Central Appalachia Severance Tax Policy Scan  1 Table of Contents Introduction .......................................................................................................................................... 3 Acknowledgments .............................................................................................................................. 3 The Central Appalachia Severance Tax Policy Scan ......................................................................... 4 Overview ............................................................................................................................................ 4 Kentucky ............................................................................................................................................ 7 Maryland .......................................................................................................................................... 11 Ohio ................................................................................................................................................. 14 Tennessee ........................................................................................................................................ 18 Virginia ............................................................................................................................................. 21 West Virginia .................................................................................................................................... 26 Links and Data Sources ................................................................................................................... 30 Additional Information ...................................................................................................................... 31 Appendix A ......................................................................................................................................... 33 Best Practices for Building Local Assets .......................................................................................... 33 2012 Severance Tax Legislation ....................................................................................................... 38 Appendix B ......................................................................................................................................... 41 About the Central Appalachia Regional Network ............................................................................. 41 Central Appalachia Severance Tax Policy Scan 2 INTRODUCTION The Central Appalachian region of the United States Following recommendations from a multi-sector has an abundance of renewable and non-renewable regional summit in 2010, CARN established a Local resources such as coal, natural gas, oil and timber. Control of Assets work group. The group’s purpose is Much of this rich land however is owned by absentee to examine existing policies and develop positions landowners, and the wealth generated from these pertaining to resources found in our communities, resources is transferred out of the region. how they are taxed, and how the revenues are Severance tax is collected on the removal, or managed. “severance”, of renewable and non-renewable resources and provides a way to capture some of the The Central Appalachia Severance Tax Policy Scan value as it is removed from the region. Severance provides a foundation on which CARN will develop taxes are an important way for our communities to policy positions to create a long-term legacy for our offset the effects of extracting or harvesting the resource-rich communities resources, and can contribute to creating a more diverse and sustainable Appalachian economy. ACKNOWLEDGMENTS The Central Appalachia Severance Tax Policy Scan is Primary research for the Central Appalachia a compilation of severance tax policies and rate Severance Tax Policy Scan was conducted by Kimber information for Kentucky, Maryland, Ohio, Tennessee, Simmons and Joseph Houser of Virginia Economic Virginia and West Virginia and examines: Bridge, Inc. Additional information concerning  General Severance Tax Information monetary adjustments due to inflation was provided  Taxed Natural Resources and Current Rates by Southeast Kentucky Community & Technical  Disposition of Severance Tax Revenue College student, Chelsea Brock.  