On Wednesday, the West Virginia House of Delegates passed two bills intended to boost coal production and put coal miners back to work. Unfortunately, delegates chose to do so in a very ineffective and expensive way, through cuts and rebates to the severance tax.
With little debate, the House passed a tax credit allowing coal producers to claim 35 percent of the cost of new equipment and machinery and use that credit to offset what they owe in severance tax. This bill is reminiscent of the “Super Tax Credits” the state passed in the 1980s.
These types of tax credits encourage capital investment, which for the coal industry means increased mechanization and automation, and decreased employment, which is what happened with the tax credits in the 1980s. Companies were also able to find loopholes, shutting down mines and using contractors to reopen them, collecting the tax credit, or forming various associations to collect the credit that individual companies would not qualify for on their own. In fact, Arch Coal will be able to collect the tax credit after they have already announced they plan to open a new operation, without the tax credit.
The House also voted to straight-up cut the severance tax on steam coal from 5 percent to 3 percent. The bill, which had originated in committee just a few days prior to passage, had virtually no analysis. A fiscal note was produced just hours before the bill was up for a final vote, showing a price tag of $60 million in lost revenue, with, at best, only 500 jobs created, with 100 more likely — meaning the tax cut would cost between $120,000 to $600,000 per job created.
If the Legislature had taken a closer look at the severance tax and its impact on coal production and employment, instead of simply making emotional appeals to the history of the industry and the miners in attendance, they might have realized that a severance tax is not a major factor when it comes to coal production and employment.
A number of factors affect West Virginia’s coal industry in a way that offering a severance tax break just won’t overcome. Chief among those is 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 studies of severance taxes in states like Wyoming, Pennsylvania, and even here in West Virginia, have all found that even substantial cuts in the severance tax have little effect on employment and production.
Just look at the math. If every penny of a 2 percent reduction in West Virginia’s severance tax on steam coal went to reducing its price, the price would drop by only $1.08 per ton. Currently, West Virginia’s steam coal is $7 per ton more expensive than coal from Ohio, $10 per ton more than Pennsylvania and $10 per ton more than Kentucky. West Virginia steam coal is nearly $15 per ton more than the national average. And there is no guarantee that the coal companies will use the tax savings to lower price.
Besides that, West Virginia’s biggest competitors in the coal market aren’t our neighboring states, 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 significantly higher taxes than West Virginia.
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 percent 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.
There’s little evidence to support a severance tax cut or tax credit 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 severance tax is important to West Virginia’s budget, and it’s important that we keep it. These bills now head to the Senate. Hopefully, they will be more carefully analyzed there.