Coal tax myths: Selling snake oil never goes out of style – Helena Independent Record, Oct. 26, 2015

October 26, 2015

Categories: Coal, Congress, News

By Dan Bucks

Selling snake oil from the back of wagons is a dubious tradition from the Old West that never seems to go away.

The latest version comes from coal industry allies who claim that if our nation cuts royalties owed to the public, coal production will magically increase — so much so that royalty revenue will actually grow! The argument is that if royalties are cut in half, production will more than double to make up lost public revenues.

As the saying goes, “If you believe that, I have a bridge in Brooklyn I’d like to sell you.”

The industry is attempting to short-circuit proposals for closing loopholes in the federal royalty system. Proposals for reform were prompted by reports from the General Accountability Office and Inspectors General that current rules often allow companies to underpay federal coal royalties, falling short of what the law requires.

The truth is that changing how royalties are calculated will have little impact on production or jobs. That’s the conclusion from research by Headwaters Economics of Bozeman. If Interior strengthens royalty rules, production would not noticeably decrease. However, budgets for needed public services, including those in coal communities, would benefit substantially from the added revenue.

Many people prefer lessons of history to future economic projections. So it is good to know that the history of Montana’s coal tax directly refutes the coal industry’s claims.

From 1975 to 1988, Montana’s coal severance tax was 30 percent. During this period, coal production increased dramatically by 76 percent despite coal industry criticism of the rate.

Spurred on by industry lobbying, the 1987 Montana Legislature enacted a law that cut Montana’s coal severance tax rate in half from 30 percent to 15 percent over the course of a few years. The goal was to bolster coal production in Montana. The policy failed.

As the coal tax cuts began, coal production did not increase but actually fell from the 1988 peak of 38.9 million tons to 37.7 and 37.6 million tons in 1989 and 1990. Production recovered over the next two years, but then fell back again to 35.9 million tons in 1993. Over this first five-year period when the coal tax rate was cut, average annual production was 37.7 million tons, a net decline from the 1988 peak. That was the first sign the tax cut strategy was a false promise.

After 1993, production rose a bit and then fell back again — starting an up and down pattern continuing into the current century. Over 15 years from 1989 through 2003, annual coal production averaged 38.9 million tons — the same level produced in 1988, the last year of the 30 percent tax rate. So there was no growth in average Montana coal production, even though the tax rate was cut in half.

This history demolishes the notion that cutting tax or royalty rates can stimulate production and yield more revenue. From FY 1980 through FY 1988, Montana coal severance tax collections varied between about $70 million to $91 million annually. From FY 1994 through FY 2007, under the 15 percent tax rate, Montana coal tax collections were less than half of previous revenues — ranging between $29 million and $41 million annually. In fact, coal tax collections have never regained the level they achieved in the FY 82-88 period under the 30 percent rate.

Montana tested the claim that coal rate reductions will pay for themselves with higher production and proved that claim to be false. So when someone tells you that you’ll get rich by cutting coal royalties, tell them simply, “No. We have been there and done that. It doesn’t work.”

Coal faces challenges, but not from royalties. Those challenges come from competing energy sources and climate change. Dealing with those challenges will require public investments in workers, communities and economic opportunities. Montana will sorely miss the greater coal trust revenue that would be there today were it not for the failed tax cut experiment. So saving public revenues from coal royalties will be even more vital to meeting the challenges ahead. We certainly don’t need any snake oil.

Dan Bucks was Montana’s director of Revenue from 2005-2013.


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