If the coal severance tax had been put to better use, its decline wouldn't be creating the crisis for some local governments that was reported in Sunday's Herald-Leader — because Eastern Kentucky would have a stronger, more diversified economy and tax base.
How to wring more value from the severance tax should top the agenda for anyone who cares about the region's or Kentucky's future.
The first step is for lawmakers to swear off their practice of divvying up the local severance-tax pie into itsy-bitsy pieces that please this constituent or that group while packing no broad economic punch.
The legislature put into law some reasonable expectations for local severance tax spending. But the legislature routinely exempts itself from its own laws. In the current state budget, lawmakers approved 792 exemptions allowing them to make individual severance tax appropriations, many of dubious value. This spending nibbles up the money while bearing no resemblance to a coherent economic strategy.
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The idea behind a severance tax is to leave behind something of value when an irreplaceable natural resource is severed from the earth.
When the legislature began sending half of the severance tax back to coal communities, the goal was to spur economic development and work-force training that would relieve the dependency on a single industry. Sadly, it hasn't worked out that way. Coal production declines and layoffs — which had been predicted — are having devastating effects.
The coal severance tax generated just less than $300 million in the past fiscal year. Kentucky taxes coal at a rate of 4.5 percent of its gross value. If Kentucky had raised its severance tax rate to the same level as West Virginia (5 percent of gross value), it would have generated an additional $33 million in the past fiscal year — a droplet in the state budget but enough to send lasting ripples through local economies, if put to smarter use.
A lot of factors are depressing demand for Appalachian coal, including competition from cheaper Wyoming coal and natural gas. But a 0.5 percent increase in the severance tax would not stop anyone from mining their Appalachian reserves.
The legislature should increase Kentucky's severance tax to the same level as West Virginia's.
It also should dedicate part of the severance tax to creating an endowment for coal counties — a lasting source of seed money as the coal industry keeps fading.
Coal always has been subject to boom-bust cycles. As Bell County Judge-Executive Albey Brock said, "I know better than to hang my hat on coal-severance money." (Bell County is not facing a fiscal crisis.)
But the industry has entered a long bust in Eastern Kentucky. There might be boomlets, but all indicators point to a continued decline in production and employment.
A bill has been introduced to send all the severance tax money back to coal counties. Two-thirds of the General Fund now goes to Medicaid and education, so Eastern Kentucky is already getting a disproportionate share of revenue through health care spending on the poor and to equalize school funding.
Still, the whole state has an interest in Eastern Kentucky doing better. The only way to make a case for sending more money to the mountains is by tying it to a credible regional strategy, one with measurable goals and rigorous accountability, that would be administered transparently and nonpolitically.
Lawmakers from Eastern Kentucky hold the top posts in both chambers, so lack of political clout is not the region's problem.
What's missing is a plan.