Coal Severance Tax Credits Obsolete, JLARC Says

by James A. Bacon

Virginia’s coal tax credits are obsolete, cannot forestall the decline of coal mining in the state, and should be eliminated, finds the Joint Legislative Audit and Review Commission in a new report, “Infrastructure and Regional Incentives.”

The state provides two tax credits to encourage coal production: The Coalfield Employment Enhancement Tax Credit and the Virginia Coal Employment and Production Incentive Tax Credit. The two programs have saved coal companies and electricity generators $291.5 million in income taxes between FY 2010 and FY 2018, according to the report on the cost-effectiveness of economic development incentives. But the credits ranked at the bottom of JLARC’s list of incentives based on economic benefits per $1 million in spending.

The  coalfield credit is not needed because Virginia’s remaining mines are competitive with mines in other states based on a labor productivity basis (tons per employee hour), JLARC contends. The credit targeting electricity generators is fast becoming irrelevant when the state is moving towards a 100% renewable electric grid and phasing out its remaining coal-fired power plants.

I am sympathetic to Virginia’s coal-mining communities in far Southwest Virginia, which have been devastated by the decline in coal production. But the decline of coal production is inevitable, and local lawmakers need to focus their energies on finding a new economic foundation.

This very subject has been on my mind recently as I wind up writing a history of the A.T. Massey Coal Company and the Massey family. E. Morgan Massey, who was CEO of the coal company for 30 years, identified the problem back in the 1980s. The single-most important driver of profitability and productivity of coal mining is the height of the coal seam. The cost of mining a six-foot seam is only marginally more than a three-foot seam, but production is twice as high. As the thick seams are mined out, productivity declines. Massey warned political leaders in West Virginia, where most of Massey Coal’s mines were located, to prepare for the time when economical coal reserves were depleted. After he took age-related retirement, he turned his attention overseas, developing coal mines in South America and China with coal seams as thick as 15 feet.

Massey’s advice then applies equally to Southwest Virginia today. The region has been mining coal since the 1880s. The thickest, most profitable seams have played out. I’m not intimately familiar with the geology; there may be some deep seams of some thickness remaining. But if the thick seams are far underground, accessible only by mine elevators, they require large up-front capital investments that few coal companies are in a position to make. Nothing can change this. Over and above the remorseless facts of geology is the remorseless economic reality that gas from fracking is cheaper than coal, and the equally remorseless political reality that Virginia and many other states are moving rapidly toward the use of solar and wind.

For all practical purposes, steam coal is dead in Virginia — or soon will be. The story is different, however, for metallurgical coal. Fortunately for Virginia, much of the coal that remains in the state is met coal, which is “cooked” to make coke used for steel making. Natural gas and renewables are non-factors in this market. JLARC is correct to say that production of met coal, much of which exported to Europe, is driven largely by the price, which fluctuates with exchange rates and the business cycle.

In 2017 legislators re-tooled the coalfield tax credit to subsidize met coal production only: $2 per ton for seam thickness of 36 inches or less and $1 per ton for seam thickness above 36″ for underground mines, and $0.40 per ton for surface mines. (Other considerations are factored in but they are minor.) That compares to an average price in 2020 of $90 per ton for U.S. coal exports. Could a tax credit of $1 to $2 per ton give Virginia coal producers a competitive edge? Perhaps a tiny one.

A complicating factor in any analysis is the effect of rail rates. The Virginia coalfields are dominated by Norfolk Southern; CSX has a minimal presence. Norfolk Southern has used its monopoly position to dictate rail tariffs from Virginia to the coal terminals in Hampton Roads. According to the U.S. Energy Information Administration, rail tariffs from Central Appalachia average $23 per ton of coal in 2018. In other words, rail rates have a significantly bigger impact on the competitiveness of Virginia met coal than any tax credit. I have yet to see an analysis that investigates how much of the economic advantage of the tax credit for met coal is captured by the railroads.

