Do Coal Companies Need Another Tax Subsidy?
This week the House passed the "West Virginia Coal Employment Enhancement Act," which gives local coal producers a $3 per ton tax credit on coal sold to West Virginia power plants and other industries. According to the bill (HB 3072), the tax credit (upon the severance tax) is given only to West Virginia coal that is sold in excess of the coal consumed at a power plant or industrial facility during calendar year 2012. For example, if Acme Coal Company sold one million tons of coal to Acme Power Company in 2012, but in 2013 it sold two million tons to Acme Power Plant only a million of those tons would be eligible for the $3 credit upon the severance tax. So, how much is this credit going to cost the state's budget? According to the fiscal note from the Department of Revenue, it could be significant but that are unable to make a guess. Sounds familiar, ah...remember the cracker plant fiscal note?
The intended purpose of the bill is to "increase coal production and employment in West Virginia," but it is unclear how the bill would incentivize coal production. Coal production is based on demand, supply, and prices that are set in a regional or global market place. Therefore, it is hard to see how reducing a coal company's severance tax payments will stimulate demand from power plants to purchase West Virginia coal unless they pass the savings onto the power plants in the form of lower coal prices. According to bill, there is no requirement to do so. Even if this happens, the credit would probably not be enough to incentivize a power company to purchase additional West Virginia coal.
As the chart below highlights, the amount of West Virginia coal used by West Virginia utilities and industrial facilities has declined dramatically over the last decade from a high of 37.6 million tons in 2003 to a low of 18 million tons in 2011 (the latest year we have data). In 2003, approximately 76 percent of the coal used in West Virginia for electric power and other industries was mined in West Virginia compared to about 55 percent in 2011.
It is hard to fathom that the share of West Virginia coal used in the state for electric power generation will be increasing any time soon given the stiffer competition with other coal regions and the massive shale gas play underway in our region and across the country. It is even harder to understand how this tax credit will boost local coal production and employment since it has the incentives pointed backwards at coal producers instead of forwards at power plants who purchase coal. It also seems unclear how the power plants or industries will certify that the West Virginia coal they are purchasing is in "excess" of the amount they purchased in 2012. What if a coal company decided to rename its existing company, or gets purchased by another company and then sells their coal to a power plant? Would this coal qualify? What if a power plant purchased coal from five different West Virginia companies in 2013 and it was more than they purchased in 2012. Which company would get the $3 per ton tax credit on the excess coal purchased? The language in the bill does not clarify how this would work. One thing is for certain. If the above chart continues to show declines in WV coal being used at power plants and coal companies receive a subsidy from this bill during this period then it will be unmistakeably obvious that we are giving away free money.
With this in mind, the Senate should proceed with extreme caution if they plan to consider this bill. It doesn't seem to accomplish its stated purpose and there seems to be all kinds of wiggle room that would essentially being giving free money away at a time when we are cutting vital program like higher education and domestic violence prevention. Then again, perhaps I just don't understand the bill.