February 15, 2016
ECONOMIC IMPACTS FROM A REDUCTION IN WEST VIRGINIA’S COAL SEVERANCE TAX RATE
EXECUTIVE SUMMARY
Legislation has been proposed that would reduce the West Virginia Coal Severance Tax rate
from 5% to 2% (with no change to the 0.35% county share).1 PwC has been asked to evaluate
the economic consequences of such a reduction in the coal severance tax. In this report, we
first review the economic environment of the coal industry in West Virginia and then estimate
the potential employment impacts from the proposed reduction in the coal severance tax.
Coal mining production and employment have been declining rapidly in the State. While the
decline of the West Virginia coal industry is due to a number of factors that are expected to
continue, PwC estimates that some of the anticipated decline in coal production and coal
employment could be avoided with the tax reduction. Our base case estimate is that the
proposed 3% tax rate reduction would benefit the West Virginia economy by providing:





An increase of 1,864 jobs in West Virginia, including:
o 464 direct coal mining jobs
o 345 direct coal transportation jobs
o 490 indirect jobs in supplier industries (upstream supply chain)
o 565 “induced” jobs due to household spending by those employed above
An increase of $132 million in labor income paid to West Virginia workers
An increase of $299 million in West Virginia GDP

A reduction in the Coal Severance Tax rate will make coal produced in West Virginia more cost
competitive with coal produced in other states, allowing for increased sales of West Virginia
coal and increased coal production in West Virginia. The current 5% tax must be largely
absorbed by West Virginia coal producers in order for West Virginia coal to be purchased by
utilities who can also purchase coal produced in surrounding states (with lower severance
taxes) or substitute lower cost natural gas. The lower net-of-tax price received by West Virginia
coal producers results in lower wages for West Virginia miners and less West Virginia coal
production than in the absence of the severance tax. Electric utility customers make up for the
reduced West Virginia coal production by purchasing more out-of-state coal and natural gas.
The requested 3% severance tax rate reduction would work in the opposite direction. With the
tax reduction, West Virginia coal producers would receive a higher net-of-tax price for coal and
therefore allow for increased production while remaining cost competitive with coal produced
in neighboring states. (Alternatively, if the tax rate reduction is viewed as decreasing prices of
West Virginia coal to electric utility customers, demand for West Virginia coal will increase, also
resulting in increases in West Virginia coal production and employment.)

1

See: West Virginia Coal Association’s “WV Coal Legislative Program 2016.”

1

 ANALYSIS
1. Introduction
Legislation has been proposed that would reduce West Virginia’s current coal severance tax rate from 5
percent to 2 percent for the purpose of making coal more competitive with competing energy sources
and fuel production from other states, and protecting West Virginia jobs. This report provides
background information on the current condition of the coal industry, the factors affecting the demand
for coal, the impact of the severance tax on coal markets, and the economic effects of the proposed tax
rate reduction, including the impact on jobs, labor income, State GDP, and total output. A technical
appendix provides additional information on the estimation of the economic effects.
2. Background
As the U.S. Energy Information Administration (EIA) reported in the January 8, 2016 Today in Energy,2
Since reaching a high point in 2008, coal production in the United States has continued
to decline. U.S. coal production in 2015 is expected to be about 900 million short tons,
10 percent lower than in 2014 and the lowest level since 1986. Regionally, production
from the Appalachian Basin has fallen the most. Low natural gas prices, lower
international coal demand, and environmental regulations have contributed to declining
U.S. coal production . . . . The largest decline in coal production was in the Central
Appalachian Basin, largely because of its difficult mining geology and high operating
costs. Coal production in the Central Appalachian Basin in 2015 was 40 percent below its
annual average level over 2010-14.
The EIA’s Short-Term Energy Outlook released February 9, 2016 estimates that U.S. coal production will
fall to 834 million tons in 2016, and to 841 million tons in 2017, down from 1 billion tons in 2014, and
891 million tons in 2015.3
Other recent EIA data show West Virginia coal production for the quarter ending September 2015 was
down 13.5 percent over the prior year, with the southern part of the state experiencing a 21.8 percent
decline.4 The demand for coal, and especially West Virginia coal, has declined rapidly and with it, so
have jobs. Since the first quarter of 2012 through September 30, 2015, West Virginia coal mining
employment has fallen by about 8,400 jobs or 37 percent (see Figure 1).5 Jobs fell 13 percent within the
6 months from March 31 through September 30, 2015,6 with more losses announced since then.7 Coal
sale revenues have declined faster than tonnage because coal prices also have fallen (see Figure 2).8
Major coal companies are in bankruptcy, including Alpha Natural Resources Inc., Arch Coal Inc., Patriot
2

