Severance Tax Story Archives - West Virginia Public Broadcasting

Days Are Numbered For State’s Severance Tax Windfall, Expert Says

Higher coal and natural gas prices, and higher demand for both generated a severance tax windfall that fattened the state’s budget surplus last year.

Higher coal and natural gas prices, and higher demand for both generated a severance tax windfall that fattened the state’s budget surplus last year. But the prices for both fossil fuels have declined in recent months.

Sean O’Leary, senior policy analyst for the West Virginia Center on Budget and Policy, said the state could find itself with a shortfall instead of a surplus in the coming years. He spoke with Curtis Tate about the volatility of the severance tax.

This interview has been edited for length and clarity.

Tate: What’s happening with the severance tax right now? Will it result in another big surplus?

O’Leary: The difference is shrinking. We had a big increase over last year’s revenues in the first half of the fiscal year. That gap is starting to get smaller. And I think in February, we collected less severance tax revenue than we did last February. So we’re already starting to see that come back down to earth.

Just under half of the surplus that we’re running this fiscal year is from the severance tax. And we know that’s changing rapidly. It’s changing rapidly now. So when we’re basing a lot of policy on the fact that we have this big surplus, and that big surplus is being driven by the severance tax, and we know historically, and we can see it happening right before our eyes, that there’s a lot of volatility and what is there today might not be there tomorrow.

Tate: Can you describe where the severance tax fits into the tax revenue stream and what it provides for state and county government?

O’Leary: For the state budget, it’s one of the big four sources of revenue. You have personal income tax, the sales tax, severance tax, and business corporate income tax. So that’s one of our main sources of revenue for the general revenue fund.

It’s usually in the neighborhood of, you know, 10 to 15 percent of the total general revenue fund. And then a portion of that is sent back to the counties. So a portion of the cull is sent to coal producing counties, and then to all the counties. The same with natural gas, a portion is sent to the natural gas producing counties, and then another portion sent to all the counties.

It provides a source of revenue. And then, same for the counties. They have their coal fund where the coal money goes in particular, and it’s used for particular items. But they also just use it as a source of general revenue for the most part. It funds local services. At the state level, it funds state services. It’s not dedicated to any one particular agency or any one particular line item or anything. It’s just a general source of revenue for the state.

Tate: Where are we right now? Do you have some updated numbers?

O’Leary: So as of March, we were at $786 (million). Compared to this point last year, we were at $500 million. So yeah, we could easily go over $1 billion in severance tax revenue. So that’d be up about 30 percent compared to last year. But you know, we’re starting to slow down, too.

Tate: What are the risks that come with cutting the income tax and leaning on severance tax? What might happen under the next governor?

O’Leary: The more we eliminate the income tax, the more we’re going to be reliant on severance tax. And these past two years have not been normal. If we look back at the past 15 years, from 2020, you go back to 2005, the severance tax was the highest performing between 2008 and 2014. It was our best growing source of revenue. And then from ’14 to ’16, it was our worst growing source of revenue. And then it was the best again, from ’16 to ’19. And then the worst from ’19 to ’20. When you average all that out, income tax grows at three and a half percent per year, sales tax grows at two and a half percent per year. And the severance tax grows at half a percent per year. So we’re eliminating our strongest source of revenue growth and replacing it with our most volatile, and on average, one of our weakest sources of revenue growth. The only one that’s worse, of our big four, is the corporate income tax, but we were cutting that every year.

So we’re going to see the income tax look more like the corporate income tax and declining every year. If we’re cutting it every year, or do one big cut, and every other year, or however long it takes to hit those triggers, while relying more heavily on sales tax, which grows more slowly, and then relying on the severance tax, which sometimes grows real fast and sometimes grows the worst, that’s just going to make budgeting much harder. That’s going to make projections much harder. It’s going to make mid-year budget cuts probably more likely.

