virginia on a path of further cuts and just one year of revenue gain is not going to help build a stronger West Virginia where communities can thrive. While it is great to invest additional resources in our state’s crumbing roads and bridges, those gains could be washed away be shortchanging our state’s other needs – including our public colleges, schools, public safety, and health-care services.

Just any tax plan is not a good tax plan. It must be grounded in realistic assumptions and be sustainable over time.  A sound plan cannot rely on false claims about trickle-down economic growth or a sudden surge in coal mining or natural gas extraction. It must provide a reliable source of revenue that can pay our state’s debts and sustain public investments.

As developments of the tax and budget compromise unfold, we will continue to analyze and review them as they are released to the public.

 

Tackling West Virginia’s Budget Crisis

In less than a month, West Virginia’s new governor, Jim Justice, will release his FY 2018 state budget that aims to close an estimated budget gap of $497 million or about 11 percent of the state general revenue fund (before leaving office outgoing Governor Tomblin released a FY 2018 state budget).

While Governor Justice has said “we have to raise revenue,”  the GOP controlled legislature has vowed they will not enact any tax increases and seem more inclined to push for more tax cuts, such as eliminating the business personal property tax that would reduce state and local revenues by $388 million. In order to tackle West Virginia’s budget crisis effectively, it is important to understand how the state landed in this crisis. We need to look at the spending side and the revenue side of the ledger.

Big Budget Cuts Over Last Five Years

West Virginia’s budget problems are nothing new, the state has had sizeable budget gaps that have ranged from $75 million in 2014 to over half-a-billion in 2016. Over this time, lawmakers have cut millions out of the budget each year. Former Governor Tomblin estimates that the state has cut over $600 million from the budget over the last five years alone. Between 2012 and 2017, the only two major expenditure increases have been in Medicaid (mostly due to growing healthcare costs and utilization) and foster care services (mostly due to substance abuse and expensive out-of-state placements) while most agencies have been severely cut (e.g. Higher Education has been cut by over $55 million since 2012). All together, general revenue fund expenditures have grown on average by less than 1 percent annually since 2008.

Tax Cuts and Weak Energy Markets Have Severely Depressed Revenues

If we look at general revenue fund collections between 1990 and 2007 – before major tax cuts where enacted – they average about 6.8 percent of our state’s economy or total personal income. Today, they are just below 6 percent. If general revenue collections were at the historical average of 6.8 percent, the state would have about $628 million in additional revenue. This is pretty close to what Tomblin said we’ve cut from the budget since 2012.

If you adjust for inflation (CPI), estimated general fund revenue collections for the current fiscal year (FY 2017) are down about $570 million from where they were in 2008. If you look at general revenue collections during the first six-months in FY 2017, they are at the same level today as they were nine years ago (FY 2008). Either way you cut it, it seems pretty clear that West Virginia is collecting far less revenue than it should be. In other words, we have a major revenue problem – not a spending problem.

The state’s revenue problem stems from two primary factors, one that’s self-inflicted and one that is not. In 2007, the state started a series of tax cuts. The cuts totaled at least $425 million annually.  This includes phasing out the grocery tax on food and the business franchise tax, while lowering the corporate income tax rate from 9 percent to 6.5 percent.

While the business tax cuts were sold on the idea that they would boost jobs, the state had more private sector jobs before the business tax cuts than we do today. In fact, one of the only areas of private-sector job growth over the last 10 years has been in health care services, which is mostly because of our growing elderly population and the infusion of federal money from the Affordable Care Act.

The other major factor has been the decline in the coal industry – which was foreseeable at least back to 2011 – and the major drop in natural gas prices. Both of these energy industry factors have not only suppressed severance taxes (state severance taxes are down $243 million between 2014 and 2016), but have also lowered other revenues at the state and local level.

On the coal side, production has dropped from 158 million tons in 2008 to an estimated 80 million in 2016. The stems from stiff competition from cheaper and more abundant natural (shale) gas, a huge decline in coal mining productivity in southern West Virginia (thinner coal seams),  increased competition with Western coal in Wyoming and Illinois, sluggish international metallurgical coal markets, and growing demand for cleaner energy at the federal (EPA regulations) and state level (renewable energy portfolio standards).

In summary, because of major tax cuts and a weak energy sector the state has seen a large drop in revenue collections that have resulted in hundreds of millions in budget cuts over the past several years.

