LC M’, 15/23’ 1 ram.» E:~‘_.«ONGE}2 ‘:13 30050 ‘’“’'’’~‘‘‘‘’*‘"‘’**‘ OE a:f>E.,~:‘_;r;~; 3.? B.‘§3>L/“R ‘sf’ Washington i.1ar*»A.izz:~;z:,-«..».;C;~:\,,r wAm~§aN€*~;§ER Issue Brief NOV 161989 *LIBR/3\RitA.~.C ST. ls) E37; CONGRESSIONAL RESEARCH SERVICE LIBRARY OF CONGRESS ENERGY: LIMITING STATE COAL SEVERANCE TAXES ISSUE BRIEF NUMBER IB80060 AUTHOR: Parker, Larry Environment and Natural Resources Policy Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR ISSUES SYSTEM DATE ORIGINATED 9 DATE UPDATED Q FOR ADDITIONAL INFORMATION CALL 287-5700 0625 CRS- 1 IB80060 UPDATE-05/2u/80 lF’Q§-2§Il!LIlQE A coal severance tax is only one of several means by which States collect revenues from coal. However, with the advent of higher severance tax rates on the part of some coal-producing States, questions have arisen as to whether or not the Federal Government should step in and set an upper level on severance tax rates. Currently pending in the Congress are three bills to curtail States’ rights to impose such taxes. H.R. 6625 would limit the amount of severance tax any State may place on coal destined for interstate commerce to 12.5% of the value of the coal. 5. 1778 would limit severance taxes on coal, oil, natural gas, oil shale, or other energy resources extracted from Federal or Indian lands to 12.5% of the value of the resource. Finally, H.B. 529a would limit any tax or fee on coal or lignite mined on Federal lands to 12.5%. Such bills raise several questions: What is a "reasonable" tax rate? Is it the proper role of the Federal Government to determine what is reasonable taxation for the States? EA§§§BQ!!2_A!2.2QLl-I-éHALZ§l§ Severance tax rates vary from zero (Illinois) to 30% of gross value (Montana). Wyoming has a severance tax:rate of 10.5% and an average ad valorem rate of 6.5%. Most coal-producing States have coal severance tax r as under 6%. It is the severance tax rates of nontana and Wyoming which have become the focus of the severance tax issue. Several midwest and southwest States, whose utilities burn Montana and Wyoming coal, have claimed that such tax rates place an unreasonable burden on consumers in their States, and have no relationship to the cost of alleviating extraction impacts. As stated by Representative Tauke (Iowa): These two States (Hontana and Wyoming) have attempted to take inordinate advantage of the increases in coal production by imposing excessive severance taxes on the extraction of coal. The taxes - 30 percent and 17 percent, respectively - far exceed the costs these two States might incur during the extraction process. As it is now, coal producers pay the costs of reclaiming coal-producing land, and the Federal Government helps subsidize States which.incur costs during the development of coal from Federal land. The issue is one of equity. Although most of the attention has been on coal severance taxes, the lion's share of total severance tax receipts is collected on oil and natural gz . For example, Texas will collect about one billion dollars in oil and na-aral gas severance taxes for 1979, approximately u0% of all severance taxes collected. In total, oil and gas severance taxes account for over 85% of all mineral severances taxes compared with 8% for coal. With the eventual deregulation of oil prices, the severance tax revenues of oil—producing States should increase dramatically over the next few years. CBS- 2 IB8006O UPDATE-06/2U/80 No opponent of Montana's and Wyoming's severance tax rate has argued th States do not have a right to impose such taxes. Generally, they have seen severance taxes as a legitimate means by which the resource producing can collect revenue to alleviate the impacts of the resource extraction. As stated by Senator Bentsen: I have no quarrel with the concept of State severance taxes on mineral extraction, so long as the taxes are equitable and impose no unreasonable burden on consumers in other States. The industrial operations associated with mineral extraction can place significant demands on State and local services. Severance taxes are an important source of revenues to help compensate a State for the strains placed on its infrastructure. Rather, the issue has revolved around the definition of "reasonable" burden. Because most of Montana's and Wyoming's coal is exported, most of their severance tax is exported along with the coal. Opponents of Montana's and Wyoming's severance tax rate point to the disparity between these States‘ tax rates and those of other