http://www.eia.gov/todayinenergy/detail.cfm?id=24472 (downloaded January 11, 2016)
http://www.eia.gov/forecasts/steo/report/coal.cfm (downloaded January 13 2016)
4
http://www.eia.gov/coal/production/quarterly/ (See Table 2 – downloaded January 21, 2016)
5
http://ledextract.ces.census.gov/ (downloaded 12-24-2015) and www.SNL.com (downloaded December 17,
2015). Census data are from state unemployment insurance filings reported through the end of 2014 and these
data are extended based on SNL reporting through September 30, 2015.
6
www.SNL.com (downloaded December 17, 2015)
7
http://www.theintelligencer.net/page/content.detail/id/650389/-Significant--Layoffs-Expected-at-MurrayEnergy-Mines.html
8
http://www.eia.gov/coal/markets/, downloaded January 18, 2016
3

2

 Coal Group, and Walter Energy Inc., which has contributed to job losses and increased risks to retirees’
pensions. According to SNL Energy, 49 coal companies have filed for bankruptcy since 2012.9 The State
and county governments are similarly suffering due to their heavy reliance on tax revenues from coal
and coal-related economic activity. Coal severance tax collections, which provide revenues for both the
State and the counties, have been on a continuous decline (see Figure 3) at about a 10.5 percent annual
rate.

9

https://www.snl.com/InteractiveX/article.aspx?ID=35032322&KPLT=4, reported and downloaded Jan. 11, 2016

3

 Figure 1. West Virginia Coal Mining Employment, 2012–2015 Q3
25,000

20,000

15,000

10,000

5,000

0
2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1e Q2e Q3e

Sources: Census LED indicators and www.SNL.com
Figure 2. NYMEX Central Appalachian Coal Near-Month Settlement Price, 2012–present
75
70
65

$ per short ton

60
55
50
45
40
35

1/3/16

11/3/15

9/3/15

7/3/15

5/3/15

3/3/15

1/3/15

11/3/14

9/3/14

7/3/14

5/3/14

3/3/14

1/3/14

9/3/13

11/3/13

7/3/13

5/3/13

3/3/13

1/3/13

11/3/12

9/3/12

7/3/12

5/3/12

3/3/12

1/3/12

30

Source: http://www.eia.gov/coal/nymex/ and www.SNL.com (downloaded February 4, 2016)

4

 Figure 3. West Virginia Coal Severance Tax Collections (monthly)
$70,000,000

$60,000,000

$50,000,000

$40,000,000

$30,000,000

$20,000,000

$10,000,000

$-

Source: West Virginia Department of Revenue (provided December 21, 2015)
3. Factors Affecting Demand for Coal
Most causes of coal’s decline are well understood and include challenging environmental restrictions on
coal-powered electricity generation, intense competition from low natural gas prices, and the impact of
the high value of the dollar on export sales, with U.S. coal export tonnage down 24 percent for the first 3
quarters of 2015.10 These factors have led to both immediate and permanent long-term damage to the
industry. Major factors affecting the industry include the following:


Regulatory environment. Global and national concerns with climate change have led to policies
that are discouraging the use of carbon dioxide emitting fuels, with coal being more carbon
intensive than others. While there are a number of regulatory developments affecting the
production and use of coal, perhaps the most significant is the EPA’s Clean Power Plan (“CPP”)
that requires each state to develop plans for statewide carbon dioxide emission standards for
existing fossil fuel-fired electric generating units. The CPP would reduce CO2 emissions 32
percent as measured from a 2005 baseline by 2030, with compliance starting in 2022. Several

10

EIA Quarterly Coal Report, Third Quarter, 2015. See: http://www.eia.gov/coal/production/quarterly/ (See
Tables 7 and 8).

