West Virginians have something to learn from Alaskans. Several years ago, Jay Hammond, the Republican governor of Alaska from 1974-1982, wrote a memoir called “Diapering the Devil,” about how Alaska turned its rich oil assets into an everlasting source of wealth by creating the Alaska Permanent Fund.
During the 1970s, when Hammond was asked how much he should tax oil in Alaska, he said, “for every cent we can possibly get ... after all, just as it is the obligation of oil company CEOs to maximize benefits for their stockholders, so is it the obligation of the state’s CEO to do the same for his.” Moreover, Hammond argued that, instead of beginning with moderate rates of taxation and then later increasing the rates, Alaska should have started out with a “99 percent severance tax and worked our way slowly down until we started to get vibrations.”
Today, Alaska’s Permanent Fund, valued at $66.3 billion dollars, is run by a state-owned corporation. In 2017, it paid a $1,100 dividend to every state resident, for a total of $696 million, money that went right back into the local economy when many Alaskans went shopping. A 2016 study found that the dividend reduced poverty by 20 percent in Alaska.
Two of Hammond’s biggest regrets were abolishing the state income tax and not raising their severance tax higher. In 2012, Alaska’s effective severance tax rate was 23 percent. Over the past several years lawmakers in Alaska have significantly reduced the effective state severance tax rate, which, coupled with its lack of other revenue sources, has led to significant budget cuts.
While Alaska has failed to diversify its revenue sources, West Virginia wisely ensured it had an income, sales and property tax to help stabilize its revenue. However, unlike Alaska, West Virginia has failed to “diaper the devil,” because it has not adequately taxed its extractive industries or put the revenue in a permanent fund to ensure that future generations will benefit the state’s natural wealth.
With nothing in its “Future Fund” and severance taxes that are too low, West Virginia has very little to show for the hundreds of billions of dollars in coal, oil and natural gas that have been extracted from our state. As historian Ron Eller pointed out in his book, “Miners, Millhands, and Mountaineers,” West Virginia resembles a Third World nation, with growth but no development.
The good news is we can reverse our state’s “resource curse” by adequately taxing natural gas and using it to rebuild our economy so more people benefit from growth. The severance tax falls mostly on out-of-state producers who sell almost all of the natural gas out of state. This means drilling companies can’t pass much of the tax increase onto to us. They aren’t building several pipelines to keep the gas in West Virginia.
A higher severance tax keeps more money in West Virginia, money that can grow our economy and be invested in our communities. Today, producers pay a 5 percent severance tax on the well-head price. To put this in perspective, from 2010 to 2018, the price of natural gas declined by over 80 percent while production grew by nearly 600 percent. Raising the severance tax another 20 percent isn’t going to have much of an impact on production. If it did, producers could wait for the price to rise.
Research shows that a higher severance tax might move the drilling date forward, but it doesn’t necessary lead to less drilling. If severance taxes were all that mattered, then our drillers would all be moving to Ohio, where the severance tax is much lower than ours. They aren’t. Drilling depends less on taxes and more on proven reserves, quality of the resource, prices, infrastructure (e.g., pipelines) and transportation costs.
We can raise the natural gas severance tax by a lot, and out-of-state gas and oil producers will stay put. Just like they did in Alaska. If we invest that money wisely — putting some into the Future Fund, higher education, early childhood development, industrial energy efficiency, renewable energy for public schools, etc., it will create jobs now while more than paying for itself over the long run by creating stronger economic growth.
A recent Penn State University study found that, for every $100 million in severance taxes collected on oil and natural gas companies in Pennsylvania, the state would see a net gain of 1,100 jobs. This is largely because natural gas jobs are very capital intensive, whereas jobs in schools and health care are very labor intensive.
West Virginia policymakers would be smart to raise the severance tax now and use it to diversify our state’s economy before it’s too late and the gas companies inevitably file bankruptcy and reshuffle their assets like coal companies are doing now. The question is whether policymakers will be good CEOs for our state in the meantime, maximizing the benefits for our residents, or continuing to let the devil control our economy.