producing states. They point to the distribution of the revenues collected (much of which goes into trust funds or the state general fund) to claim an unreasonable burden on their States‘ consumers. This argument is buttressed by the argument that much of western coal - under Federal lands and that these severance taxes constrain development of these lands to the detriment of a national policy of increased coal use. As stated by Senator Bentsen: These energy resources - coal, natural gas, and oil shale -- are a national treasure belonging to all the American people. We must not have a domestic OPEC. This legislation will guarantee the future availability of essentail energy sources free of confiscatory and unjustifiable taxes. Furthermore, it will help pave the way for greater domesticrcoal production and reduce reliance petroleum imports. These charges of profiteering have angered the two western States, which feel their tax rates are not exploitative. As opposed to most oil, gas and coal-producing States which put most or all of their severance tax revenues into the State general fund, these States point to wtheir carefully devised system of severance tax.distribution. Montana and Wyoming are two of only six coal-producing states that have set up a local impact fund administered by the state to assist local areas impacted by resource extraction. Besides the local impact fund, both States haveeset "trust funds" as a hedge against the time when their resources run out. As explained by Senator Baucus: I should point out that Montana's citizens voted 2 to 1 in 1976 to create this trust fund. They could just as easily have voted for immediate tax relief. But we must recognize that nontana's coal is a nonrenewable resource. Some day it is going to run out. Montanans have long experience with natural resource development. CRS- 3 IB80060 UPDATE-O6/Zn/80 We know that the costs of development do not end when the resources are gone. Fabulous gold deposits and then fabulous copper reserves were exploited -- and sent out of State. Today these resources are largely gone. But the environmental and social damage remain -- and is still being paid for by Hontanans. uontanans also watched the coal boom in Appalachia. We saw what happened when the boom truned to bust -- the abject poverty. Hr. President, Montanans believe that we should not come to the Federal Government for help in dealing with the problems of energy development. So, we have moved to fill that void by imposing reasonable and responsible tax on coal. The conflict over whether a trust fund (which other States besides Montana and Wyoming have) is a legitimate use of severance taxes is, in part, a conflict over philosophy. Those in favor of trust funds feel that mineral deposits are the natural heritage of all the people within a State, and therefore future generations also have an interest in their use. Hence, States are justified in saving some of the compensation from the irretrievable loss of the resource for future generations in the form of a trust fund. Opponents disagreeein two ways. First, opponents point to the fact that much of Hontanas and Wyoming's coal is under Federal, not State lands, and therefore the natural heritage of the coal is the Federal Government's, not the State's. Second, opponents argue that the only legitimate use of severance taxes is to alleviate adverse impacts from n"eral extraction; that the economic benefits from that activity are adguate ctlpensation for the State. Three bills have been introduced in the Congress to limit, to varying degrees, the taxing capability of States. As shown in the table below, the bills vary in the scope of their limitations, although they are focused toward the coal severance issue since coal is the only resource currently taxed at a rate of more than 12.5%. This focus, along with the other limitations noted above, presents guestions of the potential effectiveness of limitation, the equity of any limitaticn, and the proper role of the Federal Government in such a controversy. Bill H.R. 6625 H.R. 5294 S. 1778 Resources Included Coal Coal Lignite Coal Oil Natural Gas Oil Shale 0ther’energy sources A 11 c oal pro- duced from federal lands All energy resources produced from federal lands CBS— H IB80060 TABLE 2 Amount of Number of Production taxes in- Included included All coal Only sever-= destined for ance taxes interstate commerce All fees or taxes on coal only sever- ance taxes UPDATE-O6/24/80 Rate Limit 12.5% 12.5% with