As an aside, 15% percent of the refunded coal tax credits went to the Virginia Coalfield Economic Development Authority (VCEDA), or $23 million between fiscal 2010 and 2018, to promote regional economic development. That program may be worth extending, if it can be shown that the VCEDA investments have been proven worthwhile. However, the 10 grant and loan awards are difficult to evaluate because the projects are either underway or represent long-term industrial-park development, training, and infrastructure investments whose positive benefits may not have been felt yet.

Share this article


(comments below)


(comments below)


25 responses to “Coal Severance Tax Credits Obsolete, JLARC Says”

  1. Peter Galuszka Avatar
    Peter Galuszka

    A couple comments. The thinning coal seam issue has been around for years. That’s the destructive mountaintop removal surface mining practice got started. It’s cheaper to destroy a mountain and habitat on a vast scale than dig a deep mine. Plus you never address how many jobs these coal firm goodies created. Any ideas?

  2. LarrytheG Avatar

    One reasonable way to deal with the issue is to convert the “coal” credit to an “energy” credit so that it would help folks who want to put solar or wind on no longer used land and abandoned coal-related infrastructure. Perhaps even credits to natural gas power plants that are near existing pipelines.

    It would be hard to argue that putting solar or wind on what is left of a removed mountaintop would be a worse scenic impact.

    1. Steve Haner Avatar
      Steve Haner

      Sounds nice, to clueless liberal media parrots. But then you have to arrange for hundred of miles of high voltage transmission lines to get the power where needed, and wind and solar are just as unreliable out there as everywhere else. It would be very easy to argue that’s nutty.

      This is all rent seeking and regional politics. There is a bloc of House and Senate votes that will fight hard to preserve these tax preferences, and they know how to trade their votes to get what they want. That’s how the Virginia City coal plant survives as Virginia pretends to go non-carbon.

      1. LarrytheG Avatar

        well, “nutty” is blowing the tops off of mountains that then become useless for anything else and basically worthless in value.

        You don’t have to arrange for anything really – just locate where there are existing pipelines and electricity substations.

        You say “rent seeking”, I ask if you are in favor of ANY tax incentives or opposed to all because all are “rent seeking”?

        Are economic-development subsidies for SW Va – “rent seeking”?

      2. Not necessarily, Steve. Many, if not all, wind or solar projects within Virginia can interconnect at low voltage levels or even to the distribution system.

        Now, if you’re talking about bringing wind power from the Great Plains as was in vogue not so long ago, then “wind by wire” would require big TX lines. Same as “coal by wire” would have required, and as was planned by PJM, just prior to the fracking revolution.

        1. Steve Haner Avatar
          Steve Haner

          Correction accepted. But I still don’t think one set of tax incentives should necessarily replace another. We should be reducing those thumbs on the scale.

      3. djrippert Avatar

        “This is all rent seeking and regional politics.”

        Isn’t almost everything rent seeking and regional politics in Virginia?

        And some people would consider voting for God’s own rent seeker – Terry McAuliffe – for another term as governor?

        1. LarrytheG Avatar

          so ALL tax-credit are by definition “rent seeking” ?

  3. Nancy_Naive Avatar

    How long will a windmill burn? How long will Pennsylvania burn?

    On the other hand, is that tire fire in NoVa still burning?

  4. LarrytheG Avatar

    The other idea would be tax credits for internet providers…and/or for community-based internet cooperatives… etc…

    What happened is the coal-companies basically co-opted credits for rent-seeking on the premise they’d provide jobs – which is really a bad bet for ANY company or industry.

    Focus on things that will help the communities develop economic development as well as things that will enable their citizens to become more/better entrepreneurs.

  5. Possible merit to focus on metallurgical grade coal as Virginia’s priority. We need the steel to build humongous offshore wind turbines. But I am not sure how well positioned Virginia is on met grade coal, or if we could consider met grade coal as “clean coal” use. Probably better than coal combustion and probably depends on the eco-regs and emissions in the country of downstream use, whether or not the met grade coal use can be considered clean. I could see met-grade-coal tax credits if the railroad’s excess fees are killing the jobs.

