Gazette photo by Chip Ellis

Does the coal industry help or hurt West Virginia’s state government budget?

The conventional wisdom is that coal keeps the state running, and is a — if not the — major driver behind the state budget (not the mention the overall state economy). That’s the argument consistently put forth for years by the industry, its friends in political office, and by various economists working for the mining lobby.

But a new, must-read report from the folks at Downstream Strategies and the West Virginia Center for Budget and Policy raises major new questions about that bit of conventional wisdom.  According to the report:

While every job and every dollar of revenue generated by the coal industry provides an economic benefit for the state of West Virginia and the counties where the coal is produced, the net impact of the West Virginia coal industry, when taking all revenues and expenditures into account, amounted to a net cost to the state of $97.5 million in Fiscal Year 2009.

That’s right — a net cost to the state of $97.5 million.

For example:

The coal industry in 2009 paid $307.3 million in severance taxes, corporate net income tax, business franchise tax and other taxes. But, the state spends $113.7 million to support units of government that regulate mining and for the repair of the state’s coal haul roads. So, the report concludes that industry in this respect provided a net benefit to the state budget of about $193.6 million.

Or:

The state provides  variety of tax credits and subsidies that amounted to nearly $174 million in 2009 — all of which show up as “expenditures,” or costs to the state budget of the coal industry.

(There’s a handy chart of all of the revenues and expenditures at the end of the Executive Summary of the report).

The report, written by Rory McIlmoil and Evan Hansen of Downstream Strategies and Ted Boettner and Paul Miller of the West Virginia Center for Budget and Policy, is similar to the previous analysis done on coal’s impact on the Kentucky state budget by the Mountain Association for Community Economic Development. It was being released today along with a similar report on coal’s impacts on the Tennessee state budget.  Both reports are available online here.

Broken down simply, the West Virginia report tries to account for all of coal’s contributions to the state budget and compare those contributions to the expenditures of state money made necessary by the coal industry. This is quite different from what is normally done in reports like the West Virginia Coal Association project released earlier this year, which promoted coal’s benefits but ignored any costs.

The report makes one thing clear from the start:

Coal plays a significant role in West Virginia’s economy, contributing hundreds of millions of dollars in state and local revenue and providing well-paying jobs to tens of thousands of West Virginians.

But:

… the size of the coal economy, while substantial, is not as considerable as previous accounts suggest. Further, such accounts have only presented coal’s benefits; our estimates provide an initial aacounting of both benefits and costs.

As estimated in this report, the industry itself — including direct and indirect employers — actually costs West Virginia state taxpayers more than it provides.

Such an accounting is important, for projected declines in production, should they prove accurate, will further diminish coal’s contribution to state revenues, while the negative impacts resulting from coal industry activity will result in ongoing costs to the state and its citizens.

Today’s release of the West Virginia and Kentucky reports is being promoted by the Sierra Club, and the West Virginia report was partly funded by the Sierra Club and the Natural Resources Defense Council (other contributors are listed in the acknowledgments section). And the authors previously issued another Coal Tattoo must read, The Decline of Central Appalachian Coal and the Need for Economic Diversification.

Among the more interesting parts of the report concerns the “legacy costs” of the coal industry, those for long-term acid mine drainage pollution, damaged roads and bridges and injured or sick workers. These items were actually not considered in the report’s accounting, but the authors make clear how important they are:

Overall, the legacy costs associated with past and future coal industry activity must be considered in examining the total impact on the state. External costs resulting from coal industry activity, including the costs to human health, for repairing damage to personal property, and in the value of lost economic opportunities resulting from the loss of clean water and timber resources, for instance, were not considered in this report. However, they all represent real costs to society, and should be considered in any full accounting of the benefits and costs of the coal industry.

Among other things, the authors recommend:

— Maintaining the revenues currently generated by the workers’ compensation coal tax and creating a “Permanent Diversification Fund” that would support short- and long-term economic development goals and insure against the potential for future declines in coal-related revenues.

— Increasing the coal severance tax rate and distribute the additional funds to coal-producing counties.

— Increase the per-ton fee on coal haul trucks.

The report concludes:

As mining declines in the future, the potential loss of state revenues will make it even more difficult to cover the annual and legacy costs of coal. Therefore, state policy related to energy and economic development — to the extent that it supports the coal industry — should be reconsidered, and new policies should be enacted that reflect the recognition of these realities.