CHARLESTON, W.Va. -- West Virginia could improve its financial picture by strengthening severance taxes on coal and natural gas, according to a report released Thursday.Sean O'Leary, author of the West Virginia Center on Budget & Policy study "Investing in the Future: Making the Severance Tax Stronger for West Virginia,"
concluded West Virginia does not benefit as much from its natural resources as other states with similar plentiful reserves."The most important thing we found in our study," O'Leary said Tuesday, "is that West Virginia's reliance on severance taxes is growing."Severance taxes will be 11 percent of our state general revenue funds this year. It has really spiked in the past five years."Severance taxes also go to towns and counties where coal mines and natural gas wells are located. They help finance local services like fire departments, police forces, trash collection, snow removal, libraries, local parks and recreation facilities, O'Leary said."A lot of counties might not be able to provide these services without this revenue," he said.Severance taxes also help create local jobs. Last year, a Pennsylvania State University study showed 1,100 jobs were created in that state for every $100 million in severance taxes imposed on coal and natural gas companies.Severance taxes are based on the "gross value" of resources after they are sold.
In West Virginia, severance taxes of 5 percent are assessed on natural gas and on coal produced in seams 47 inches thick or more.Coal severance taxes are reduced to 2 percent for thin coal seams, between 37 inches and 47 inches, and to 1 percent for coal seams thinner than 37 inches."When we compare West Virginia to other states that rely heavily on severance taxes, we have a low severance tax," O'Leary said. West Virginia also assesses severance taxes on limestone, sandstone, sand and gravel.Today, West Virginia ranks seventh nationally in its overall reliance on severance tax revenues.
A total of 38 states impose some type of severance tax on their minerals."Studies in other states have shown that raising or lowering severance taxes has little effect on industry production and employment, while significantly affecting tax revenue," O'Leary wrote in the report.
"If you raise or lower our severance taxes in West Virginia, it will affect how much revenue you bring in," O'Leary said. "But it will have almost no impact on the production of coal or natural gas and no effect on employment in those industries."Companies will drill gas where they want to drill for gas and mine coal where they want to mine it. Taxes do not have any real influence."In West Virginia, a major shift is also beginning to take place, O'Leary said. Coal production is declining, while natural gas drilling is booming.O'Leary believes West Virginia should "create a permanent trust fund to help the state out during economic depressions. We shouldn't be concerned that our severance taxes are too high."The new report discusses the growing shift in sources of severance taxes."While natural gas booms, coal production in West Virginia is declining," the report states. "The state's reliance on coal severance tax revenue could put it in a precarious fiscal position in the future, if it were not for new severance tax revenue from natural gas."
O'Leary said West Virginia is one of the few states with major severance taxes that does not also have a "trust fund" to help stabilize government finances through economic booms and busts."If we had begun putting aside money into a trust fund 30 years ago, we could have a permanent source of revenue today," he said.The Center on Budget & Policy plans to release another report, focusing on trust funds created from severance taxes, before the end of the year.Reach Paul J. Nyden at firstname.lastname@example.org