5

 states have already committed to eliminate coal as a fuel source for their electricity production
within the next several years.
While the Supreme Court recently decided to stay the CPP, pending lower court review, the
electric utility industry is already well underway in transitioning away from coal. For example,
according to SNL Energy, the President and CEO of the TVA “said the EPA's plan was taken into
consideration when the utility's most recent integrated resource plan was created . . . [and] the
stay granted by the high court will not affect the TVA's action ‘in any way.’"11
Coal-fired electric utilities are being retired or converted to natural gas, and wind, solar, and
other renewable energy sources are being constructed and put on-line. The pace of this change
is highlighted in a recent SNL Energy report showing that new electric utility capacity additions
in 2015 were accounted for almost entirely by natural gas and renewables. With 14,468 MW of
capacity additions, natural gas accounted for 35 percent, wind for 47 percent, solar for 14
percent, water 1 percent, and other nonrenewables, including coal, for 2 percent. Together,
coal, oil, and geothermal were less than 1 percent.12 Many major investment decisions are
being made that will affect the demand for coal for years in the future.


Low natural gas prices. Changes in drilling technology have led to a large increase in domestic
natural gas reserves and expanded production, with much of this increase being attributable to
the Marcellus shale.13 According to EIA, between 2010 and 2014, U.S. natural gas production
increased from 61 billion cubic feet per day (“bcf/d”) to 75 bcf/d. Over the same period,
Marcellus production increased from 2 bcf/d to 13 bcf/d and now is about 16 bcf/d. This
increase in supply has pushed down natural gas prices and the lack of pipeline infrastructure in
the region has led to particularly large natural gas price reductions in the Marcellus. Low natural
gas prices are expected to persist for many years and natural gas is now highly cost competitive
with coal and is frequently displacing coal as a fuel source. While there will eventually be some
relief when more natural gas pipelines are completed, the new pipelines opened to date suggest
that any increase in prices will be modest in the near term. As a result, the coal industry has
experienced new, lower-cost competition not only in West Virginia, but in all the markets where
West Virginia coal has historically been sold, and this is expect to last into the foreseeable
future.



Strong U.S. dollar. With the U.S. economy doing well relative to its major trading partners, the
value of the dollar remains high, which has and will continue to hinder coal exports. Figure 4
shows the large decline in coal exports since the beginning of 2012, with the most recent data
showing third quarter of 2015 exports down 55 percent from a recent high in the second
quarter of 2012.

11

See “TVA on track with plant retirements despite Clean Power Plan stay,” SNL Energy, 2/11/2016.
https://www.snl.com/Interactivex/Article.aspx?id=35357588&KPLT=2
12
See: SNL Energy, “Data Dispatch: Gas, wind contribute 82% of capacity additions in 2015,” January 7, 2016.
https://www.snl.com/InteractiveX/article.aspx?Id=34950800&KPLT=2
13
The Marcellus shale underlies most of West Virginia and extends into parts of Ohio, Pennsylvania, New York, and
Maryland.

6

 Figure 4. Coal Exports, 2012–2015 Q3
40,000

35,000

short tons (1,000s)

30,000

25,000

20,000

15,000

10,000

5,000

0

Source: EIA Quarterly Coal Report, Third Quarter, 2015

4. Impact of Severance Tax on Coal Markets
Under current law, West Virginia imposes a 5-percent severance tax rate on the gross proceeds received
from West Virginia coal production with 4.65 percent going to the State’s general fund and 0.35 percent
to the counties. Reduced tax rates of 1- or 2-percent apply to the production of certain thin-seams
coal.14 An additional 56-cents per ton is used to redeem workers’ compensation revenue bonds. These
bonds had been issued to pay off the old workers’ compensation debt. The Governor proposed in his
Executive Message with the FY 2017 budget to pay off the remaining debt and terminate the 56-cents
per ton severance tax.15 The Senate Finance Committee recently adopted this proposal.
Much of West Virginia’s coal production is used to generate electricity in West Virginia and other states.
In 2014, EIA Form 923 data show 56 million tons of coal mined in West Virginia were used for this
purpose, with 19 million tons used for West Virginia electricity generation and 37 million tons exported
to produce electricity in other states. West Virginia electricity producers also imported 14 million tons
of coal from other states (see Table 1).

