West Virginia’s Severance Tax Boom

Coal and natural gas are on fire, and the state of West Virginia is a major beneficiary.

Prices for the commodities have skyrocketed, in some instances to record levels, generating previously unimaginable severance tax collections for the Capitol treasury.

For example, the price for Central Appalachian thermal coal is close to $180 a ton, three times the price of a year ago. Northern Appalachian coal has risen from about $60 a ton last year this time to over $140.

Natural gas (NG) prices have also pushed significantly higher. A year ago, NG was trading at around $4 per million btu, but it was trading Wednesday at over $8.

The state imposes a severance tax on extractive resources, and as the price for those resources rises, the amount of money collected also increases. As a result, those severance tax collections are soaring.

The state ended the fiscal year last month with severance tax revenue of $769 million, more than twice the amount projected and almost three times the amount collected the previous fiscal year. And the state is off to a remarkable start so far this year.

West Virginia collected nearly $55 million in severance taxes just in July, 18 times the amount projected late last year when the state Department of Revenue was putting together projections for the next year. In fairness to the prognosticators, no one could have foreseen the rapid and historic rise in demand, especially for coal.

Even Wall Street experts are shocked. Peter O’Conner, senior analyst with Shaw and Partners, told CNBC recently, “Who would have thought that dirty ol’ coal would have been the best-performing equities in the last financial year,” he said.

The war in Ukraine and the subsequent sanctions on Russian energy, combined with increased global demand and the inability of renewables to meet that demand, has forced countries to turn back toward fossil fuels.

O’Conner explained that, at least in the case of coal, price has followed demand. “And supply (of coal) is tight. Why? Because nobody’s building capacity. So that market will stay higher for longer, probably well into (the) 2023 calendar year.”

Commodities often follow boom-bust cycles. That has historically been true for the coal and gas industries in West Virginia, and the state budget has been impacted accordingly. Right now, we are enjoying an unprecedented boom, and West Virginia is benefiting significantly.

 

 

 





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