Recent Severance Taxes Projections Should Not Deter Establishment of Future Fund
Yesterday, Mark Muchow, the Deputy Secretary of the Department of Revenue, presented at November Legislative Interims on the future of state severance taxes. In his presentation (Severance Tax Trends -November 26, 2012), he found that severance taxes are going to decline and stagnant over the next few years because the boom in shale natural gas production will not be enough to make up for the projected loss in coal production.
While there are no facts about the future, the implications of these projections could impact how the state approaches the establishment of a Future Fund funded by severance tax revenue.
Below is our updated (August 2012) projected estimates of coal and natural gas severance taxes from 2013 to 2035 . These projections are based on data from the 2012 Annual Energy Outlook published by the Energy Information Administration that includes natural gas projections for the Northeast and coal projections for Central and Northern Appalachia.
Compared to our projections, the state’s projections show a more pessimistic view of future coal severance tax collections over the next five years, while their projections for natural gas severance tax collections are more optimistic than our estimates. In 2017, the state is projecting the state will collect $129.5 million in natural gas severance taxes and $346.5 million in coal severance taxes in 2017 (see link above) – a combined collection of $476 million. Our estimates, on the other hand, show a combined severance tax collection of $469.4 million, $105.3 million in natural gas and $364.1 million in coal severance taxes.
While the state is projecting stagnant severance tax collections over the next four years, it is important to keep in mind that they are based on somewhat pessimistic projections of coal prices and/or production – which is interesting given that the governor has been quiet about the decline of coal. For example, “consensus” projections produced by WVU’s Bureau of Business of Economics Research forecast that West Virginia will produce 143 million tons in 2015 while our analysis of EIA projections show 112.5 million tons. It appears that the coal projections that state is using are much lower than our projections or WVU’s consensus projections.
Since projections over the long-term indicate that overall severance taxes will grow to over $750 million by the end of the forecast, policymakers would still be wise to contemplate setting a side a portion of natural gas or coal severance tax revenue in a Future Fund. One of the central reasons for doing so is to avoid the roller coaster ride of severance tax revenues and ultimately to prepare (by providing revenue) for the day that severance taxes no longer make up a big chunk (11 percent) of our state’s budget.