Uses of Revenue in Specified Funds (where identified) The research and analysis contained in the 2012 Severance Tax Legislation and Best Practices section The second section of the report (Appendix A) was were provided by Ted Boettner of the West Virginia crafted by the West Virginia Center on Budget & Center for Budget and Policy. Policy and supports the creation of Permanent Severance Tax Trust Funds in Central Appalachian Initial funding for the Rural People, Rural Policy states. A national comparison of states with existing initiative and funding for this report were provided by permanent severance tax trust funds is provided the W.K. Kellogg Foundation. along with a compilation of 2012 severance tax legislation from each of the Central Appalachian states. CONTACT INFORMATION ABOUT CARN For more information about the severance tax report or to obtain a copy, please contact: The Central Appalachia Regional Network (CARN) is a coalition of organizations from the Appalachian Jenny Lancaster counties of Kentucky, Maryland, Ohio, Tennessee, Network Coordinator Virginia, and West Virginia. This regional network is a Central Appalachia Regional Network founding member of the nationwide Rural People, [email protected] Rural Policy Initiative. CARN strives to connect diverse www.carnnet.org organizations to promote policy and action to improve the quality of life available to the people of Central Appalachia. Central Appalachia Severance Tax Policy Scan 3 CENTRAL APPALACHIA SEVERANCE TAX POLICY SCAN Central Appalachia (the region comprising Eastern For fiscal year 2011, $355 million in severance taxes Kentucky, Western Maryland, Southeastern Ohio, were collected in Kentucky with over $295 million, or Eastern Tennessee, Southwestern Virginia and West 83%, coming from coal severance. This amount shows Virginia) is rich in beauty, culture and natural an increase of nearly 21% over the total severance tax resources. These natural resources – particularly coal, collected for fiscal year 2006. According to the U.S. natural gas and timber – have been the backbone of Census Bureau, severance tax collections in Kentucky the region’s economy and have helped fuel America’s represented over 3% of all state revenue.2 economy for generations. Maryland While these natural resources have created significant The only severance taxes collected at the state level in economic growth in the region, much of the wealth Maryland are on shellfish and surcharges on open-pit generated has not been shared with the people who and deep mined coal. The severance tax on shellfish is live here. The extraction of these resources has also administered by the Department of Natural Resources come with considerable costs to the communities, the and the surcharges on coal are administered by the environment and the region’s residents. One way that Department of the Environment. the region has attempted to recoup some of these costs is by levying severance taxes. Severance taxes While there is no statewide severance tax on are taxes imposed distinctively on removal of natural minerals, the state gives counties the authority to levy resources (e.g. oil, gas, coal, other minerals, timber, severance taxes, and the counties of Garrett and fish, etc.) from land or water and measured by the Alleghany impose taxes on the severance of coal and value or quantity of products removed or sold.1 natural gas. These county-imposed taxes are administered by the County Commissioner of Severance taxes are collected throughout the Central Revenue and distributed by the County Treasurer. Appalachian region; but each state, and sometimes counties within the state, has different policies for Ohio their collection, administration and revenue Severance taxes are collected on coal, natural gas, oil distribution. This report will provide an overview of and other minerals (including sand, gravel, salt, these policies, including the types of resources that limestone, etc) in Ohio. In addition to the severance are taxed, the rates of the taxes, how the revenues tax on coal, there is a reclamation tax and a surface are distributed and the intended uses of the funds. mining tax. The Tax Commissioner administers the severance tax program, and payments are made to the State Treasurer. The State Treasurer oversees the SUMMARIES BY STATE disbursement of revenue. Kentucky For fiscal year 2010, $10.5 million in severance taxes Severance taxes are collected on coal, natural gas, oil were collected in Ohio with over $6 million, or 59%, and other minerals (including limestone, clay, lead, coming from coal severance. zinc, etc.) in Kentucky. The severance tax program is administered by the Kentucky Department of This amount shows an increase of nearly 39% over the Revenue and all payments are made to the State total severance tax collected for fiscal year 2005. Treasurer. The State Treasurer oversees the According to the U.S. Census Bureau, severance tax disbursement of severance tax revenue. The tax rate collections in Ohio for 2010 represented 0.04% of all for most natural resources is 4.5% of gross value with state revenue. tax credits for thin seam coal and minerals used for specified purposes. 