14

Coal produced by underground mining methods from seams 37” to 47” thick is taxed at 2% and coal produced
from seams less than 37” thick is taxed at 1%.
15
See: http://www.budget.wv.gov/executivebudget/Documents/VI2017.pdf (p. 6)

7

 The high West Virginia severance tax discourages purchases of West Virginia mined coal by both out-ofstate and in-state electric utilities.
West Virginia’s severance tax of 5 percent, plus 56 cents per ton, is higher than the severance tax
imposed in the states to which West Virginia exports coal as well as the states from which West Virginia
imports coal.
Table 1 shows the coal imported for electricity production in 2014 by each West Virginia power plant
and the state in which the coal was mined. Of these states, Illinois imposes no severance tax. Kentucky
imposes a severance tax of 4.5 percent of the gross value of all coal severed and/or processed during
the reporting period. In Maryland, a county coal severance tax of 30 cents per ton is imposed on surface
mined coal that is reported to the Bureau of Mines. The Ohio severance tax rate is 10 cents per ton with
an additional tax of 1.2 cents per ton of coal imposed on coal mined by surface mining methods. An
additional tax of 14 cents per ton of coal is imposed on coal produced from an area under a coal mining
and reclamation permit. Depending on the balance in the state’s reclamation fund, this tax can vary
between 12 cents and 16 cents per ton. Pennsylvania imposes no coal severance tax.
Table 1. West Virginia Coal Imports for Electricity Generation (short tons)
by West Virginia Plant and Coal Mining State, 2014
WV Electricity Plant
Ceredo
FirstEnergy Fort Martin Power Station
FirstEnergy Pleasants Power Station
John E Amos
Kammer
Kanawha River
Longview Power LLC
Mitchell (WV)
Mountaineer
Mt Storm
Philip Sporn
PPG Natrium Plant
Grand Total

Coal Imported from Mines in:
KY
MD
OH
PA Grand Total
524,162
737,177 1,405,001
100,332
14,185 360,109
474,626
53,601
3,034,838
3,088,439
450,997
1,526,332
38,059 2,015,388
5,305
11,731 200,232
217,268
9,562
9,562
1,527,336 1,527,336
675,818
675,818
8,674
1,155,930
75,007 1,239,611
2,021,142
1,139,354 3,160,496
93,779
93,779
89,478
89,478
143,662 1,922,230 2,021,142 5,832,494 4,077,274 13,996,802

IL
143,662

Source: EIA Form 923, http://www.eia.gov/electricity/data/eia923/
Table 2 shows the states to which West Virginia mined coal was delivered to electric utilities in 2014.
Some these states also were significant coal producing states, such as Ohio and Pennsylvania where 8
million tons were delivered to each in 2014. Various factors affect the cost of delivered coal, such as
quality, quantity, and transportation. In order to make these sales, the West Virginia producer had to
overcome the excess of the West Virginia severance tax over the minimal severance tax on Ohio coal
and no severance tax imposed on Pennsylvania coal. Had the West Virginia severance tax been lower,
sales of West Virginia coal to these and other states would likely have been greater.

8

 Table 2. West Virginia Exports for Electricity Generation in Other States, 2014
State of plant No. of Plants
DE
4
FL
78
GA
9
IA
12
IN
189
KY
49
MA
10
MD
44
MI
89
MS
7
NC
233
NH
10
NJ
34
NY
25
OH
208
PA
134
SC
59
TN
8
VA
241
WI
16
Grand Total
1459

Short tons
70,243
2,264,698
159,030
1,027
1,361,838
505,978
760,439
877,565
1,332,931
286,775
7,134,627
102,804
530,277
364,871
8,241,451
8,269,385
1,106,378
183,000
3,355,078
378,196
37,286,591

Source: EIA Form 923, http://www.eia.gov/electricity/data/eia923/
5. Economic Impact of Reducing Severance Tax Rate
The economic impact of the proposed rate cut from 5 percent to 2 percent will depend on how it affects
the behavior of coal buyer and sellers.16 We first discuss how economic theory describes buyer and
seller behavior and then present the results of our modeling.
a. Buyer and seller behavior
Whether West Virginia’s 5-percent severance tax is ultimately borne by the producer or the consumer is
not entirely clear. In a legal and accounting sense, the severance tax is, in many cases, passed forward
to the utility by contract. It also may be indirectly passed forward because the coal producer includes it
in the delivered price as a cost of production when bidding for a contract. The utility, in turn, typically is
allowed by a public utility commission to pass forward fuel costs, including the severance tax, to
customers as part of the price of electricity.
In an economic sense, however, the utility must seek the lowest cost of fuel required to operate the
plant. If the delivered price of West Virginia coal exceeds that of fuel from another supplier, the West
16

The proposed reduction from the current 5-percent rate to 2-percent would not affect the 0.35 percent going to
the counties or the thin seams tax rate.

