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Coal gets big tax breaks in Kentucky

FRANKFORT — This winter, before the General Assembly decides how much further it may have to cut education, social services and public safety to balance the budget, more than $111 million is already off the table.

That's the estimated annual total for tax breaks devoted to the coal industry. The next year, regardless of Kentucky's fiscal health, it's set to rise to almost $114 million, or as much as Kentucky spends on its Department of Juvenile Justice.

These exemptions in the sales and coal-severance taxes make it cheaper for mining companies to dig for coal and for utility companies to burn it to produce electricity.

When the legislature passed the first of them, in 1960, coal was a major industry in Kentucky. But in the past three decades, the number of people employed in coal mining has fallen from about 50,000 to fewer than 20,000, which is only about 1 percent of the state's workforce.

At the same time, concerns have arisen about coal's role in global warming. Climatologists and other scientists believe that the gases produced by burning fossil fuels gradually increase the Earth's temperature. Studies also link pollution from coal-fired power plants to lung cancer, heart attacks, asthma and other ailments.

Now, as other states and countries look at different energy sources, from natural gas and nuclear power to solar and wind energy, critics say Kentucky seems locked onto coal, even at the cost of subsidizing it.

"We clearly are more interested in making it cheap to burn coal than we are looking at some of the alternatives emerging out there," said Jason Bailey, policy director for the Mountain Association for Community Economic Development in Berea.

In 2009, MACED published a report showing that the coal industry takes $115 million more from Kentucky's state government annually in services and programs than it contributes in taxes, due in part to the tax breaks.

Of all of Kentucky's tax breaks related to energy development, 98 percent focus on coal, MACED said.

"Environmentally, we're subsidizing what could possibly lead to a greater set of problems," Bailey said. "In terms of economic development, coal is not what it used to be. It doesn't employ as many as it used to, it doesn't produce as much electricity as it used to. The rest of the world is starting to look beyond coal."

It's possible the General Assembly will attempt some kind of tax reform this winter, which may or may not address the billions of dollars in annual tax breaks that generally go unexamined.

Democratic House Speaker Greg Stumbo is putting together an effort in his chamber to discuss tax reform, although Gov. Steve Beshear, also a Democrat, repeatedly has said he's lukewarm to the idea. Republican Senate President David Williams says he favors dropping the individual and corporate income taxes and replacing them with consumption-based sales taxes, although he has not filed a bill.

Coal's Frankfort ties

Coal's role may be diminishing elsewhere, but it still looms over Frankfort.

The coal industry spent more than $1 million on state political donations in recent years and $255,145 to lobby the last two legislative sessions. Top Kentucky lawmakers own coal mines, hold white-collar posts at coal companies or otherwise do private business with coal. Gov. Steve Beshear joined coal lobbyists in the capital last winter for the unveiling of Kentucky's Friends of Coal license plate.

And the industry is not enthusiastic about starting a public discussion of its tax breaks.

Asked to talk about the value of the tax exemptions, David Moss, a lobbyist for the Kentucky Coal Association, said simply, "The coal association will have no official statement on the budget situation in Frankfort at this time."

Coal Operators and Associates, a Pikeville-based group representing smaller coal companies in Eastern Kentucky, did not respond to email or telephone questions.

State Sen. Robin Webb, D-Grayson, said critics underestimate the competitive pressure Kentucky coal faces to be as cheap as possible — and tax breaks help it in that regard. Webb represents the coal region, and she is a former coal miner who, as a lawyer, has worked for coal companies.

"We've seen not just national but global expansion of the coalfields," Webb said. "I can remember in the 1980s when we saw China and South America and even Australia coming to Eastern Kentucky to offer us jobs developing their coalfields. A lot of these places don't have the environmental or labor protections that we do, so it can be hard to remain competitive."

The breaks

The primary coal tax breaks are:

■ An exemption in the 6-percent sales tax for the purchase of coal to generate electricity, which is estimated to cost the state $86 million this fiscal year, rising to $89 million by fiscal year 2012.

This break, created in 1960, rewards utility companies for using coal instead of other fuel sources, such as natural gas, which is becoming popular nationally. And it doesn't have to be Kentucky coal; any state's coal, including West Virginia's, is given this tax break if a Kentucky utility buys it.

The exemption provides enormous financial relief to utility companies. Eastern Kentucky Power Cooperative in 2008 bought 4.6 million tons of coal — about half from outside Kentucky — for $282 million. Kentucky Utilities' parent company in 2008 bought 8.2 million tons of coal for $474 million.

"Fuel is definitely our single-largest expense," said Eastern Kentucky Power spokesman Nick Comer.

The utility companies say lawmakers could end this tax break if that's what the state wants, but the cost would be passed along to their customers. The companies said they're not sure what a 6-percent tax on coal would add to a typical electric bill, but at present, Kentuckians enjoy some of the cheapest power in the country.

"Everyone is feeling pinched in the pocketbook already," said Caryl Pfeiffer, KU's director of corporate fuels.

■ A break in the coal-severance tax — which mining companies pay to compensate the state for the loss of a natural resource — to cover the expense of transporting coal from the mine to the market. Created in 1978, this break is estimated to cost the state $21 million this fiscal year, rising to $22 million by fiscal year 2012.

On a national level, the transportation tax credit recognizes that it's expensive to haul coal out of the Appalachian Mountains, Webb said.

"Western states can put up a belt-line to carry coal over a distance without much interference because they have flat topography," Webb said. "We have mountains and mountain roads. Just getting the coal out can be a huge expense."

■ A tax credit for up to 3.75 percent of coal's market value for mining coal from thin seams or from areas that already have been heavily mined, both of which can be difficult and expensive. Created in 2000, this break is estimated to cost the state $2.3 million this year, rising to $2.4 million by fiscal year 2012.

'Who benefits?'

Critics say tax breaks typically are intended to help develop new industries or attract businesses that otherwise might go elsewhere. But coal is hardly a new industry, they said, and any national mining company that wants Kentucky coal must come here to dig it up.

While it's easier to mine coal in some Western states, such as Wyoming, because the land is flatter and seams are thicker, experts say Central Appalachian coal is recognized as being of higher quality; it produces more energy per ton when burned.

The state is needlessly subsidizing a profitable industry, said Thomas FitzGerald, director of the Kentucky Resources Council, an environmental group that lobbies in Frankfort.

"In an era of unparalleled state budget holes, where we've exhausted all of our easy revenue possibilities, we have to ask ourselves: What is the purpose of these tax breaks at this point? Who benefits?" FitzGerald said. "The coal industry should not need public assistance from us any longer."

Clean coal attempt

Some of Kentucky's specially targeted coal tax breaks have fallen flat.

The legislature met in special session in 2006 and passed "clean coal" exemptions potentially worth up to $90 million.

Kentucky lawmakers worked with Peabody Energy of St. Louis in an attempt to attract the U.S. Department of Energy's experimental FutureGen project, which was supposed to use new technology to build a coal-fired power plant that produced almost no greenhouse gases.

However, Kentucky was eliminated as a site for FutureGen, and President Bush later killed the project, calling it too costly. China, which is aggressively pursuing zero-emission energy sources, jumped in with its own GreenGen project. Peabody became a partner in China's effort.

According to the state budget office, nobody is claiming Kentucky's new clean coal credits.

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