Is the Coal Tax Credit a Giveaway?
Yesterday, the Senate Energy Committee passed out HB 3072, which gives West Virginia coal companies a severance tax credit of $3 per ton for coal that is sold to power plants in the state that is an excess of what was sold in 2012. As we noted in an earlier post, the tax credit could not only drain money out of the general revenue fund and local governments but it could be a giveaway to the coal companies and could do little to encourage the use of West Virginia steam coal.
The effectiveness of the credit hinges on its ability to encourage utilities to purchase additional West Virginia coal instead of cheaper Western coal or halt power plants from moving to natural gas for electricity generation. To accomplish this goal, the entire value of the credit would have to be passed along to the power plant and the marginal cost of the credit would have to be large enough to encourage the purchase of West Virginia coal.
For example, in 2011 coal power plants purchased 16.2 million tons of West Virginia coal. Using this as our base year (2012), if power plants purchased 19.2 million tons – 3 million more than in 2011 – of West Virginia coal at the spot price of $67 per ton it would total $1,286,400,000. If we apply the $3 per ton credit to the additional 3 million of tons it would reduce this amount by only $9 million or to $1,277, 400,000. This is a marginal cost difference of 0.7 percent. Meanwhile, the $9 million would reduce coal severance tax collections by more than 2 percent and ultimately reduce investments in important government services and programs. Of course, this assumes that the goal of the bill is to increase the aggregate production of West Virginia coal used in the state and not just coal used by one individual power plant.
This bill just doesn’t add up, nor does it encourage coal production or increase jobs. While there is little doubt the coal industry faces tough times ahead, we should not be giving away free money that will reduce our important investments in the public structures that we know create jobs.