Appalachian States Reconsider the Role of Coal Severance Taxes

By Brian Sewell

Lawmakers in Central Appalachia are seeking legislative solutions to counter declining severance tax revenue after decades of natural resource extraction.

Although not all of the counties in coal-producing states in Appalachia have minable coal, they all benefit from severance taxes, which generate millions of dollars used to improve roads, build flood controls and extend and improve natural gas and electrical infrastructure. New proposals hope to provide coal-producing counties with a larger share of revenue and the means to maintain local services and fund future projects.

According to the U.S. Census Bureau, severance tax collections in West Virginia for 2010 represented nearly nine percent of state revenue, with 88 percent coming from coal. The same year in Kentucky, severance taxes totaled three percent of all revenue, with 83 percent from coal production. Tennessee, Virginia and Ohio also levy severance taxes on natural resources, but rely less on extractive industries for public funds.

As the legislative session began, lawmakers in Kentucky wasted no time before introducing legislation to reform the way severance taxes are collected and distributed. Perry County Rep. Fitz Steele introduced a bill to require all that severance tax revenue go to coal-producing counties — half currently goes into Kentucky’s general fund.

The commonwealth also must prioritize projects already in the state budget. After reaching an all-time high in 2009, analysts predict that this year 27 of the 35 coal counties will not receive funding needed to complete projects that were already approved.

In Virginia, anticipating rising utility costs, House of Delegates member James Morefield announced he will introduce a bill to amend the state’s severance tax statute to focus funding on natural gas infrastructure that would include commercial and residential use.

By far the largest coal producer in the region, West Virginia has the most to gain from coal severance taxes. Recent legislative changes and rising natural gas production are predicted to offset declining coal production, keeping tax revenue relatively stable. But some groups believe the tax should be increased to create a permanent trust fund similar to those in states such as Wyoming, New Mexico and Alaska.

Increasing the severance tax on coal and natural gas by one percent could yield $5.7 billion dollars over the next 23 years, according to the West Virginia Center on Budget and Policy, a proponent of the West Virginia Future Fund.

If properly set up, the center says, “the fund itself becomes self-sustaining, even once the natural resources have been exhausted.”