Severance Tax Report - Central Appalachia Regional Network

42 Pages·2012·1.39 MB·English

by  Jenny Lancaster

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