1 2006 edition of the U. S. Census Bureau's Government Finance 2 A table displaying this information is available in the “Additional and Employment Classification Manual. Information” section of this report. Central Appalachia Severance Tax Policy Scan 4 Tennessee West Virginia Severance taxes are collected on coal, natural gas, oil Severance taxes are collected on coal, natural gas, oil, and other minerals (including sand, gravel, sandstone, timber4 and other minerals (including sand, gravel, limestone, etc) in Tennessee. The severance tax salt, limestone, etc) in West Virginia. The “Workers’ program is administered by the Department of Compensation Debt Reduction Act of 2005” imposes Revenue. The Department of Revenue retains a an additional severance tax on coal, natural gas, coal- portion of severance taxes collected on coal and other bed methane and timber. The State Tax mined minerals for administration fees, and returns Commissioner administers the severance tax the remaining moneys to the counties of severance program. for disbursement. The Department deposits 2/3 of the severance taxes on natural gas and oil into the state’s For fiscal year 2010, $511 million in severance taxes General Fund and returns the remaining moneys to were collected in West Virginia with over $449 the counties for disbursement. million, or 88% coming from coal severance. This amount shows an increase of nearly 37% over the For fiscal year 2011, $6.9 million in severance taxes total severance tax collected for fiscal year were collected in Tennessee with over $800,000, or 2006. According to the U.S. Census Bureau, severance 12% coming from coal severance. This amount shows tax collections in West Virginia for 2010 represented a decrease of nearly 25% over the total severance tax nearly 9.0% of all state revenue. collected for fiscal year 2006. According to the U.S. Census Bureau, severance tax collections in Tennessee for 2010 represented 0.02% of all state revenue. Virginia The only severance taxes collected at the state level in Virginia are on timber. The severance is administered by the Department of Taxation and payments are made to the State Treasury. While there is no statewide severance tax on minerals, the Commonwealth gives counties and cities the authority to levy severance taxes. The counties of Buchanan, Dickenson, Lee, Russell, Scott, Tazewell and Wise and the City of Norton levy a severance tax on coal and natural gas. The counties of Buchanan, Dickenson, Lee, Russell, Tazewell and Wise levy a severance tax on oil. These taxes are administered by the County Commissioner of Revenue and distributed by the County Treasurer. For fiscal year 2010, $1.875 million in severance taxes were collected in Virginia on timber. This amount shows an increase of 9% over the severance tax collected for fiscal year 2005. According to the U.S. Census Bureau, severance tax collections in Virginia for 2010 represented 0.01% of all state revenue.3 3 These calculations on include data on the timber severance tax. Since severance taxes on coal, natural gas and oil are not collected at the state level, they were not included in the calculations. 4 The severance tax on timber has been temporarily eliminated for tax years 2010-2012. Central Appalachia Severance Tax Policy Scan 5 Severance Tax Rates by State and Natural Resource Kentucky Maryland Ohio Tennessee Virginia West Virginia Base Tax – 4.5% State: Base Tax – Base Tax - State: Base Tax – 5% of gross value; Open-pit Mined $0.10/ton; $0.20/ton n/a of gross value; Coal Surcharges Reclamation (before 7/09), Thin seam coal – $0.17/ton; Tax – $0.12/ton, $0.50/ton (37”-47”) – 2% Deep Mined $0.14/ton or (7/09-6/11); of gross value; Coal Coal Surcharges $0.16/ton*; $0.75/ton Thin seam coal – $0.15/ton Surface mining (7/11-6/13); (<37”) – 1% of County: Tax – $1.00/ton (after County/City: gross value; Surface mining $0.012/ton 6/13) 2% of gross Waste coal – Tax – $0.30/ton receipts 2.5% of gross value 4.5% of gross State: $0.025/Mcf 3% of gross State: 5% of gross value n/a value n/a value Natural Gas County: County/City: (includes Allegany County 3% of gross Coal-bed – 7% of market value (with the Methane) value; Garrett exception of County – 5.5% Norton City of market value with 2%) 4.5% of market n/a $0.10/barrel 3% of gross State: 5% of gross value value n/a value Oil County/City: 0.5% of gross value 4.5% of gross n/a Salt – Varies by n/a Limestone, value $0.04/ton; county up to a Sandstone, Limestone, maximum of Clay/Shale & Gravel, Sand & $0.15/ton Salt – 5% of Dolomite – gross value Minerals $0.02/ton; Sandstone, Shale, Gypsum & Quartzite – $0.01/ton n/a n/a n/a n/a Varies by Temporarily Timber timber type and eliminated use n/a Oysters – n/a n/a n/a n/a $1.00/bushel; Hard-shell Shellfish clams – $0.25 per bag; Soft- shell clams – $0.50/bushel Central Appalachia Severance Tax Policy Scan 6 KENTUCKY General Information • A severance tax on coal was first enacted in Kentucky in 1972. • A severance tax on natural gas and other natural resources was added in 1980. • The severance tax programs in Kentucky are administered by the Kentucky Department of Revenue.5 Taxed Natural Resources and Current Rates • Coal (severing and/or processing): - Base rate – 4.5% of gross value with a minimum tax of $0.50 per ton6 - There are credits applied to coal mined from thin seams that lower the rate of the tax.7  For above-drainage seams using deep mining or underground mining methods: 2.25% for seams with thickness between 27 and 30 inches (making the tax rate equal to 2.25% of gross value) or 3% for seams with thickness of less than 27 inches (making the tax rate equal to 1.5% of gross value).  