County’s economy hobbled by outsider landowners, tax loopholes

jcheves@herald-leader.comJune 22, 2013 

HINDMAN — One of Knott County's long-running challenges is that outsiders own so much of it.

A half-dozen corporations headquartered in Houston, St. Louis, Lexington and elsewhere own a combined 62,346 acres, more than one-fourth of Knott's 225,825 acres, according to county land records. Other companies own thousands of acres more. Many hold claims staked early in the 20th century after East Coast investors discovered the value of Appalachian coal and timber, sending land agents to acquire vast tracts cheaply.

Over time, area residents became "a landless people, at the mercy of the landlords," University of Kentucky law student Joe Childers wrote in 1980 as he led a team of researchers studying property records in Knott County and at courthouses across Eastern Kentucky. The Appalachian Regional Commission financed the team's work, published in the 1983 book Who Owns Appalachia?

Childers wrote that land-holding companies avoided paying their fair share of taxes. This starved local governments and schools of revenue and resulted in shabby public services for generations. For instance, the companies manipulated a law allowing reduced property assessments for farmland. Wealthy corporations turned that into a loophole to pay "pasture taxes" on their valuable coal seams, he wrote.

"Overall, corporate landowners maintain a low property tax burden," Childers wrote in his Knott County profile. "Corporations sampled control 36 percent of the county and pay only 21 percent of the property taxes."

Kentucky has made progress since then in requiring coal companies to pay more taxes on their holdings. But outside ownership continues to squeeze the scarce usable land that remains in mountainous Knott County.

Among the barriers cited to economic development are family home prices that can rival Lexington's (houses at a subdivision outside Hindman, built on an old, flattened surface mine, cost more than $200,000) and lack of space for new enterprises unless a longtime landholder is willing to sell. Most of Knott County is locked up.

"You've got a county where so much of the land either was owned by the coal companies or the coal companies held the mineral rights, so they could go through and strip-mine whenever they wanted. Who in their right mind would want to make a significant capital investment in a community when they couldn't be sure they could find a piece of land they could control?" asked environmental attorney Tom FitzGerald, who is active in Eastern Kentucky land issues.

'Comic opera'

Exploitation by outsiders defines the history of southeastern Kentucky, Harry Caudill wrote in his 1963 book Night Comes to the Cumberlands.

"The essential element of the plateau's economic malaise lies in the fact that for a hundred and thirty years it has exported its resources, all of which — timber, coal and even crops — have had to be wrested violently from the earth," Caudill wrote. "The nation has siphoned off hundreds of millions of dollars' worth of its resources while returning little of lasting value. For all practical purposes, the plateau has long constituted a colonial appendage of the industrial East and Middle West, rather than an integral part of the nation generally."

In Knott County, local tax officials did not know how to assess the value of outside companies' massive holdings. Some accepted whatever sums they were offered. A 1969 report on Eastern Kentucky property taxes prepared by an activist group, the Appalachian Volunteers, singled out Knott's predicament as "comic opera."

"The coal companies pretty much set their own assessments," Knott County tax commissioner Delmar Draughn told the St. Louis Post-Dispatch about that time. "We pretty much have to work with them. We have no system for finding out what they own. Like, they may tell us they own 50 acres at a certain place when actually they own 500 acres."

Tax laws have improved to make land-holding companies contribute more than they once did, said Childers, now a Lexington attorney.

In 1972, Kentucky levied a severance tax on coal and other minerals as they are removed from the ground. Twenty years later, the state legislature agreed to share that money with the coal-producing counties. Knott County received $6.6 million in 2012 severance taxes, although the total varies from year to year depending on how much coal is being mined in the county.

In 1988, in a lawsuit involving Childers, the Kentucky Supreme Court ruled that unmined minerals should be taxed just like any other property. Engineers, geologists and appraisers at the Kentucky Revenue Department were put in charge of assessing the value of unmined coal, rather than leave it to locally elected officials who might not be capable.

For 2012, the Revenue Department assessed the value of Knott County's unmined coal at $345 million, reflecting 2011 market prices. That's more than twice what all the homes in the county were considered to be worth. The county sheriff collected more than $2.7 million in unmined coal taxes, giving the lion's share to the schools and lesser amounts to the state, the county and special taxing districts.

Knott County Fiscal Court has grown so dependent on coal taxes that it nearly went insolvent last winter because of a 45 percent slump in local coal production.

Good business

The current list of major Knott County landowners looks much as it did in surveys 35 and 45 years ago, except for corporate mergers and acquisitions that tweaked a few company names. Some companies mine coal themselves; others lease out their properties for others to mine.

Western Pocahontas Properties, part of Houston-based Natural Resource Partners, long has topped the list with 20,210 acres — 27 times the size of the University of Kentucky's Lexington campus.

For 2012, Western Pocahontas paid a property tax of $62,261 on surface holdings and $191,247 on unmined minerals for a total bill of $253,508, according to the Knott County property valuation administrator and the Revenue Department. That's enough to pay the average salary for five Knott County school teachers.

The Chestnut Mountain development on Ky. 80 near Hindman. Photo by Charles Bertram | Staff

"We don't comment on our private companies. It's just our policy," said Kathy Roberts, spokeswoman for Natural Resource Partners.

In recent years, Western Pocahontas expressed interest in developing 650 acres of a reclaimed surface mine on Chestnut Mountain, northeast of Hindman, for mixed-use retail and housing. Last year, the Troublesome Creek Environmental Authority opened a $5 million sewage treatment plant near the site to make such development possible. Locals say they're waiting to see what becomes of the company's plans.

Kentucky River Properties, headquartered in Lexington, owns 8,193 acres of Knott County. For 2012, it paid a property tax of $45,803 on surface holdings and $936,602 on unmined minerals for a total bill of $982,405, according to the county PVA and Revenue Department.

That's a hefty tax bill, but the company still might enjoy generous profits in Knott County.

Kentucky River is owned by a handful of investors and seldom has to disclose its finances. In a rare filing it made to the U.S. Securities and Exchange Commission in 2003, it said it collected an average of $5.41 million annually in coal production royalties from its Knott County properties in 2000, 2001 and 2002. Also, its contracts require that its partners reimburse it for unmined mineral taxes paid on coal they lease, relieving much of the company's tax burden, according to the SEC filing.

Company executives declined to answer questions for this story.

"Generally, we've found the Herald-Leader to have a bias against coal," said Fred Parker, a Kentucky River executive.

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