Today's Herald Leader features an editorial supportive of reforming the current coal severance tax system. We agree — investing severance tax now in a permanet trust fund will help provide a longer term financial resource for eastern Kentucky, as we transition to a different economic future.
From the HL:
State government's cupboard is so bare the House-Senate budget negotiations resemble "two mules fighting over a turnip," says House Speaker Greg Stumbo.
State revenue will rebound with the economy, especially if the two mules ever agree on tax reform.
But the outlook for one revenue source — the severance tax — is not so good.
The Energy Information Administration, the statistical and analytical agency within the U.S. Department of Energy, predicts a steep decline in coal production in Central Appalachia, including Kentucky, from 175 million tons to 77 million tons, between now and 2020.
The decline will be driven by diminishing coal reserves, cheaper coal in other parts of the country, a shift to natural gas and other energy sources and stiffer environmental and health regulations.
It will be especially hard on counties such as Perry and Pike where 20 percent of private sector jobs and 30 percent of payroll are directly tied to mining.
It will also be hard on local governments that depend on severance tax revenues.
The severance tax is levied when natural resources that will eventually be depleted are extracted and processed. It's based on volume and price. Increased natural gas production should help make up for some of the lost coal production.
But coal severance tax revenue is projected to decrease 41 percent (in real dollars) between 2015 and 2035, as declining production outweighs rising prices.
To help cushion the blow and aid the economic transition, the study recommends creating a permanent severance tax fund that would act as an endowment for coal-producing counties.
Four other natural-resource rich states — Alaska, Montana, Wyoming and New Mexico — have had such funds for years, while Utah created one in 2008 and North Dakota in 2010.
The authors suggest setting aside a half-percent from existing revenues and raising another half-percent by increasing Kentucky's severance tax from 4.5 percent to the 5 percent levied in West Virginia.
About $2.2 billion will be collected from Eastern Kentucky coal severance taxes between 2013 and 2035, the study says. One percent of that applied beginning now would create a permanent fund of $735 million by 2035 (2010 dollars). By then, the annual dividend from the fund would be $31 million for "needed education, economic development, human services, infrastructure and/or other purposes."
"Creating a fund now," say the authors, "would assure that a small portion of the wealth created as coal declines is turned into a permanent financial asset for the region."
This is a smart idea that deserves support as the spotlight turns from the turnip tussle to Gov. Steve Beshear's tax reform effort.