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Justice administration introduces tiered severance tax proposal

CHARLESTON, W.Va. — The Justice administration has introduced its bill aimed at establishing a tiered system for severance taxes for the coal and natural gas industries.

Gov. Jim Justice first introduced the idea during his inaugural address in January and has since talked about it, including in front of oil and gas producers last week.

But this is the first look at the language of the bill, which was referred to the state Senate’s Energy, Industry and Mining committee. If it becomes law, the system would go into effect July 1.

MORE: Read the bill reflecting the governor’s tiered severance tax proposal.

The governor’s chief of staff, Nick Casey, described its goals following an appearance on a panel to discuss the state budget at the Charleston Marriott.

“It’s designed to anticipate the break even point in coal in two lines — metallurgical and then steam coal. I think the industry recognizes a certain break even point,” Casey said.

The administration has determined that point could be represented by a 5 percent tax, Casey said.

The tax would fluctuate, depending on the going rate of coal, Casey said.

“Below that it graduates down. Below that it graduates up to a maximum of 10 percent,” he said.

During the quick conversation outside the Marriott, Casey said provided fewer details about how the tax would affect the natural gas industry.

“It’s the same concept with the severance tax on gas,” Casey said. “It’s in one bill and they’re running together.”

The bill describes ranges on severance tax on natural gas between 5 percent when gas is priced at less than $3 per thousand cubic feet to 10 percent when natural gas is priced at $9 or more per thousand cubic feet.

As the Legislature and the Justice administration try to figure out how to fill an estimated $500 million budget gap, making this move on the severance tax would provide a level of uncertainty, Casey acknowledged.

“It’s difficult to predict the fiscal note because there is a little loss of revenue because you can have a rate lower than 5 percent,” Casey said, “but on the upside is a much more significant benefit.

“So depending upon production and sales prices it would produce more money for the state at a time when there’s a higher sales price and the folks in the business are getting a higher profit margin, so they’re sharing a little of that profit margin with a higher severance tax,” Casey said.

Chris Hamilton, vice president of the West Virginia Coal Association and chairman of the state Business and Industry Council, said he is still assessing the governor’s proposal although he had heard some details from Casey at a coal forum this week.

Hamilton said the coal industry appreciates the governor’s recognition that it could use relief while it is down, but Hamilton expressed concern about a rising tax rate when times are better.

“I think it will be met with mixed reaction,” Hamilton in an interview at the state Capitol. “We appreciate the governor’s appreciation that the industry is not doing very well and has the highest severance of any state in the country, so therefore is willing to consider lowering that at times when the industry is not doing very well.”

He said, though, that a stable percentage tax already causes the amount paid by the industry to fluctuate if times are good or worse. He said changing that would treat West Virginia’s energy industries in a way the state does not treat other industries.

“We have a sliding scale at the current time. The more coal sells for, the  more tax dollars the state of West Virginia brings in. So we question why you’d want to double the tax on coal just because they’re selling it for a higher price.

“Frankly, that is very concerning because I’m not sure that we are interested in taxing Procter & Gamble more if they sell more volume here in the state. Nor do we care to raise taxes on Toyota down the road if they sell a few more cars. So why would we want to penalize our core industry here in the state at times when they do well.”

On Feb. 15, Governor Justice pitched his tax proposals, including the tiered severance tax idea, to representatives of the state’s and gas industry.

Speaking at the West Virginia Independent Oil and Gas Association’s winter meeting, Justice again used a dry erase board to describe his thoughts. Like Casey, he talked more in terms of coal than about the specifics of natural gas.

Justice said the oil and gas industry is generally healthy, but the rest of the state’s economy is not.

“We’ve got to find a way that works for you and works for the state,” he said, touting his tiered severance tax proposal.

He told oil and gas representatives that he expects all West Virginians to do their part.

“I know you’re good people,” he said. “You don’t need to be hogs. I don’t need to be a hog. I like to eat a lot, but we don’t need to be hogs.

“I’m going to help if it gets bad. But I’m going to expect you, as great West Virginians, to say ‘Yeah, I’m good with that, and I completely understand.’”

The tiered severance tax bill is one of several with administration backing that have been introduced in the state Senate:

SB 414: [By Request of the Executive] Creating Division of Multimodal Transportation
SB 415: [By Request of the Executive] Relating to severance tax on natural gas
SB 416: [By Request of the Executive] Relating to Public-Private Transportation Facilities Act
SB 417: [By Request of the Executive] Removing financial limitations on number of design-build projects undertaken by DOH
SB 418: [By Request of the Executive] Relating to Comprehensive Substance Use Reduction Act
SB 419: [By Request of the Executive] Creating special revenue fund sources for Division of Labor to meet statutory obligations
SB 420: [By Request of the Executive] Relating generally to education
SB 421: [By Request of the Executive] Increasing amount of authorized federal Grant Anticipation Notes for which DOH may apply

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