provisions for higher rates. cRs- 5 i IB80060 UPDATE-06/2H/80 m_E- ECTIVE scopn Each of the three bills has a different scope of impact as to the resources and percentage of production covered. H.R. 6625 and H-R. 5294 cover only coal; hence, rates on other resources, such as oil shale, uraniumq (oil, and natural gas, may go as high as a State cares to impose. S. 1778 broadens the resource scope to include all energy sources. However, energy sources are not the only resources subject to severance taxes. In fact, last year Minnesota received more money from its 15% severance tax on iron ores (taconite, semitaconite, and iron sulfides) than Montana did from its coal severance tax. These bills would place a limitation on some energy resources, particularly coal, but do not contemplate a comprehensive limitation. While H.R. 6625 covers all coal destined for interstate commerce, H.Rg 5294 and S. 1778 cover only resources produced from Federal lands. Although this limitation would have a significant effect on western land, it would have no effect on eastern coal States and southern and southwestern oil- and gas—producing States which have little Federal land. Such a regional bias on the part of S. 1778 and H.R. 5290, along with the resource bias of H.R. 6625 raises an additional question of equity which will be discussed later. A third question of scope is the breadth of the limitation on State taxing c ‘ability- Severance taxes are only one of many taxes producing States can place on resources mined in their states. Privilege taxes, conservation taxes, mining occupation taxes, excise taxes, and local taxes such as ad valorem, are some of the various taxes levied on mineral resources. In fact, West Virginia calls its mineral taxes a "business and occupation tax" and not a severance tax. Whether these other taxes would be included under H.R. 6625 and S. 1778 is unclear. If not, then a significant loophole could exist for producing States to avoid the limitation. If they are included, (as in H.R. 5290) the question of Federal reach with respect to the taxing power of ‘the States needs to be addressed. This would be particularly true if the limitation included ad valorem tax which historically have been a State and local prerogative. This question of the proper role of the Federal Government will be discussed under the section on States’ rights, below. EQUITY The major attack on Montana's and Wyoming's severance taxes has been the assertion that the high rate places an undue burden on utility consumers in other States --consumers who have no voice in deciding on the severance tax rate. To look at this burden, and to provide some comparison between the impact of coal severance taxes and oil and gas severance taxes, a methodology was employed that compares the severance tax on a unit of end product to the cost of that en product to the consumer using current 1980 data and assuming a otal pass-through of the tax. For purposes of comparison, the highest severance tax rate for each of the three major resources was used: 12.5% for oil (Louisiana), 10% fit natural gas (Alaska), and 30% (adjusted for credits allowed by Montana) for coal (Montana). Also, the following conversion efficiencies were assumed: 9fl% for oil, 97% for natural gas, and 30% for electric powerplants. Except for electricity, end product costs reflect current national averages as do raw product costs. Electricity prices were CRS- 6 IB80060 UPDATE-06/2“/80 estimated from current regional figures for cities predominately relying on oil, coal, or natural gas. The results are as follows: CRS- 7 IB8006O UPDATE-O6/24/80 TABLE 3 End product Price at point Amount of End-use Percentage o of taxation severance tax cost end-use cost as tax Oil-fired $17.00/bbl. $2.125/bbl $.07/kw 6.3% powerplant (electric) Home-heating $17.00/bbl $2.125/bbl $.86/gal. 6.3% oil Gasoline $17.00/bbl $2.125/bhl $1.20/gal. u.1% Residential $1.30/mcf $0.13/ncf $3.50/ncf 3.8% Gas Coal-fired $12.00/ton $2.64/ton $.0u5/kw 3.6% power plant (HT-9300btu/ (electricity) lb) Gas-fired 5 1 . 30/mcf $0 . 1 3 $ . 