One of the many challenges in reaching agreement on a proposed state budget for the new fiscal year beginning July 1 has to do with coal and gas severance taxes.   The current rate is five percent, but at issue during informal budget discussions are proposed sliding severance tax rates, depending on the market price for the resource.

The West Virginia Coal Association has sent a letter to each member of the Legislature in support of the variable rate schedule for steam coal. Those rates range from 2.5 percent when steam coal is selling for less than $42 a ton, up to 10 percent when the price reaches $74 and higher.

Northern Appalachian steam coal market price has been fluctuating from $40-$46 a ton for the last year, meaning under the scale proposed by the Justice administration the severance tax would vary from 2.5 percent to 3.25 percent, well below the current rate.

(At least those are the most recent figures available, but those numbers can and do change rapidly as budget discussions continue.)

While the Coal Association is on board with the severance rates for steam coal, its members are adamantly against a similar sliding scale for metallurgical coal that’s used in making steel.  West Virginia produces from 40 to 50 million tons of coking coal a year and business is very good, at least for the moment.

Several weeks ago, a major cyclone damaged Australia’s key rail lines, interrupting shipments from Queensland which supplies more than half of the world’s coking coal. That caused prices to surge to between $180 and $260 a ton depending on the grade, sending met coal producers here scrambling to meet the demand and take advantage of the higher prices.

Under the Justice administration’s proposed sliding scale severance tax rates, met coal producers would see their tax rate double to ten percent beginning July 1, hitting them with a big expense just as they are getting back on their feet. Additionally, Australia will soon have those repairs completed, putting its coal back in the global market and bringing the price back down.

Meanwhile, the state’s natural gas industry is also worried about the possibility of higher severance taxes. One trade group, the West Virginia Oil and Natural Gas Association, did sign off on a Senate-passed bill that included the variable rates, but only because it included co-tenancy and joint development, two provisions that would make it easier for gas companies to conduct horizontal drilling. That bill failed in the House.

Governor Justice’s concept from the beginning has been for the state to give the natural resources industries a break when prices are low, but require them to pay more when times are good. That may sound like a reasonable concept, but it’s a tough sell with the state’s energy sector which has been battered by low prices and regulatory constraints.

Also, commodity prices are notoriously volatile. The sliding scale severance tax rates would make it even more difficult for companies to anticipate their production costs.  As the Coal Association said in its letter to lawmakers, “Certainty is key for sustaining our operations.”

Right now, there is no certainty because there is not yet a budget for next fiscal year, and it remains unclear whether severance tax rates will change significantly just two months from now.

 

 

 

 

 

 

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