Closing the $500 Million Budget Gap

Going forward, it is clear the state will have to raise revenues in order to pay for vital public services such as schools, roads and bridges, public safety, and health care. This could include applying the sales tax to cell phones ($70m), digital downloads ($4m), grocery items ($170 million), and more personal services ($5.8m) while also increasing the sales tax rate to 7 percent from 6 percent ($200m). Other revenue options could also include raising the natural gas severance tax rate to 6 percent from 5 percent ($19m), reinstating the state estate tax ($20m), adding a 3 percent income tax surcharge on incomes over $200,000 ($96m), and reinstating the business tax cuts ($219m).

The good news is that a large majority – 70 percent – of West Virginia voters are willing  to pay more in taxes if the money goes toward maintaining these key priorities.

While it is unclear how lawmakers will close the nearly $500 million state budget gap during the 2017 legislative session, a cuts only approach would be devastating to vital public programs and services that all West Virginians rely on each day. The most prudent approach would be to raise revenues and then set in motion some long-term government reforms (e.g. criminal justice reforms) that could  reduce expenditures over time and improve our workforce. If we continue to just cut and our public structures continue to deteriorate, there is a good chance more people will leave the state and far less will make our state their home.

 

What Will it Take for Coal to Make a Comeback?

Back in early May, President-Elect Donald Trump pledged to revive West Virginia’s coal industry and some school officials in Boone County say they are counting on this to help them keep schools open and save jobs. While it doesn’t need to be repeated here that this is highly unlikely (see here, here, here, and here), it is important, at least for posterity’s sake, and for those who believe it’s possible to revive the state’s coal industry, to see what that would have to look like.

According to the most recent forecast from West Virginia University, which does not include the now-unlikely implementation of the Clean Power Plan, the state is expected to extract under 80 million tons per year for the foreseeable future. Between 2000 and 2015, West Virginia produced between 98 million and 165 million tons of coal. The average tons produced over this period was approximately 144 million. Therefore it would be reasonable to surmise that for the coal industry in West Virginia to be revived production would have get back to at least 144 million tons per year. Or we could set the bar even lower and say coal production would need to return to at least 2015 levels or about 100 million tons per year.

wv-coal-projections

Historically, coal mining has been a source of relatively high-paying jobs for those without college degrees in West Virginia. Its decline has been a major factor in the state’s budget woes and its weak economy. It remains to be seen how, and if, Donald Trump will keep the promise he made to West Virginia voters to bring back the coal mining jobs that have been lost over the past several years.

Natural Gas Biggest Driver of Shrinking Severance Taxes

While some have blamed the state’s budget crisis on the decline of coal severance taxes, declining natural gas severance taxes are also taking their toll. The decline in mineral extraction, along with a weak economy and major tax cuts phased in between 2006 and 2015, is the central driver of the state’s weak revenue growth over the past several years and into the future.

In January 2015, the governor projected that total severance tax collections (not including local share) for the current fiscal year of 2016 would be $495 million (see graph below). This included $265 million in coal, $178 million in natural gas, and $52 million in oil, natural gas liquids (NGL), and other rock materials (limestone, gravel, sand, etc.). In January of 2016, the governor revised this estimate down by $227 million. About 70 percent of this decline, or $160 million, was attributed to shale gas and oil development (aka fracking) – including $120 million for natural gas and $40 million for oil and NGLs. The decline in coal severance taxes made up just $67 million, or 29 percent, of the projected decline in severance tax collection for FY 2016.

FY16CoalNatGasSevEst

The picture for the upcoming budget year (FY 2017) is much the same. The governor’s revenue estimate for coal severance taxes for FY 2017 was about $62 million less  – a decline of 25% – in January 2016 compared to his January 2015 estimate. For natural gas, it was $139 million less, and for oil and for natural gas liquids (+ other rocks)  it was $45 million less. Natural gas, oil, and natural gas liquids make up almost 3/4 or 75% of the decline in severance tax projections between 2015 and 2016.  

FY17CoalGasSevEst

The sharp decline in natural gas severance tax collections isn’t due to production – which reached an all time high of 1.3 trillion cubic feet in 2015 – but the steep fall in national natural gas prices which is the result of an oversupply of natural gas in the United States. This abundant and cheap natural gas is also a main driver of the state’s decline in coal production, along with reduced demand and low prices for metallurgical coal, declining productivity, and new clean energy regulations

One thing is clear from the steep drop in natural gas prices – it hasn’t hurt production. This means that the state should consider whether it levies an adequate severance tax on natural gas. As Sean has pointed out, severance taxes a have small impact on production but a big impact on increasing revenue. When the legislature reconvenes this spring to close the $558 million budget gap for FY 2017, it should consider raising the natural gas severance tax to help ensure that the state funds important priorities such as higher education.