04 5/kw 3 .4% (electricity) CRS- 8 IB80060 UPDATE-O6/24/80 While these numbers should be considered "ballpark" in nature, they shrr A that Montana's severance tax rate imposes about the same or less of a burd on other States than the examined severance tax rates on oil or gas from the perspective of the end product that the consumer actually uses. The reason 2 for this is two-fold. First, coal in general, and western coal in particular, is cheaper per btu than oil or gas. In December 1979, the national average cost of coal per million btu was $1.29. This compares with $3.95 for residual fuel oil and $1.83 for natural gas for the same million btus. Second, while some products of crude oil and natural gas are used in a fairly direct manner (gasoline, home-heating oil, residential gas), coal is almost exclusively used in powerplants to generate electricity. Because of this, coal becomes a small input cost into the price of the final product as opposed to some oil and natural.gas products, and therefore the impact of the severance tax is less. This is not to say that Montana's tax is reasonable, only that it doesn't place more of a burden on consumers than other severance taxes on oil and natural gas. A second question of equity mentioned earlier is the regional impact of the bills submitted. Because the bills are primarily focused at either coal or minerals produced on Federal lands, the impact of them will be felt mainly by the western coal-producing States. Because H.R. 5294 and S. 1778 affected only minerals produced on Federal lands, only the West, which has enormous amounts of Federal land, would be seriously affected. In the case of S. 1778, this impact is increased by the inclusion of other resources such as oil shale and uranium of which the west.has the lion's share of the reserves. Although H.R. 6625 includes al].coal destined for interstate commerce, " impacts only coal. Notably, Hestarn States don't have the industrial base L4 use their coal and therefore a large percentage of their coal is exported to load centers outside the region. Finally, the 12.5% rate raises some questions. As indicated above, the burden a severance tax places on consumers depends in large part on the end—product. Also, some may argue that the 12.5% limitation could prove inadequate to treat the special problems of strip-mining impacts, boom-town problems, and reclamation difficulties that the western coal producers face due to an oil or gas well in Louisiana. S. 1778 attempts to deal with this question by providing for exceptions to the 12.5% ceiling where the need is demonstrated. How this clause would be interpreted is unclear. STATES‘ RIGHTS AND NATIONAL GOALS Any attempt to curtail the taxing power of States raises serious questions concerning State prerogatives. H.R. 5294, with its limitation on all taxes or fees on coal produced from Federal lands, is particularly sweeping in its potential impact on western States. However, as noted earlier, for a limitation to be effective such sweeping limitation would probably be necessary. Such a limitation would presumably include property as well as excise taxes in its coverage. As stated by the attorney general of Montana: Federal legislation limiting a state general excise would be an unprecendented interference with states‘ rights. Such actionmby Congress would open the floodgates of federal control over state taxation in all areas. CRS- 9 IB80060 UPDATE-06/2H/80 Proponents of the limitation argue that this is the only way in which to p. tent profiteering and preserve national energy goals. As stated by Congressman Sharp: ...these excessive taxes are indefensible from any point of view. They threaten our national energy policy goal of increasing coal production, they contribute to inflation, and they are absolutely unrelated in amount to any coal development costs the States bear now or will bear in the foreseeable future. But unless some restraint is imposed, these will continue to exact these oppressive coal taxes, and will tempt other coal-praiucing States to indulge in similar tax profiteering. The only power to check this trend to coal tax profiteering lies with the Federal Government. There are several factors that a State may consider in deciding on a severance tax rate. Rewenue needs, resource extraction impacts, competitive positions in the market, and growth potential are some of these factors, and their relative importance differs among the severance-producing States. An example of this contrast is in the coal industry. Generally, western coal-producing States are in a boom situation with their low-sulfur coal. However, becaus of the States‘ small population, the technology involved (“trip-mining), and the rapid nature of the growth, these States are is -uggling to control the situation. This contrasts with some eastern States which currently have idled mining capacity and