Myth Busting #1: Severance Taxes & Jobs

The Bottom Line: For the Coal Mining Industry, Severance Taxes Do Not Impact Production or Jobs. They Do Bring in Revenue. A Lot of It.

 

The Claim:

“Creating a special tax for the coal industry will make Illinois coal less competitive and ultimately lead to lost jobs and lost opportunities.

In addition, creating a coal severance tax will also increase costs for consumers. The cost of these taxes will inevitably be passed on to consumers.”

David From Americans for Prosperity

 

The Facts:

A review of numerous studies analyzing the impact of tax rates on extractive industries such as coal mining found that tax rates have little impact on production, but result in substantial increases in state revenue.

Overall, taxes represent just a small part of the overall cost of doing business. Wages and transportation costs can have a far greater impact on production than changes in tax rates.

Tax BurdensThe Big Factors at Play for Coal Mining Companies:

  1. Production is driven mainly by the location of reserves, and other factors such as price, access to markets, and infrastructure

  2. Deductibility. Severance taxes are deductible against federal corporate income tax liabilities

  3. Mining industries have below-average tax burdens, receiving preferential treatment in Illinois and nationwide

  4. Taxes are only a small part of the cost of doing business. Minor variations in wages, utilities, and transportation costs have a greater impact than major changes in taxes.

 

Example: Montana & Wyoming, late 1990s.

Wyoming sees extraction boom and more revenue…with a higher severance tax.

In the late 1990s, both Montana and Wyoming were experiencing a lull in energy production and exploration, and were looking for ways to jump-start their economies.

In 2001, Montana’s legislature simplified its tax structure and reduced its severance tax rate on oil and gas, and also added new incentives that nearly exempted new production from production taxes.

In contrast, Wyoming canceled a two percent reduction in its severance tax that had been scheduled the previous year.

As a result of these changes, the overall effective tax rate faced by the oil and gas industry was about 50 percent higher in Wyoming than in Montana.

Both states experienced a boom in the natural gas industry in the years after their tax changes, but Wyoming fared much better. Not only did Wyoming see a greater increase in production value, but state revenue increased more as well. There is little evidence in the production and revenue figures to suggest that the natural gas industry fled Wyoming’s higher tax climate and moved to Montana.

 

Wage GrowthExample: West Virginia workers see higher wages than Pennsylvania.

West Virginia has a severance tax, while Pennsylvania does not.

 

Who Pays the Severance Tax?

Most scholars agree that severance taxes are highly exportable, meaning that the burden of the tax falls on out-of-state consumers and stockholders of natural resource companies.

Illinois exports about 80% of its coal out-of-state, and this number may increase in the coming years. In the case that companies need to pass the cost of the tax, the burden will be placed almost entirely outside of Illinois.


Further Reading:
O’Leary, Sean. Investing in the Future: Making the Severance Tax Stronger for West Virginia.
http://www.wvpolicy.org/downloads/SeveranceTax022812.pdf

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