Raising coal industry tax a tough sell

By John Cheves – jcheves@herald-leader.com

Gov. Steve Beshear and the legislature could find themselves wrestling this summer with a $1 billion state budget shortfall. But there’s one option the politicians say they will not consider: higher coal taxes.

Kentucky hasn’t touched its coal severance tax rate or its mine permit fees in about 30 years, while other taxes and fees gradually increased and other coal states asked the mining industry to contribute more.

Tennessee lawmakers, for instance, sent a bill to their governor April 24 hiking that state’s coal severance tax from 20 cents a ton to $1 a ton over four years.

But few at the Kentucky Capitol expect such action here, no matter how painful the spending cuts that might be coming.

While Beshear says it’s too early to discuss specifics, the House and Senate budget chairmen this week said coal is off-limits. They, and the Kentucky Coal Association, warned that raising coal taxes would discourage mining in the state and eliminate jobs.

“If you try to raise the severance tax, we’ll squeal,” said Bill Caylor, Kentucky Coal Association president.

Coal’s squeals are hard to ignore in Frankfort. The coal industry spent more than $1 million on state political donations in recent years and $255,145 to lobby the last two legislative sessions.

Several top lawmakers work for coal companies, including House Speaker Greg Stumbo, D-Prestonsburg, and House Majority Leader Rocky Adkins, D-Sandy Hook, both employed by Ashland-based Energy Coal Resources.

“This is a subject that desperately needs to come up, but, obviously, we have strong coal interests throughout Frankfort,” said Rep. Jim Wayne, D-Louisville, a tax-reform advocate on the House budget committee.

“Still, we haven’t faced this sort of a budget shortfall before,” Wayne said. “I’d like people to take off their coal company hats when they walk into the Capitol and consider instead the good of the entire commonwealth.”

It’s considered likely that Beshear will call the legislature into special session this summer to deal with the projected budget shortfall for the fiscal year that starts July 1.

If so, lawmakers must raise more revenue or further cut state spending — or both.

A handful of urban lawmakers and environmentalists say this is the right time to revisit the coal severance tax rate (set in 1978 at 4.5 percent on the gross value of coal mined) and mine permit fees (set in 1982 at $375 per application, plus $75 for every affected acre of land).

“This has been a year of record profits for the coal industry. I think it’s legitimate for us to look at the tax rates,” said Tom FitzGerald, director of the Kentucky Resources Council and a longtime environmental lobbyist.

No untouchables?

Little else has stayed the same in Frankfort for a generation. Tobacco and alcohol taxes jumped again just this year, and the cost of getting a driver’s license rose from $1 to $12 over the last three decades. But coal still pays rates that were established in the disco era.

“We’ve learned that smokers and drinkers aren’t untouchable anymore, even in Kentucky, so why is coal?” asked Sen. Kathy Stein, D-Lexington.

“Everyone keeps saying that ‘everything is on the table,’ so let’s really put everything on the table,” Stein said. “Coal prices have been up. Coal seems to be weathering the recession better than many of the industries that we tax.”

Companies pay a severance tax when they extract natural resources from the ground. Kentucky splits its severance tax receipts between the state and the coal-producing counties, who are supposed to use the money for diversified economic development.

Of the top coal-producing states, Kentucky gets the least from severance taxes — only 2.9 percent of its total tax income, compared to 7.1 percent for neighboring West Virginia.

In 2008, Kentucky collected $221 million in coal severance taxes. That was a rare bright spot for a bleeding budget. By summer, coal severance collection was up 28 percent over the previous year as coal prices more than tripled to $140 a ton.

(The state never saw a three-fold rise in taxes because coal companies can deduct transportation costs, and much of the coal was sold through cheaper, long-term contracts.)

Central Appalachian coal prices later slid to $69 a ton, which still is above the recent years’ average. But Caylor, whose association represents coal companies in the state, said the industry is stuck with a glut of coal mined when prices were higher.

“We’re in a recession,” Caylor said. “A lot of companies already are cutting jobs and going to a shorter work week. To put more taxes on top of that would be a real mistake. You cannot tax an industry into prosperity.”

Cheap electricity

By driving up coal costs, higher taxes would force an increase in Kentucky’s enviably low electricity prices, said Senate budget chairman Charlie Borders, R-Grayson. Kentucky gets most of its power from coal.

“The more financial incentives you can give people to mine coal, the cheaper you can keep our electric rates, which are among the cheapest in the country,” Borders said. “That’s a valuable competitive edge we enjoy over other states. You don’t want to outsmart yourself and lose that edge.”

Electric rates will rise in Kentucky regardless of the severance tax because President Barack Obama and Congress will make burning coal more expensive as they deal with global warming, countered FitzGerald of the Kentucky Resources Council.

“We will be competing out there in a cap-and-trade system with states nowhere near as dependent as we are on old coal-fired power plants,” FitzGerald said. “Where we set our coal severance tax has almost nothing to do with that.”

Apart from the severance tax, the state Division of Mine Permits last year collected $1.6 million in fees from mining companies, using the rates set in 1982.

But the agency, which reviews surface and underground mining applications, needed an annual budget of $8.6 million, most of which came from the state’s General Fund and the federal government.

In essence, taxpayers subsidize a regulatory agency for the coal industry, FitzGerald said. By comparison, the state Department of Fish and Wildlife Resources supports itself through hunting and fishing licenses.

“We’re in a time of state wage freezes and cuts in essential social services,” FitzGerald said. “It’s just unconscionable that the coal industry isn’t paying its own way here.”

Caylor, the coal lobbyist, said the industry has debated whether to acquiesce to higher mining permit fees. It opposes an increase at present, he said. But coal companies are frustrated that the Division of Mine Permits is understaffed and slow to act on applications, so more resources do seem needed, he added.

Ultimately, any legislation to raise coal-related revenue must be approved by the House and Senate budget committees. The chairmen say that won’t happen this year. Next year seems unlikely, too.

“That would be a big hill to climb,” said House budget chairman Rick Rand, D-Bedford. “Not only is it tough to raise additional revenue now on top of the cigarette and alcohol taxes we just raised, but the coal industry would almost certainly resist. I think it would be a tough sell.”

Filed Under: Featured • Greg Stumbo • KY General Assembly • Rocky Adkins • State Budget • State Government • Steve Beshear