Coal Tattoo

There’s a new report out this afternoon from the good folks over at the West Virginia Center for Budget and Policy, examining our state’s severance tax policies and their role in industry activities and their potential role in making a brighter future for residents. Their conclusion:

West Virginia’s natural resources are one of its greatest assets and an important source of wealth. But the extraction of those resources can come at a heavy price, creating stress on the environment, infrastructure, and local communities. Like many other natural resource-rich states, West Virginia levies a severance tax on the extraction of its natural resources. The revenue from the severance tax allows the state to capture natural resource wealth and use it for important purposes like education, infrastructure, health care, and countless other priorities for the state, as well as providing a way for the state to bear the costs imposed by natural resource extraction.

Importantly, the report explains — as we’ve discussed before here — that effective severance tax rates in West Virginia do not put the state at a disadvantage in trying to attract industry and jobs:

While the severance tax is levied on natural resource production in the state, evidence from other states suggest that the tax is exported and paid by out-of-state consumers. This allows West Virginians to enjoy the benefits provided by the revenue without bearing the actual burden of the tax. In addition, research shows that the severance tax is not a large burden on industry, having little effect on production and industry location.

The new report explains:

Historically, coal has been the dominant source of severance tax revenue in West Virginia. However, West Virginia’s coal production is projected to sharply decline in the coming years, decreasing the amount of revenue brought in by the coal severance tax. Fortunately, the decline of coal in West Virginia corresponds with a boom in natural gas production. In the coming years, natural gas will grow from a relatively minor source of severance tax revenue to the state’s largest source. In order for West Virginia to benefit more fully from its natural resources, the state should consider policy changes surrounding its severance tax.

Among the recommendations:

— Consider scaling back severance tax credits, limits, and deductions. West Virginia’s effective severance tax rate is far below the statutory rate of five percent due to a number of credits, limits, and deductions available against the severance tax. In particular, the reduced rate for thin-seam coal production is rapidly growing in size and value. The effectiveness of these policies should be examined to determine if the goals of the policies are being meant and if the cost is acceptable. This is more important as tax policies like the reduced rate for thin-seam coal grow more expensive even as coal severance tax revenue declines and coal prices escalate.

— Encourage local governments to make a better effort to diversify their economies. Currently, most severance tax revenue distributed to local governments is used to fill budgets and provide basic services. The new allocation for coal-producing counties is a step in the right direction, with its funds directed towards economic development. Local governments should do more than use their share to pay for basic local government purposes. Local governments should use their revenue share to make investments that lead to greater economic diversification and growth, and should break their dependence on a volatile revenue source for the provision of basic services.

— Create a permanent trust fund. The coming boom in natural gas production provides West Virginia with an opportunity to convert its depleting natural resources into a permanent source of wealth. West Virginia should join states like Alaska, Montana, New Mexico, North Dakota, Utah, and Wyoming and establish a permanent trust fund based on a portion of severance tax revenue. In fact, the state could actually raise the effective rate of the severance tax in order to finance the trust fund with little risk of affecting the state’s natural resource industries.