    This a little reminder of the recent Michael Moore eco-documentary, in all likelihood lots of coal is used and lots of emissions are made. in making cheap solar panels in China as well as off-shore wind turbine steel structures (not sure who makes that steel). As long as that pollution is not happening in USA, we are good on it, right? zero pollution here, we have the right to demand zero. …not really.

  6. James Wyatt Whitehead V Avatar
    James Wyatt Whitehead V

    I wonder if the College of Mining at VPI will survive?

    1. Nancy_Naive Avatar

      There’s always the salt mines. Kraft stores cheese in one.

      1. Baconator with extra cheese Avatar
        Baconator with extra cheese

        And spent nuke fuel….
        But remember we will need to mine rare earth metals somewhere for those promised magic storage batteries yet to be invented.

        1. Nancy_Naive Avatar

          No, no, no. Never store spent nuke stuff with your cheese, although Kraft cheese…meh.

    2. James Wyatt Whitehead V Avatar
      James Wyatt Whitehead V

      I guess the College of Mining at VPI might cash in the mother ship uranium lode in Pittsylvania County.

    3. Atlas Rand Avatar

      As an alumnus, I believe it will survive, though will probably shrink and redirect focus. A large number of graduates, myself included, had fed the coal industry but that number is dwindling. It will certainly take less graduates to keep the quarries staffed . The western schools dominate the hard rock ore mines. If I had seen the writing on the wall I would have pursued something different. When I started college W was president and things were booming. Didn’t see the 08 Obama mess coming and the quick shift in public sentiment that it seemed to entail. Definitely would have done civil or mechanical instead. Have been lucky to transition into transportation planning.

      1. James Wyatt Whitehead V Avatar
        James Wyatt Whitehead V

        First alumnus I ever met from the College of Mining. Glad you landed on your feet in transportation.

  7. Peter Galuszka Avatar
    Peter Galuszka

    Tmt. Met coal is unlikely to benefit from wind turbines. The steel will come from overseas. US steel shifted to rolling mills years ago. Hardly any integrated steel mills left. Maybe met coal goes overseas and comes back as product.

    1. Matt Adams Avatar

      Not exactly, I think the Mon Valley Works in North Braddock would contest your opinion about US Steel and how they operate.

      US Steel still operates 4 Integrated Mills in the US and they aren’t the only ones with Integrated Mills.

  8. Peter Galuszka Avatar
    Peter Galuszka

    That ain’t much.

    1. Matt Adams Avatar

      And so? If you fancy yourself a journalist you should at least be aware of the facts of the matters. You made the following comment:

      “US steel shifted to rolling mills years ago.”

      I disproved you in 30 seconds, as how many wasn’t the comment. You indicated that they no longer operated integrated mills, that is completely and demonstrably false.

  9. James Wyatt Whitehead V Avatar
    James Wyatt Whitehead V

    One of the leading polluters of the World Mr. Peter. China. They love heavy industry. They love pollution. They are the new US Steel. I doubt they pay better than Carnegie paid Polish steel workers 130 years ago.×342.jpg

    1. This is an issue for Liberals….they take the position that the slightest trace of pollution, even with strict 99% controls, from the technologies they see as old, is toxic death to Americans, and must be stopped. All US industry must be destroyed ASAP except the industries that Liberals see as qualified for their future vision of America.

      This week on TV’s 60 Minutes one news item covered the Tijuana River in Mexico, which flows back into California. Thanks to the Free Trade agreement, there is a factory on the Mexico side where people live in squalor and send uncontrolled pollution and sewage into the river.

      This seems to be the Liberal version of perfection: NIMBY.

      1. LarrytheG Avatar

        @Tbill – do you remember our country before we had emission standards on cars and coal-burning plants and wastewater rules for rivers?

Leave a Reply