9

 Virginia coal producer must meet the lower price or lose the contract. In markets where West Virginia
producers face ample competition from out-of-state coal producers or competing fuels, the tax will be
largely borne by the West Virginia producer, resulting in a decline in the West Virginia producer’s net-oftax selling price. Only when West Virginia producers face little competition will much of the tax to be
passed forward to the utility.
When the tax is borne by West Virginia producers in the form of a lower net-of-tax selling price of coal,
this will lead to a decline in production as some production will no longer be profitable to undertake.
Declining production will reduce mining employment and coal mining investment. Reduced profitability
and reduced production may also place downward pressure on labor compensation. To the extent
returns on investment are reduced, new investment and maintenance of existing investment will be
discouraged and some mines may be shut down.
A reduction in the severance tax rate would operate in the opposite direction. A reduction in the tax
rate would lead to a higher net-of-tax price for coal, thereby making some mines profitable to operate
that would otherwise be shut down. Production from existing mines would also be expected to increase
with the higher net-of-tax selling price. Increased production would increase coal mining employment
and coal mine investment.
Set against the background of today’s weaker market for coal, the large declines in the demand for West
Virginia coal, and the decline in coal prices, which have led – and are expected to continue to lead – to
mine closures, bankruptcies, and workforce reductions, a reduction in the severance tax rate may
reverse in part or slow these trends. Numerous factors have contributed to today’s market for coal and
West Virginia’s high severance tax rate is not the only or even one of the larger causes. That said, West
Virginia coal production is uniquely burdened by its severance tax because the 5-percent rate is the
highest among all the coal producing states with which it competes.
The economics literature17 on the taxation of natural resources generally assumes severance taxes are
borne by the producer and labor. The tax directly increases the cost of production and production will
be lower due to the tax. If the demand for coal is highly responsive or “perfectly elastic,” any attempt to
pass through the tax to the buyer will cause the demand for the seller’s coal to fall to zero because the
buyer will switch to an alternative fuel source, such as coal from another state or natural gas.
Correspondingly, a reduction in the tax rate will reduce production costs allowing more coal to be sold
with higher margins, which will increase production and employment. The tax cut would not be passed
along to the buyer in the form of a lower price because, under the assumption of a perfectly elastic
demand curve, the tax had previously been fully borne by the producer in the form of a lower net-of-tax
price.
An alternative interpretation is that severance taxes are borne at least in part by the buyer, thereby
raising prices and reducing the amount of coal purchased. In this alternative, a reduction in the tax rate
will flow through to the buyer to the extent previously borne and will increase the amount of coal
purchased.

17

See, for example, a series of papers published in 1982 by The University of New Mexico School of Law, which
held a Symposium on the Taxation of Natural Resources where several papers discuss the incidence and economic
effects of severance taxes. See: http://lawschool.unm.edu/nrj/volumes/22/v22_no3.php

10

 It is also possible for the severance tax to be partially borne by both coal producers and coal buyers. If
the responsiveness of the buyer to a change in prices is equal to the responsiveness of the producer to a
change in net-of-tax price, the benefit of the tax reduction will be equally shared. In this case the
percentage increase in production from reducing the tax will be half what it would be when demand is
perfectly elastic.
Our base case analysis assumes coal producers cannot raise the selling price of coal in response to the
severance tax. We assume that coal production responds positively to an increase in the net-of-tax
price, with a 1 percent increase in price leading to a 1 percent increase in production. As a result, coal
production will increase in proportion to the reduction in the tax rate; that is, a 3 percentage point
reduction in the tax rate will cause production to increase by 3 percent. Under the alternative
interpretation where the tax reduction is equally shared, production would increase by 1.5 percent. We
also present analysis below under this alternative assumption.
As an example of our base case analysis, if 100 million tons were mined in the absence of a policy
change, 3 million additional tons would be mined with the 3 percentage point tax rate reduction. The
analysis can also account for a continuation of the declining market for coal. For example, if the demand
for West Virginia coal were expected to fall to 90 million tons without any policy change, the demand
could be expressed as instead falling to 92.7 million tons with the policy change. That is, the severance
tax cut would reduce the decline by 2.7 million tons.
b. Economic impact
The IMPLAN Model18 is used to quantify economic effects of a reduction in the coal severance tax rate
from 5 percent to 2 percent on West Virginia’s coal mining industry. The results are summarized below
and a more detailed description is provided in the appendix.
In describing these economic impacts, three separate channels are considered – the direct impact, the
indirect impact, and the induced impact – that in aggregate provide a measure of the total economic
impact of the proposed severance tax reduction on the West Virginia coal mining industry. The direct
impact is measured in terms of the jobs, labor income, and value added within the coal mining industry.
The indirect impact is measured in terms of the jobs, labor income, and value added19 occurring
throughout the supply chain of the coal mining industry. The induced impact is measured in terms of
the jobs, labor income, and value added resulting from household spending of labor and proprietor's
income earned either directly or indirectly from the coal mining industry's spending. Because the coal
transportation industry (trucking, rail, and water borne shipping) is required to deliver coal to end users,
it is included in the direct industry impacts.
These economic impacts represent all of the backward linkages of the West Virginia coal mining industry
with its suppliers. They do not capture forward linkages (i.e., the economic impact on production in
18