Severance Tax Cut Would Cost Millions (Updated)

After hearing from the coal industry about their desire for cut in the severance tax, SB 705 was quickly introduced and sped through the Senate Finance Committee on Monday, and is already on 2nd reading in the Senate today. In its current form, the bill cuts the severance tax on coal from 5% to 4% starting in FY 2019, and then down to 3% starting in FY 2020. We’ve talked before about how a cut in the severance tax is unlikely to benefit the industry much, and certainly not to the extent that they claim. Now that there is an actual bill, we can make an estimate of its fiscal impact.

The bill’s severance tax cut is phased in over 2 years, dropping to 4% in FY 2019 and to 3% in FY 2020, for a total rate reduction of 2 percentage points. It’s important to note that the state already has reduced rates for thin seam coal of 2% and 1%, depending on seam thickness. SB 750 does not change that, so the rate reduction would only apply to coal produced in seams thicker than 45 inches. In FY 2017, the thin seam rate reduction was worth $40 million. Also important to note is that the state’s 5% severance tax rate is technically two rates, a 4.65% rate for the state and a 0.35% rate for local governments. SB 750 keeps the local rate the same, so the bill actually lowers the state rate from 4.65% to 2.65% over two years.

With all of that being said, let’s try to estimate the fiscal impact of the bill. The state’s share coal severance tax revenue is projected to be about $206 million for FY 2019 and $213 million for FY 2020. 

SB 750 would reduce the state’s share of coal severance tax revenue by about $53 million in FY 2019, and $109 million in FY 2020 and about $110 million/year after that. And while the 0.35% local rate is unaffected, coal producing counties also receive an additional distribution of 5% of total coal severance tax revenue. Lowering overall revenue by $110 million would cost those counties $5.5 million in lost severance tax distributions.

Of course, this analysis assumes that coal production would be unaffected by the tax decrease, but that’s a pretty safe assumption. Multiple studies have show coal production is largely unaffected by changes in severance tax rates, with tax cuts causing large declines in revenue far outweighing the only minor increases in production. And, as we’ve pointed out before, West Virginia already has lower taxes than our main competition in coal production, and tax cuts will do little to change our productivity challenges and the threat to coal from low natural gas prices.

So while the coal tax cut will do little to help the industry, the revenue lost could do some real harm, West Virginia is in the midst of a substantial budget crisis, and has been neglecting investment in areas like education, infrastructure, and our workforce for years. Year after year of budget cuts have taken their toll, and more tax cuts will only make future cuts more likely. And while the Coal Association report (dubiously) claims that a severance tax cut will create 1,800 jobs, as I’ve pointed before, the spending cuts the revenue loss would likely force would offset any economic gain. Large spending cuts 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 $110 million, that would equal a loss of 2,200 jobs, more than the severance tax cut is alleged to create.

 

***UPDATE***

Just minutes after this post was published, the Senate amended SB 705 to include natural gas in the tax break along with coal, and the tax break would start one year earlier in FY 2018. Total natural gas severance tax revenue (both state and local shares) is projected to be $104.3 million in FY 2018 and $109.3 million in FY 2019.

SB 750 would reduce total natural gas severance tax revenue by $23.7 million in FY 2018 and $49.7 million in FY 2019 and over $61 million/year by FY 2021. Of that reduction, local governments would lose $6.1 million/year and the state would lose $54.9 million/year.

With the new start date, SB 705 would reduce state coal revenue by $51.5 million in FY 2018, and $105.6 million in FY 2019, and about $110 million a year after that. Counties would lose $5.5 million/year.

The total loss for the state when fully enacted would be about $159 million/year while local governments would lose about $11.6 million/year.

 

***UPDATED 3/10/16***

While the bill the cut the severance tax on coal has been turned into a study resolution, much to the chagrin of some in the coal industry, Ted and I decided to take a close look at the Coal Association’s study on the benefits of the severance tax cut. One of the most egregious omissions from the study was a lack of any revenue estimate, as well as not evidence to support the claim that a three-percent cut in the severance tax would result in a three-percent increase in production. But even taking that assumption at face value, a three-percent cut in the severance tax would still costs hundreds of millions of dollars, even with a three-percent increase in production. 