All of those things that we used to see back when the severance tax numbers started to collapse back in 2015, 2016. When Gov. (Jim) Justice came into office, that was the big problem was the severance tax numbers collapsed. And then they bounced back. And that solved the problem. And we all applauded him for that. But it was really bad energy prices bouncing back from a collapse a few years earlier.

State Budget Surpluses Continue To Rise

For the 2022 fiscal year, the state had a budget surplus of $1.3 billion. Cabinet Secretary for the Department of Revenue Dave Hardy said he expects to surpass $1.7 billion in budget surpluses for the year.

Gov. Jim Justice celebrated budget numbers for the month of April that were $319 million above estimates at a Monday press conference. That brought the budget surplus for all taxes to $1.585 billion for the year so far.

“The April general revenue numbers are the tax collections, are all the different collections that are coming into the state, have surpassed all of our wildest imaginations,” Justice said. “It’s hands down, the single largest collections, I guess in our history.”

April is typically a big revenue month with personal income tax collections and quarterly tax collections for small business. During the last legislative session, the state passed personal income tax reductions which went into effect for April.

Personal Income Tax collections totaled $192.8 million above estimates for April, which is also a new all-time record for a single month despite those reductions. Record year-to-date collections of more than $2.277 billion were $439.5 million above the official estimate and 9 percent ahead of prior year receipts.

April General Revenue Fund Severance Tax collections totaled nearly $35.6 million. Monthly collections exceeded the official estimate by nearly $17.6 million. Record year-to-date general revenue fund severance tax collections of $822.5 million were 48.1 percent ahead of last year and $622.5 million above estimate.

Hardy noted that 65 percent of those severance tax revenues are from natural gas with coal only amounting for about 35 percent.

Consumer Sales Tax collections of $129.2 million were $18.8 million above estimate in April and 5.3 percent ahead of prior year collections. Cumulative collections of more than $1.398 billion were $189.6 million above the official estimate and 6.6 percent ahead of last year.

Corporation Net Income Tax collections totaled nearly $98 million in April. Monthly collections were nearly $65 million above estimate. Year-to-date collections of $330.8 million were $205.8 million above the official estimate and 17.8 percent ahead of prior year-to-date collections.

The surplus comes at a time when the state also faces unbudgeted financial needs in the West Virginia Department of Corrections and Rehabilitation system for infrastructure and payroll. Corrections needs approximately 1,000 more staff members. One proposal is to offer significant pay raises to make them competitive with surrounding states. That alone is expected to cost the state between $40 and $60 million.

Similarly, staffing issues in schools statewide are often traced back to pay. A proposal to raise the pay of new teachers that failed in the most recent legislative session had a cost of $24 million.
The departments of Child Protective Services and Adult Protective Services are also severely understaffed within the Department of Health and Human Resources and libraries across the state have millions in deferred maintenance costs.

Why Keeping Pleasants Idle Doesn’t Add Up For State, Local Government

The coal it does not consume will not generate severance tax revenue for state and local government.

Keeping the Pleasants Power Station in operating condition, as Mon Power proposes to do, has a downside for state and local government.

On Monday, the West Virginia Public Service Commission gave Mon Power and Potomac Edison the go-ahead to negotiate a deal to keep the Pleasants plant from shutting down next month.

If an agreement is reached with the plant’s owner, ratepayers will pick up a surcharge to keep the plant’s workers on the payroll, the equipment in operating condition and the tax revenue going to Pleasants County.

The plant would not produce electricity. Which means it will not burn the 3 million tons of coal a year it receives mostly from Marion, Marshall and Ohio counties.

And the coal it does not consume will not generate severance tax revenue for state and local government. Idling Pleasants will cost the state millions of dollars in severance tax.

Severance tax revenue was a large part of the budget surplus the state accumulated last year.

Coal prices have recently been over $100 a ton. The severance tax is 3.95 percent. If the plant consumes 3 million tons a year, the state should receive $11.85 million in severance tax.

Local governments receive a 10 percent share of that, so $1.85 million at that price.