IMPLAN Group LLC, IMPLAN System (data and software),16905 Northcross Dr., Suite 120, Huntersville, NC
28078 www.IMPLAN.com
19
Value added refers to the additional value created at a particular stage of production. It is a measure of the
overall importance of an industry and represents the industry's portion of West Virginia gross domestic product
("GDP"). Value added consists of: employee compensation, proprietors' income, income to capital owners from
property, and indirect business taxes (including excise taxes, property taxes, fees, licenses, and sales taxes paid by
businesses).

11

 sectors that use coal as an input, such as electricity generation, steelmaking, or all the goods and
services that rely on those industries).
The economic impacts are gross impacts associated with the increased coal production. For example,
they do not account for employment reductions in other sectors of the West Virginia economy as
individuals gain (or maintain) employment in coal production.
These estimates were developed using the IMPLAN model based on 2013 data, with adjustments to
reflect 2015. The model shows 20,052 West Virginia coal mining jobs in 2013, while current
employment is approximately 15,000 full-time and part-time jobs (see Figure 1). For 2015 as a whole,
total coal mining employment was down by 23 percent from 2013 levels. The IMPLAN model also shows
coal transportation employment with 7,341 jobs, or 37 percent of 2013 coal mining jobs. These
transportation jobs also will be directly affected by any change in the demand for West Virginia coal.
They have similarly been reduced by 23 percent to reflect current employment levels. The direct impact
of the decline in coal production on coal transportation can be observed in railroad statistics.
Association of American Railroads’ data on coal shipments by rail for the U.S. as a whole illustrate the
decline during 2015 (see Figure 5).
Figure 5. U.S. Average Weekly Coal Shipments by Carload, 2012–2015

Source: Association of American Railroads (see: https://www.aar.org/Pages/Freight-Rail-TrafficData.aspx#monthlyrailtraffic), downloaded January 31, 2016.
The impact of providing a 3-percent cut in the severance tax rate is first modeled using a 3-percent
increase in production. This is estimated to result in 464 direct coal mining jobs, 345 direct
transportation jobs, 490 indirect jobs in supplier industries, and 565 induced jobs arising from the
household purchases of the miners, coal transporters, and support jobs. In total, this tax rate reduction
would result in 1,864 West Virginia jobs. The labor income from these jobs, which includes wages and
fringe benefits, totals $132 million. The associated value added (GDP), which measures the West
Virginia economic activity at all stages of production, totals $299 million. The total output associated
with these jobs is $555 million.

12

 Table 3. Impact of a 3-Percent Increase in Coal Production on the West Virginia Economy
Base case analysis
2015
Impact Type

Employment
(Jobs)

Labor Income
($Million)

GDP ($Million)

Output ($Million)

Direct Effect
Coal mining
464 $
50 $
160 $
281
Coal transportation
345 $
30 $
46 $
107
Total Direct Effect
809 $
80 $
206 $
388
Indirect Effect
490 $
30 $
53 $
99
Induced Effect
565 $
22 $
39 $
68
Total Effect
1,864 $
132 $
299 $
555
Source: Estimates based on the IMPLAN input-output model, with adjustment for 2015 actuals.