For below-drainage seams using deep mining or underground mining methods: 2.25% for seams with thickness between 32 and 36 inches (making the tax rate equal to 2.25% of gross value); 3% for seams with thickness between 27 and 32 inches (making the tax rate equal to 1.5% of gross value); or 3.75% for seams with thickness of less than 27 inches (making the tax rate equal to 0.75% of gross value). - Limit of tax on coal used for burning solid waste – $0.50 per ton or 4.0% of selling price, whichever is lower8 • Natural Gas (severing and/or processing) – 4.5% of gross value9 • Oil: - Base rate – 4.5% of the market value10 - Tax credit equal to 4.5% of the market value of crude petroleum oil that is produced from a recovered inactive well (making the tax rate equal to 0%)11 • All other Natural Resources (severing and/or processing): - Base rate – 4.5% of gross value12 - Tax credit on limestone severed or processed within the state and sold outside of the state – 4.5% of gross value (making the tax rate equal to 0%). This credit is limited to those that sever or process limestone through the rip-rap construction aggregate or agricultural limestone stages and sell at least 60% of stone out of state.13 - Limit of tax on limestone used in the manufacture of cement – $0.14 per ton14 - Clay – limited to $0.12 per ton. There is a tax credit equal to the entire rate of the severance tax for clay that is severed or processed in the state and sold to and used for the construction of landfill in the state.15 - Exemptions:  No tax on the processing of Ball Clay16 5 Kentucky Tax Code §143.040 and Kentucky Tax Code §143A.040 6 Kentucky Tax Code §143.020 7 Kentucky Tax Code §143.021 8 Kentucky Tax Code §143.023 9 Kentucky Tax Code §143A.020 10 Kentucky Tax Code §137.120 11 Kentucky Tax Code §137.132 12 Kentucky Tax Code §143A.020 13 Kentucky Tax Code §143A.035 14 Kentucky Tax Code §143A.036 15 Kentucky Tax Code §143A.037 16 Kentucky Tax Code §143A.020(1) Central Appalachia Severance Tax Policy Scan – Kentucky 7  No tax on Fluorspar, Lead, Zinc or Barite17  No tax on Rock, Limestone or Gravel used for privately maintained but publicly dedicated roads18  No tax on Limestone sold or used for agricultural purposes that qualify for exemption from sales and use taxes19 Disposition of Severance Tax Revenue • Coal: - $19 million is transferred annually (in four equal quarterly payments) to the benefit reserve fund of the Kentucky Workers’ Compensation Funding Commission20 - Payment of severance tax incentives (as a reimbursement of up to 80% of severance tax paid) to qualifying companies for purchase and/or severance of coal used in alternative fuel or gasification facility21 - On an as needed basis, the Transportation Cabinet and the Department for Energy Development and Independence may request funds annually from the commissioner of the Department of Revenue. The Transportation Cabinet may request the funds required for lease rental payments for resource road projects. The Department for Energy Development and Independence may request the funds required (up to $3 million) for lease rental payments for energy research development or demonstration projects.22 (No payments have been made under this statute in recent years.) - 35% of the remaining revenue(after disbursements to the Workers’ Compensation Funding Commission and for severance tax incentives) is transferred into the Local Government Economic Development Fund (50% of the revenue is transferred into the fund and then an amount equal to 15% of coal severance revenue is transferred from the Local Government Economic Development Fund into the Local Government Economic Assistance Fund)23  5% of funds in the Local Government Economic Development Fund (after the transfer of moneys into the Local Government Assistance Fund) is transferred into the Secondary Wood Products Development Fund24  1/3 of the remaining funds (after transfers to the Local Government Economic Assistance Fund and to the Secondary Woods Products Development Fund) are allocated to each coal producing county based on a ratio of the coal severed in the respective county to the total of coal severed in the state.25  1/3 of the remaining funds (after transfers to the Local Government Economic Assistance Fund and to the Secondary Woods Products Development Fund) are allocated to each coal producing county based on the following factors: percentage of employment in the mining industry in relation to total employment; percentage of earnings from the mining in relation to total earnings; and surplus labor rate.26  1/3 of the remaining funds (after transfers to the Local Government Economic Assistance Fund and to the Secondary Woods Products Development Fund) are reserved to be expended for industrial development projects that benefit two or more coal producing counties.27 17 Kentucky Tax Code §143A.030 18 Kentucky Tax Code §143A.030 19 Kentucky Tax Code §143A.030 