Estimated Impact of Reduction of Coal Severance Tax from 5% to 2% using WV Coal Association Study*

Estimated Coal Production at 5% Severance Tax: 90 million tons
Estimated Coal Production at 2% Severance Tax (3% Increase in Production): 92.7 million tons
Estimated price of coal in WV: $50 per ton
Estimated price of coal in WV if Severance Tax Reduction (5 to 2%) savings lower price: $49 per ton

Current Law estimated coal production value in WV: $4.50 billion
Reduced severance tax estimated coal production value in WV: $4.54 billion

Estimated coal severance tax collections under current law (5%): $225 million
Estimated coal severance tax collections under reduced severance tax rate (2%): $90.8 million

Estimated lost revenue under 2% coal severance tax: -$134 million

**At $50,000 per 1 job, $134 million in state and local expenditures = 2,680 jobs
WV Coal Association estimate of job gains from severance tax reduction = 1,864 jobs

Estimated net jobs from severance tax reduction = -816 jobs

*This simple exercise is not definitive but is meant to provide a simple explanation of how even using the findings contained in the WV Coal Association study are fundamentally flawed since it fails to consider how severance tax reductions would impact state and local expenditures. The above assumes 90 million tons of coal production in a given year in West Virginia with an average price of $50 per ton. The current spot price for steam coal in West Virginia is $42.25 per ton in Central Appalachia and $48.60 per ton in Northern Appalachia. http://www.eia.gov/coal/markets/

The average price of US metallurgical coal exports was $85.65 per ton between July and September of 2015. http://www.eia.gov/coal/production/quarterly/pdf/t12p01p1.pdf

It is unclear what share of total coal production in West Virginia is metallurgical coal, but a large share of it is produced in thin-seams which already receive a reduced severance tax rate of 2 and 1 percent. WV Coal Association study: http://www.wvcoal.com/latest/wv-coal-tax-relief-economic-impact.html

**The multiplier used ($50,000 in state expenditures per job) is a conservative estimate based on several studies. A 2009 study by the Economic Policy Institute estimates that each direct public sector job cost about $70,000 with an indirect multiplier of 0.5% per private sector jobs, which is about $46,000, cost per job. http://www.epi.org/publication/bp252/

A study by Harvard University economics professor Daniel Shoag finds that $35,000 of state spending generates one job. http://scholar.harvard.edu/files/shoag/files/impact_of_government_spending_shocks_01.pdf?m=1455221651

In a more recent study by Shoag, he finds that during an economic recession “every additional $22,011 of spending contemporaneously creates one job.” https://www.aeaweb.org/aea/2013conference/program/retrieve.php?pdfid=436

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.

Severance Tax Cut No Cure for Coal and Could Seriously Impact Budget

The West Virginia Coal Association announced it intends to push for a cut in the state’s coal severance tax rate, from its current rate of 5% to 2%, as an attempt to jumpstart the state’s ailing coal industry. This is the latest in a series of attempts to give coal a tax break under the justification of increasing coal production and employment in the state. While past attempts have taken the form of credits and other schemes, this effort is a straightforward cut in the severance tax rate. But with the state budget already in a precarious position, is a tax cut the solution to coal’s problems, or will it lead to even more trouble for West Virginia?

It’s clear that the coal industry is struggling, particularly in southern West Virginia. The state’s coal production is expected to be down 39% from 2008 to 2015, while nearly 50 coal companies have declared bankruptcy nationwide. But while giving coal a tax break sounds like a quick fix to help turn the industry around, it’s unlikely to do much to help increase production or employment, while doing some serious damage to the state budget.

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.”

The coal industry often argues that the state’s severance tax makes West Virginia uncompetitive, however, coal seams are getting thinner and it’s more expensive to mine coal here than in other states, particularly those out West, severance tax or no severance tax. In fact, of the top 10 coal producing states in 2013, West Virginia had the lowest coal mine productivity, meaning that it is much more labor intensive, therefore expensive, to mine coal from seams in West Virginia, than in any other state.