Under our alternative assumption where the benefit of the tax rate reduction is equally shared between
the buyer and seller, the impact will be half that of our base case. This impact would result in 932 jobs,
$66 million in labor income, $149 million of value added, and $278 million of output.
Both the base case and alternative estimates are based on current levels of production and
employment. To the extent that West Virginia’s coal mining production and employment continue to
decline in future years, these estimates will be correspondingly reduced.
The coal industry is undergoing a rapid transition as coal-fired electric utilities are being retired or
converted to natural gas, and as wind, solar, and other renewable energy sources are constructed and
put on-line. This long-term trend is likely to continue. A severance tax reduction, however, can affect
the timing and the magnitude of these changes and contribute to a delay in coal plant retirements, in
the conversion of electric plants from coal to gas, and potentially make it more economic to invest in
new clean coal and carbon sequestration technologies.20

20

See, for example, Mississippi Power’s planned conversion this year of a natural gas plant to a coal (lignite) plant
with carbon sequestration: https://www.snl.com/interactivex/article.aspx?ID=35019352&KPLT=2

13

 APPENDIX

ESTIMATING THE IMPACT OF AN INCREASE IN COAL MINING PRODUCTION ON THE WEST VIRGINIA ECONOMY

1. Baseline
In 2013, the West Virginia coal mining sector directly provided some 20,000 full- and part-time
jobs in the state, accounting for nearly 24 percent of the coal mining employment in the United
States. An additional 7,300 jobs were required to transport the coal in West Virginia. Coal
production in the state was valued at $12 billion for the year, which represented 21 percent of
the total coal production in the country. Table A-1 shows the West Virginia coal industry’s direct
employment, payroll and benefits, GDP, and output in 2013.
Table A-1. IMPLAN West Virginia Baseline
2013
Direct Impact

Employment
Labor Income
GDP ($Million) Output ($Million)
(Jobs)
($Million)
20,052 $
2,083 $
6,715 $
12,054

Coal mining
Coal transportation
Rail
2,890 $
253
Trucking
4,387 $
276
Water
64 $
5
Total transportation
7,341 $
534
Total
27,393 $
2,617
Source: Estimates based on the IMPLAN input-output model.

$
$
$
$
$

532
307
10
849
7,564

$
$
$
$
$

1,069
682
45
1,796
13,850

2. The Simulation
An input-output model for West Virginia (developed by the IMPLAN Group) was used to
simulate the impact in our base case of a 3 percent increase in coal production by the West
Virginia coal mining sector. The impact estimate consists of the following two components:
a. Impact of the additional West Virginia coal production on the West Virginia coal mining
sector (direct impact), its in-state supply chain (indirect impact), and impact attributable to
consumption spending from the additional earnings by the employees of the state’s coal
mining sector and its in-state supply chain (induced impact); and
b. Impact attributable to the transportation of the additional coal products (from the 3 percent
increase in West Virginia coal production) to the final user.
14

 These estimated economic impacts are gross impacts associated with the increased coal
production. They do not take into account, for example, that individuals who gain employment
in coal production may voluntarily leave employment in other sectors of the West Virginia
economy.
3. The Results
The IMPLAN model was used to quantify the economic impacts for this simulation.21
A 3 percent increase in coal production by the West Virginia coal mining sector relative to its
2013 baseline level is equivalent to $362 million of additional coal mining output in the state in
2013 producers’ prices. According to the IMPLAN input-output model, the additional coal
production by the West Virginia coal mining sector would lead to an increase of $73 million in
output throughout its in-state supply chain (indirect impact) and another $54 million in output
in the West Virginia economy from consumption spending (induced impact).
Additionally, based on government estimates on the transportation margins for the coal mining
sector, the 3 percent increase in West Virginia coal production is estimated to generate an
additional $106 million of margins for West Virginia’s transportation sector (primarily railroad,
truck, and water transportation). On average, each $1 million of railroad transportation margins
translates into 2.7 jobs. The comparable numbers for truck and water transportation are 1.4
jobs and 6.4 jobs, respectively. On this basis, we estimate the 3 percent increase in coal
production in West Virginia would add 362 new jobs to the state’s transportation sector. These
new jobs would similarly generate indirect and induced impacts on the West Virginia economy.
Overall, the 3 percent increase in West Virginia coal production is estimated to generate nearly
2,200 new jobs in the state, add $149 million to labor income, contribute $356 million to the
state’s GDP, and $650 million in total output at the 2013 income level.
Table A-2, below, summarizes the direct, indirect, and induced impacts on the West Virginia
economy from a 3 percent increase in the state’s coal production.

