Coal Association uses flawed study to justify tax cut

By John Street, guest columnist

The West Virginia Coal Association wants the 2016 Legislature to reduce the state’s coal severance tax in order to “benefit the West Virginia economy.” Their recent report touts the idea as a simple fix to help an ailing industry, but as with many simple fixes, the devil is in the details–or lack thereof. The 17-page report claims that a three-percentage point coal severance tax cut (from 5% to 2%) would create as many as 1,864 direct and indirect jobs in the state, with corresponding increases in labor income and West Virginia GDP. However, there are flaws in this claim and the “analysis” that tries to support it.

The assumption that there is a direct connection between a reduction in the severance tax and a corresponding increase in coal production is really what the report, and the drive to cut the tax, is all about. While the Coal Association used a sophisticated economic model to come to their conclusions, at its core all that it involved were some simple percentage calculations.

There is no empirical evidence anywhere in the report to justify the assertion that a lower severance tax rate equals higher production. In a document filled with footnotes, the following (from page 11 of the report) is presented without one: “We assume that… coal production will increase in proportion to the reduction in the tax rate….” This assumption greatly exaggerates the relationship (“elasticity”) of coal production based on the severance tax rate. West Virginia University’s Bureau of Business and Economic Research showed that previous proposals for tax breaks for coal would have, at most, minor effects on the industry’s production and jobs resulting from it. Other factors, such as the regulatory environment, low natural gas prices, a strong US dollar, and difficult geology play far more important roles in the current situation of the West Virginia coal industry.

The report compares surrounding states’ lower coal severance tax rates as more proof that our rate should be lowered. But the market factors listed above, as well as strong competition from western states’ higher productivity, have suppressed WV coal production significantly more than the current severance tax. Indeed, the Coal Association’s report lists all of these, while admitting that the “severance tax rate is not the only or even one of the larger causes” (see page 10 of the report) of the problems facing West Virginia coal production.

West Virginia is in the midst of a deepening budget crisis. 2016’s budget gap is $381 million, and 2015’s was $195 million–well over half a billion dollars in the red in just the last two fiscal years. It is this backdrop that makes the Coal Association’s push to lower the coal severance tax that much more crass. The report makes no mention of the result such a tax break would have on the state’s budget. Dropping the coal severance tax from 5% to 2% in 2015 would have lowered state revenues by $220 million dollars, while doing little or nothing to help the coal industry. It has been reported that each $50,000 in tax revenue supports one public sector job; a drop of $220 million dollars of revenue would create a loss of 4,400 public sector jobs, more than double the supposed gain in employment claimed in the Coal Association’s report.

Lowering the coal severance tax is arguably the wrong move at any time, given the coal industry’s externalized costs that place enormous economic and human burdens on coal communities.   Lowering the coal severance tax is certainly the wrong move for West Virginia now. The state does not need a “fix” that costs more than it benefits the public at large.

Updated: February 19, 2016 — 2:27 pm

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