Untitled

While Central Appalachian states like West Virginia have been hamstrung by thinning seams and lower productivity, they has been losing market share to western states, in particular Wyoming. West Virginia has seen its share of total U.S. coal production decline from 14.4% in 2001 to 11.5% in 2013, while Wyoming’s has increased from 32.7% to 39.4%. So while the industry points to the lack of severance tax in Pennsylvania, and a lower severance tax in Kentucky as evidence of West Virginia’s uncompetitiveness, those states have seen their market shares decline as well in the face of higher productivity out West.

coal shareIn fact, while West Virginia has lost coal market share to Wyoming, it has happened even as Wyoming coal faces both higher severance and overall taxes. West Virginia’s effective severance tax on coal is 4.25%, compared to Wyoming’s rate of 5%, while overall taxes in West Virginia on coal total 6.5%, well below Wyoming’s rate of 10.6%. Even with taxes nearly 40% lower in West Virginia, it isn’t enough to overcome Wyoming’s productivity advantage.

taxes

But beyond competition from coal in other states, West Virginia coal faces even stiffer competition in its own backyard from natural gas. Booming natural gas production, which is subject to the same 5% severance tax in West Virginia as coal, has hurt the coal industry as well. The Marcellus and other shale plays have led to a glut of natural gas, driving energy prices down, making gas-fired electricity often a better deal than coal. In fact, natural gas topped coal as the nation’s largest source of electricity for several months in 2015. And again, a cut in the state’s severance tax will do little to help make coal more competitive with natural gas.

So while a cut to the severance tax will do little to aid the coal industry, it would spell disaster for the state budget. The severance tax on coal produced a little over $311 million in FY 2015, including both the state and local share. Cutting the severance tax rate from 5% to 2% would have cost nearly $220 million, digging an even deeper financial hole than the state already finds itself in.

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, to the point where it can cost the state and taxpayers more than it provides. The severance tax is one of the only ways we have to account for the costs created by the coal industry. And while the coal industry is struggling, it doesn’t mean it should be let off the hook with a dubious tax cut.

Recovery in Reverse: The State of West Virginia’s Economy

Andrew Brown has a good piece in the Gazette-Mail highlighting that West Virginia now has the nation’s highest unemployment rate. West Virginia’s economic recovery since the Great Recession (December 2007) has been bumpy but it now appears that the state may be entering a new downturn. Overall, West Virginia has lost 1.1 percent of its jobs base (8,700 jobs) since December 2007,  while the nation as gained 2.5 percent or 3.5 million jobs. In fact, West Virginia has fewer jobs today than it did in 2006. While the decline in coal jobs is one reason for the state’s poor economic performance over the last several years, other sectors are also performing poorly.

The economic recovery for both manufacturing and construction is well below the national average. West Virginia has lost 16.1 percent of its manufacturing job base, compared to 10.2 percent nationally, and nearly 23 percent of its construction job base compared to about 15 percent for the nation as a whole. The closures of coal-fired power plants in the state have also dragged down employment in the utilities sector while other states continue to add jobs. Most surprisingly, the state has lost a large chunk of jobs in leisure and hospitality while nationally these jobs have grown. The one bright spot for West Virginia has been job growth in business and professional services, which typically pay above average wages, and growth in government employment. 

jobgrowth by sector

The mining and logging sector, after initially adding jobs during the recession, has declined over the last three years as demand for coal and lower prices for natural gas have reduced jobs in both industries. However, it is important note that mining jobs over the last 25 years (1990) have averaged about 3.9 percent of total non-farm employment and today it’s just below this number at 3.8 percent. This tells us that the relatively poor performance of other industry sectors is also a large reason for West Virginia’s poor job growth in the economic recovery.

mining and loggingWVmininshare of wv jobs

One other bright spot in June’s unemployment numbers was the  increase in the state’s labor force, which pushed up the state’s unemployment rate. While it is great to see the labor force growing, it has a long way to go before it’s back to historical levels. At 782,000, the state’s labor force is down by 35,000 from its peak of 817,00 in 2009 and it’s smaller than it was in 1980, 35 years ago.

labroforve historica

While the state’s economic recovery is in reverse, it is important that policymakers take the important steps needed to help get it back on course. This would start by efforts to push more people and places out of poverty by enacting a refundable state EITC, investing more in higher education (instead of cutting it) and infrastructure, and avoiding the tax cut mistakes of the past. While national trends (e.g. energy prices) and federal policies have a much larger impact on our state’s economy, well-targeted state policies that invest in communities and educate our children can help us in the long-run to get back to stronger economic growth, and more better-paying jobs.

Yes, We Should Tax Coal Property Like Natural Gas Property

On Monday, the Joint Select Committee on Taxation met again to discuss revising our state’s tax system. The focus of this meeting was on local property taxation, especially as it impacts the coal and natural gas industries. During the meeting, John Mairs, a lawyer for the coal industry, stated that he “would love to have their taxes assessed like the oil and gas industry.” Presumably, Mairs believes that the coal industry would pay less in property taxes if its property were assessed the same way as natural gas and oil property. However, this is not the case. The natural gas industry has a much higher effective property tax rate than the coal industry.

