Our friends at WV Center on Budget and Policy have a great piece about capturing revenue from coal extraction…and missed opportunities to do so in West Virginia. While they focus on the West Virginia landscape, many of the questions apply to Kentucky too. Looks like we have a lot of room for improvement in taking advantage of severance taxes. Take a look at the original post and resources on their site.
One idea we've championed in the past is the creation of a trust fund for economic development and diversification funded through an increase in West Virginia's severance tax levied on coal and natural gas extraction. But would raising the severance tax make it too expensive to mine coal or drill for natural gas in West Virginia, and hurt the state's economy? Let's look at how West Virginia compares to other states.
Using this method, West Virginia has an effective severance tax rate of 3.2%, well below the average of 5.2% for the top ten states. Alaska had the highest effective rate at 11.2%. Of the ten state's most reliant on the severance tax, West Virginia ranked 7th for effective rate. West Virginia also had a lower effective rate than neighboring energy producer Kentucky, and a lower rate than the western states whose production is growing more competitive with West Virginia every year.
With West Virginia's effective severance tax rate lower than several other highly productive energy resource states, it seems unlikely that a small increase in West Virginia's severance tax rate would hurt production nor cause any economic harm. Further, most analysts believe that severance taxes are highly exportable, meaning that the tax burden falls mostly on out of state utility customers and shareholders. This is just one more reason why the state needs to create a WV Trust Fund with a modest increase in the severance tax. Without it, there is no guarantee that the state will benefit from natural resource production in the long-run.