unemployment problems. What a Federal 12.5% ceiling on severance tax would do to this situation is unclear. A lower Hontana or Wyoming severance tax would increase the competitive advantage those States have in the midwest and southwest, to the detriment of eastern coal States. Such a situation could arguably exacerbate the growth-related problem of western States, and the contraction problem of eastern States. LEGISLATION H.R. 6625 (Sharp et al.) Amends the Powerplant and Industrial.Fuel Use Act of 1978 to limit the sum of all severance taxes or fees, for any fiscal year, levied upon or collected from any taxpayer by a State or any political subdivision thereof on coal destined for shipment in interstate commerce for use in any powerplant or major fuel-burning installation or on any improvements or other rights, property, or assets produced, owned, or used in connection with the production of such coal. States that such tax shall not exceed a total of 12.5% of the value of such coal.produced during a fiscal year. Referred to House Committee on Interstate and Foreign Commerce Feb. 26, 1980. Hearings held before Subcommittee on Energy and Power Mar. 21, 1980. 2 H.R. 5294 (Pickle) Prohibits State or local authorities from levying or collecting any tax or fee on coal or lignite mined from Federal lands, unless such tax or fee is fairly related to services provided by such State or local authority in connection with such mining. Limits the total of such State or local taxes CRS-10 IB80060 UPDATE—06/24/80 or fees which may be levied or collected. Referred to Hose Committee on Interior and Insular Affairs Set. 10, 1979. Referred to Subcommittee r“ 1 Mines and Mining Oct. 0, 1979. S. 1778 (Bentsen) Limits the levying or collection of severance taxes by a State or within a State on coal, oil, natural gas, oil shale, or other energy resources mined L or produced from Indian Lands or other Federal lands. Provides for exceptions to 12.5% ceiling when cause is shown. Referred to Senate Committee on Energy and Natural.Resources Sept. 19, 1979. E§ABlE§§ U.S. Congress. House. Coittee on Interstate and Foreign Commerce. Subcommittee on Energy and Power. Coal severance tax. Hearings, 96th Congress, 2d session. Washington, 0.5. Govt. Print. Off., 1980. [not yet published] Baucus, Max. In Remarks in the Senate. Montana severance tax on coal. Congressional record [daily ed.] Nov- 6, 1979: S16008. --—-- State coal severance tax and the windfall profit conference: a note of warning. Congressional record [daily ed.] Apr. 21, 1980: S0008. Bentsen, Lloyd. In Remarks in the Senate. In support of S. 1778. Congressional record [daily ed." Sept. 19, 1979: S13017. Grasslay, Charles E. In Remarks in the House. our increasing national energy shortage. Congressional record [daily ed.] May 6, 1980: H3303. Sharp, Philip R. In Remarks in the House. Congressman Sharp introduces legislation to set a reasonable limitation on coal severance taxes of 12.5 percent. Congressional record [daily ed.] Feb. 26, 1980: H1300. Tauke, Thomas J. In Remarks in the House. Coal severance tax. Congressional record [daily ed.] Mar. 19, 1980: H2000. A22lIlQ!AL-§§2E§§E§§-§Q!BE.§ Blackstone, Sandra L. Mineral severance taxes in the western states: a comparison. Prepared for Colorado Energy Research Institute, Golden (CO), August 1979. Dorgan, Byron L. Taxing coal. Prepared for North Dakota Tax Commission, November 1977. Duncan, Harley T. Tables on state oil, natural gas and coal severance taxes. Prepared for National Governors’ Association, Mar. 6, 1980. CBS-11 IB8006O UPDATE—O6/2H/80 isriffin, Kenyon N. and Shelton, Robert B. Coal severance tax policies in the Rocky Mountain states.n Policy Studies Journal, v. 7, Autunn 1978. Starch, Karl E. Taxation, mining, and the severance tax. IC 8788, USDOI. Washington: Govt. Print. Off., 1979. 0.5. Bureau of the Census. State government tax collections in 1979. Washington: U.S. Print. Off., 1980. U.S. General Accounting Office. Rocky Mountain energy resource development: status, potential, and socioeconomic issues. Washington: U.s. Govt. Print. 0ff., July 13, 1977. 0.5. Library of Congress. Congressional Research Service. Constitutional authority for federal limitation on state severance taxes [by] Howard Zaritsky. American Law Division. Mar. 13, 1980. H p. Williams, David C. State severance taxes on coal: an effective but limited response. Prepared for the President's Commission on Coal, July 9, 1979. oz: WAEHFNGTON uwevsraswr ST. Lou§s- mo.