Even at the current $75 a ton price for Northern Appalachian coal, the state would still lose $8.9 million in severance tax, and local governments would lose nearly $1 million.

Coal Severance Tax Exemption Moves Forward In Senate

According to an attached fiscal note, the measure would cost the state $22 million in tax revenue each year.

A bill to exempt West Virginia coal consumed in-state from severance taxes advanced in the Senate.

The Energy, Industry and Mining Committee approved Senate Bill 168 Thursday.

The bill, SB 168, would exempt West Virginia coal burned by West Virginia power plants from severance tax.

According to an attached fiscal note, the measure would cost the state $22 million in tax revenue each year.

The local government portion of severance tax would not be affected by the bill.

The fiscal note also warned that the bill might run into constitutional issues. A federal appeals court ruled against a similar law in Kentucky.

SB 168 now goes to the Senate Finance Committee.

Coal Industry Wants Legislature's Help To Recruit And Train Miners

Hamilton said Senate Bill 157 could help do that, by funding the Coalfield Community Development Office.

The West Virginia coal industry’s top lobbyist says mine companies are having trouble finding workers, and he’d like lawmakers to help recruit and train them.

Chris Hamilton, president of the West Virginia Coal Association, told members of the Senate Energy, Industry and Mining Committee on Tuesday that West Virginia coal mines could hire several hundred workers, if it could find them.

“You know, we ought to be recruiting people from around the country, bringing them here and providing them land and opportunities within our industrial sector,” he said.

Hamilton said Senate Bill 157 could help do that, by funding the Coalfield Community Development Office. That office has been dormant for at least a decade, Hamilton said.

The state employs about 13,000 full-time mine workers. Coal production has been up in the past year, but the industry has been limited by its ability to find new workers.

The committee approved the bill and sent it to the Finance Committee.

The funds would come from coal severance taxes, which have increased with the demand for coal and higher prices per ton.

Energy Bills Move Forward As Legislature Winds Down Session

State lawmakers wrapped up energy related legislation in the final hours of the session, including a bill to create a Mining Mutual Insurance Company.

The Senate unanimously approved the final version of Senate Bill 1 on Saturday, and it becomes effective immediately when the governor signs it.

SB 1 creates a five-member board to manage at least $50 million in taxpayer funds. Those funds would back mine reclamation bonds.

An audit last year found that the state’s special reclamation fund was not adequate to cover future mine cleanup obligations, potentially exposing the state to hundreds of millions of dollars in liabilities.

Senate President Craig Blair identified SB 1 as one of his top priorities, and in a rare move, he sponsored the bill.

Advanced Batteries

The House sent House Bill 4025 back to the Senate late Saturday with an amendment removed, but the chamber didn’t act on it before the session expired.

The bill would have exempted rare earth minerals mined in the state from severance taxes. Its supporters say that will encourage the development of advanced battery technology for use in electric vehicles and storage batteries for renewable energy.

Carbon Storage

Both chambers finished action earlier this month on House Bill 4491, with the Senate agreeing unanimously to the legislation.

HB 4491 will create a permitting system for underground carbon storage. The system could help carbon-intensive industries, such as power plants, steelmakers and cement companies, meet their carbon-reduction or net-zero goals.

The stored carbon could also be used in the future and meanwhile would not be released into the atmosphere.

Nuclear Power

Senate Bill 4 made it across the finish line and to the governor’s desk last month.

SB 4 repealed the state’s longstanding ban on the construction of new nuclear power facilities. The ban was enacted over concerns about nuclear safety and to protect the state’s coal industry from a competitor.

But times have changed. Gov. Jim Justice, a coal executive, signed the repeal. It will take effect on May 1, 2022.

Mine Safety

A bill to change the state’s mine safety code didn’t get very far.

House Bill 4840 would have made changes that Democrats, many Republicans and the United Mine Workers of America said would have weakened safety.

An intensive lobbying effort by mine workers and their allies effectively sidelined the legislation.