Declining Severance Tax One Reason WV Economy in Trouble

Welch, WV

Welch, W. Va., was an important community in a county booming with nearly 100,000 people in the 1950s. The decline of the coal industry in southern West Virginia is a large part of why the population has decreased to just 19,835 in 2010. David Mark/pixabay.com – Licensed under Creative Commons.

 

In July 2016, The Mountain State Business Index reported that West Virginia is likely coming out of the recession it’s been suffering in recent years, though the future still looks bumpy.

The state’s revenue is down, and according to State Revenue Secretary Bob Kiss, if the state legislature fails to impose any new tax increases or budget cuts, the state’s deficit in 2018 could exceed $400 million.

Monthly revenue reports, courtesy of the West Virginia State Budget Office, show where the state earned revenue in the fiscal year 2015-16. By comparison, the report detailing revenue estimates for the 2016-17 year shows that the state is projected to lose about 2.8 percent in revenue. Part of the drop comes from the loss of $147 million from severance taxes between the 2015 and 2016 fiscal years.

The chart below shows the changes in severance tax revenue as well as West Virginia coal production between fiscal years 2006 and 2016 (*note that statistics for coal production for 2016 are not yet available).

Severance tax info from the West Virginia State Budget Office. Coal production statistics from the United States Energy Information Administration.

The severance tax is a tax levied on companies and other organizations that extract natural resources from a state (i.e. timber, coal, and natural gas).

What is causing this decline? A study from Case Western Reserve University, in The Electricity Journal, noted the demand for coal has decreased recently, due partially to the increased demand for natural gas. A report published by the WVU Bureau of Business and Economic Research (BBER) reveals coal production in the state peaked around 1997, remained a bit unstable until 2008, and since then has been on a steady decline. The same report details that not only is natural gas outcompeting coal, but other states like Wyoming have become strong competition, and according to BBER Director John Deskins, West Virginia coal (notably that found in the southern part of the state) has become more costly to extract.

That can partially explain why the amount collected in severances is down, but shouldn’t the increase in revenue from natural gas extraction reduce the impact of the decline? Not necessarily. Deskins says the natural gas industry in West Virginia boomed for a short period before falling, the result of a high supply and demand with a lack of infrastructure to deliver it. Production, he says, has flattened out in the last 18 months due in part to these things, causing “a glut of natural gas.”

“We just don’t have the infrastructure in place to get the natural gas to where it needs to be geographically… (and) in terms of industry,” Deskins said.

A factor in the gas industry, he says, is that the process is capital intensive, meaning that there are low numbers of jobs relative to the amount of product produced. He describes how economics trends are not necessarily smooth, as can be seen in the gas industry in West Virginia. Keeping jobs here, he adds, would be possible if we invested in downstream activity in the production cycle.

Story, video and graphics by Aaron New