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Stewardship for the Future: Restore Wyoming Coal Taxes

BACK Severance Tax Study
Status of Wyoming’s Coal Industry
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     Last year, Wyoming coal production hit yet another all-time high—but revenues from Wyoming coal have not kept pace proportionately with these record production levels.
     While combined revenues from Wyoming’s coal severance tax and the state’s share of federal coal royalties also stand at an all-time high, the data chart on page three tells the full story. While production has increased by 172% since 1986, combined coal severance and federal royalty revenues have increased by only about 42%.
     Revenues lag production for three main reasons:
     (1) lower prices for Wyoming coal;
     (2) the reductions in Wyoming’s coal severance tax rate; and
     (3) changes in the way Wyoming sets a value on coal for tax purposes, resulting in lower values.

Coal Prices
     Over the past 15 years, prices for Wyoming coal dropped considerably as long-term contracts expired and utility customers chose to purchase more coal on the spot market. Prices reached their low point in the late 1990s and have since rebounded, now averaging $6-$7 a ton. Since taxes and royalties are levied as a percentage of value, lower prices resulted in lower revenues.

Coal Severance Tax
     Revenues from Wyoming’s coal severance tax peaked in 1986, the last year the tax rate stood at 10.5%. The expirations of the 2% coal impact tax at the end of FY 1987 and the 1.5% capital facilities tax at the end of FY 1993 dropped Wyoming’s coal severance tax rate by 33% to its current level of 7%.

     The impact of falling coal severance tax revenues was mitigated by the state's share of rising federal coal royalties. The federal government’s decisions to substantially increase both the federal coal royalty rate and the state’s share of federal coal royalties combined to generate the increase in federal coal royalty revenues to Wyoming. But in the face of state severance tax reductions, the federal royalty revenue increases were not enough to keep coal revenues proportionate to coal production increases.
     A substantial increase in coal “bonus” money also has accrued to the state, but these funds are shown separately in the table on page three because, as noted, the bonuses are one-time, competitive payments by coal producers to secure federal leases. Bonuses are not a continuing revenue source, but strongly demonstrate the industry’s confidence in the future profitability of Wyoming coal.

Coal Valuation
     In 1990, the Legislature changed the way the value of coal is determined for severance and property tax purposes. The Legislative Service Office predicted at the time that coal valuations would go down, consequently reducing tax revenues to both the state and counties.
     A recent Wyoming Supreme Court decision will further reduce coal valuations. A bill to restore this loss was defeated in committee during the 2003 Legislature.
     Because taxes are levied as a percent of value, lower coal valuations mean lower tax collections.

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