20 Kentucky Tax Code §342.122 21 Kentucky Tax Code §143.024 22 Kentucky Tax Code §143.090 23 Kentucky Tax Code §42.4582-2 and Kentucky Tax Code §42.4585 24 Kentucky Tax Code §42.4586 25 Kentucky Tax Code §42.4592 26 Kentucky Tax Code §42.4592 27 Kentucky Tax Code §42.4592 Central Appalachia Severance Tax Policy Scan – Kentucky 8 - Of the remaining revenue (after disbursements to the Workers’ Compensation Funding Commission and for severance tax incentives), 15% is transferred into the Local Government Economic Assistance Fund.28 The severance tax revenue in the Local Government Economic Fund is disbursed as follows:  60% of the funds are distributed to each coal producing county based on a ratio of the coal severed in the respective county to the total of coal severed in the state.29  30% of the funds are distributed to each coal producing county based on the following factors, equally weighted: per capita income (in inverse order); ton miles of resource roads; and population.30  10% of the funds are distributed to non-coal producing counties that are impacted by the transport of coal based on the following factors, weighted as indicated: geographic area (30/100), ton miles of resource roads (40/100); and per capita income in inverse order (30/100).31 - The remaining funds (50% of the coal severance revenue after disbursements to the Workers’ Compensation Funding Commission and for severance tax incentives) stay in the Kentucky General Fund. • All other minerals32 (excluding coal): - 50% of the revenue is transferred to the Local Government Economic Assistance Fund.33  100% of the funds are distributed among the mineral producing counties based on amount of the tax collected within the respective county.34 - 50% of the revenue stays in the Kentucky General Fund. Uses of Revenue in Specified Funds: • Local Government Economic Development Fund:35 - All moneys must be spent on industrial development projects (including industrial development parks, regional industrial parks, and value-added facilities), job development incentive grants to individual firms, and debt service on industrial development projects. • Local Government Economic Assistance Fund:36 - 30% of all moneys in the fund must be spent on the coal haul road system - 70% of moneys in the fund are to be spent on the following priority categories (none of these moneys may be used for expenses related to administration of the government):  Public safety, including law enforcement, fire protection, ambulance service, and related services  Environmental protection, including sewage disposal, sanitation, solid waste, and related services  Public transportation, including mass transit systems, streets, and roads  Health  Recreation  Libraries and educational facilities  Social services for the poor, the elderly, and individuals with disabilities  Industrial and economic development  Vocational education 28 Kentucky Tax Code §42.4585 29 Kentucky Tax Code §42.470 30 Kentucky Tax Code §42.470 31 Kentucky Tax Code §42.470 32 This includes natural gas and oil as well as mined minerals. 33 Kentucky Tax Code §42.450 34 Kentucky Tax Code §42.470 35 Kentucky Tax Code §42.4588 36 Kentucky Tax Code §42.455 Central Appalachia Severance Tax Policy Scan – Kentucky 9  Workforce training  Secondary wood industry development • Secondary Wood Products Development Fund37: - Funds are to be used to support the Quicksand Wood Utilization Center, secondary wood products firms, and secondary wood products networks. Kentucky Severance Tax Collections Actual Dollars vs Inflation Adjusted Dollars $400 $380 $360 $340 s $320 n o Milli $300 $280 $260 $240 $220 $200 2005 2006 2007 2008 2009 2010 2011 Adjusted Actual Kentucky Severance Tax Collections 2005-201138 Natural Resource 2005 2006 2007 2008 2009 2010 2011 Coal $184,436,935 $224,490,111 $221,952,516 $232,977,827 $292,591,094 $271,943,611 $295,836,611 Natural Gas & Minerals* 38,801,666 50,701,858 47,161,910 50,155,157 54,963,206 37,639,344 38,195,264 Oil 4,710,832 6,386,501 6,198,342 10,201,113 8,430,228 7,564,121 8,287,566 Total $227,949,433 $281,578,470 $275,312,768 $293,334,097 $355,984,528 $317,147,076 $342,319,441 * Receipts for severance taxes on natural gas and minerals (such as limestone and clay) are aggregated. Kentucky Severance Tax Collections 2005-2011 – Adjusted to 2011 Dollars 39 Natural Resource 2005 2006 2007 2008 2009 2010 2011 Coal $212,427,341 $250,479,073 $240,789,502 $243,404,873 $306,777,610 $280,528,348 $295,836,611 Natural Gas & Minerals 44,690,261 56,571,554 51,164,515 52,399,878 57,628,142 38,827,619 38,195,264 Oil 5,425,754 7,125,859 6,724,392 10,657,669 8,838,974 7,802,920 8,287,566 Total $262,543,356 $314,176,485 $298,678,409 $306,462,420 $373,244,726 $327,158,887 $342,319,441 37 Kentucky Tax Code §154.47-070 38 Annual Reports of the Department of Revenue for 2005-2011 39 The actual amounts for 2005-2011 have been adjusted to 2011 values using an inflation calculator (http://www.usinflationcalculator.com/ ). Central Appalachia Severance Tax Policy Scan – Kentucky 10