As Sean and I highlighted in this report, the effective property tax rate on the value of natural gas in West Virginia is about 3 percent compared to just about 1 percent for coal. This is largely because producing natural gas property in West Virginia is valued differently than active coal property. Unlike coal, active oil and gas property is appraised and assessed on both the royalty land-owner and the producer (or leaseholder). Currently, active coal property  being mined is taxed based only upon the royalty rate value of the property, which is typically 5.5 percent of the value, and not the “chattel real interest” or the leaseholders (coal producers) working interest value. This means that a large portion – 94.5 percent, after reducing for operating expenses  – of the value of active coal property is not being assessed and taxed. The result is that coal companies pay much less in property taxes than natural gas and oil companies even though they are paying more on their machinery and equipment.

In 2008, natural gas paid $58.3 million in property taxes based on a production value of about $2 billion – an effective rate of 2.97 percent. Meanwhile, coal paid $90.8 million based on a production value of $9.7 billion or just 0.94 percent. If coal paid the same effective property tax rate as natural gas, it would have paid approximately $288 million or $197 million more in local property taxes. So, yes, taxing coal property the same as natural gas property would be great, as it would be provide additional resources to maintain our highways, and could pay for other important programs that have seen their funding cut over the past several years.

7 Things You Need to Know About Why Coal is Declining in West Virginia (4 of 7)

In the last post, we looked at how West Virginia – especially southern West Virginia –  is being out-competed by other coal regions because of the decline in coal mining productivity that makes it cheaper to produce coal in places like Illinois and Wyoming. Not only do West Virginia coal producers face stiff competition from other coal basins, they see growing competition from large deposits of shale natural gas out west and in West Virginia and, to a lesser extent, from renewable energy.

#4 West Virginia coal is losing steam to natural gas and renewable energy

Over the last several years the amount of coal used for electricity production at power plants in the United States has dropped considerably, from just about 2 billion megawatt hours in 2008 to about 1.6 billion megawatt hours in 2013. This trend is largely driven by the nation’s recent development of shale natural gas. Electricity generated from natural gas grew from about 639 million megawatts in 2011 to over 1.1 billion megawatts in 2013 – growing from 17 percent to 27 percent of the country’s net electricity generation. Coal, on the other hand, has declined over this period from 51 percent to just 39 percent of total electricity generation. Renewable energy has also grown over this period, from about 8 percent in 2001 to over 14 percent in 2013.

fueltype

The shift away from coal and toward natural gas electricity generation is also evident by looking at surrounding states that have relied heavily on West Virginia steam coal for electric power generation. Between 2001 and 2012, West Virginia’s largest domestic customers for steam coal (outside of West Virginia) were North Carolina, Ohio, and Pennsylvania. However, over the last several years West Virginia exported far less coal to North Carolina and Ohio. Meanwhile, Pennsylvania has shifted toward relying more on natural gas for electricity generation.

For example, in 2008, West Virginia shipped approximately 17.7 million tons of coal to North Carolina for electricity production compared to 11.6 million in 2012. Ohio received approximately 13.6 million tons of West Virginia coal in 2008 compared to just 5.1 million tons in 2012. While Pennsylvania imported more steam coal from West Virginia between this period (9.5 million tons in 2008 compared to 11.2 million in 2012), coal used for electricity generation in the state has declined.

From 2008 to 2013, Ohio, Pennsylvania, and North Carolina saw substantial drops in the share of coal used for electricity generation. In Ohio, the share of electricity generation from coal has declined from 85.5 percent to 67 percent since 2008, while in Pennsylvania it has declined from 53 to 40 percent, and in North Carolina it has dropped from 61 to 44 percent over this six-year period. Renewable energy has also grown in these states, from about 3 percent to 6 percent in North Carolina, 2.3 percent to 3.4 percent in Pennsylvania, and 0.4 percent to 1.4 percent in Ohio.

major coal fuel type

As shale development expands with new pipelines and with new natural gas utilities added in the region, the share of electricity from natural gas will likely grow over time in these states, putting more downward pressure on the ability of West Virginia to export coal to other states. As we shall see in the next post, natural gas is also becoming more competitive as the federal government implements rules around the problems associated with global climate change.