21

IMPLAN is a well-known modeling system developed by the IMPLAN Group LLC for estimating economic impacts and is
similar to the Regional Input-Output Modeling System developed by the U.S. Department of Commerce. The model is primarily
based on government data sources. It can address a wide range of impact topics in a given region (county, State, or the country
as a whole).

15

 Table A-2. Impact of a 3-Percent Increase in Coal Production on the West Virginia Economy
2013
Impact Type

Employment
(Jobs)

Labor Income
($Million)

Direct Effect
Coal mining
602 $
62
Coal transportation
363 $
31
Total Direct Effect
965 $
93
Indirect Effect
516 $
30
Induced Effect
683 $
25
Total Effect
2,164 $
149
Source: Estimates based on the IMPLAN input-output model.

GDP ($Million)
$
$
$
$
$
$

201
54
256
54
46
356

Output ($Million)
$
$
$
$
$
$

362
109
471
100
79
650

4. Adjustments for 2015
IMPLAN provides inflators to adjust West Virginia economic activity to 2015 levels from the
2013 base year analysis. While this methodology generally provides good results, IMPLAN could
not have anticipated the decline in energy prices, the fall in the demand for coal, and the job
losses that actually occurred. A two-step process is required to adjust the 2013 results to reflect
the current state of West Virginia’s coal industry. The first step is to apply IMPLAN inflators to
the 2013 results in Table A-2 to produce the 2015 level impacts in Table A-3.

Table A-3. Impact of a 3-Percent Increase in Coal Production on the West Virginia Economy
(before adjustment)
2015
Impact Type

Employment
(Jobs)

Labor Income
($Million)

Direct Effect
Coal mining
602 $
65
Coal transportation
363 $
32
Total Direct Effect
965 $
97
Indirect Effect
516 $
31
Induced Effect
683 $
26
Total Effect
2,164 $
154
Source: Estimates based on the IMPLAN input-output model.

GDP ($Million)
$
$
$
$
$
$

209
56
266
56
48
369

Output ($Million)
$
$
$
$
$
$

369
113
482
104
82
669

The second step is to adjust the estimated impacts shown in Table A-3 based on the IMPLAN
2015 inflators to reflect a more current estimate of 2015 West Virginia coal industry activity.
West Virginia coal mining employment has fallen sharply since 2013, with 2015 employment

16

 down by about 23 percent. Coal tonnage mined declined by about 5 percent from 2013 to 2015.
The total value of economic output over the same period, reflecting the decline in both tonnage
and prices, is approximately 24 percent. Due to the severity of these effects, the Table A-3
results must be adjusted. The direct and induced effects of coal mining employment and labor
compensation are reduced by the actual decline in industry employment. Coal transportation
employment and compensation are more likely to change with coal tonnage than mining
employment, so these amounts are reduced by 5-percent. All indirect employment and labor
compensation effects are also reduced by 5 percent. Because GDP reflects both labor
compensation and output, the same percentages are used based on their relative contributions
to GDP.
Table A-4. Impact of a 3-Percent Increase in Coal Production on the West Virginia Economy
(adjusted)
2015
Impact Type

Employment
(Jobs)

Labor Income
($Million)

GDP ($Million)

Output ($Million)

Direct Effect
Coal mining
464 $
50 $
160 $
Coal transportation
345 $
30 $
46 $
Total Direct Effect
809 $
80 $
206 $
Indirect Effect
490 $
30 $
53 $
Induced Effect
565 $
22 $
39 $
Total Effect
1,864 $
132 $
299 $
Source: Estimates based on the IMPLAN input-output model, with adjustment for 2015 actuals.

281
107
388
99
68
555

In sum, the base case estimate of a 3-percent increase in the demand for coal would increase
total West Virginia employment by 1,864 jobs, labor compensation by $132 million, GDP by
$299 million, and economic output by $555 million. Under our alternative assumption where
the benefit of the tax rate reduction is equally shared between the buyer and seller, the impact
will be half that of our base case leading to a 1.5-percent increase in the demand for coal. This
impact would result in 932 jobs, $66 million in labor income, $149 million of value added, and
$278 million of output.

17