Coal prices way up; coal taxes, not so much

The price of coal mined in Central Appalachia (including Kentucky) has more than tripled in the past year, reaching $140 a ton last week, according to the U.S. Energy Information Administration.

At first, this looks like fantastic news for the social workers, educators, state police and others who work for -- or get services from -- Kentucky's budget-strapped state government.

Kentucky levies a 4.5 percent tax on the gross value of coal mined here (which is less than some other coal-producing states, like West Virginia). Last year, the coal severance tax yielded an impressive $221 million, according to the state Office of Property Valuation. So that sum is going to more than triple this year and ease the state budget crunch, right?

Wrong.

For one thing, the jaw-dropping figure of $140 a ton is the market's spot price for coal. But much of the coal in Kentucky is sold under contract for a lower, predetermined price to utility companies and other major buyers, said Greg Guess, assistant director of the state Department for Energy Development and Independence.

"That acts as a delaying effect when prices rise," Guess said.

So for the month of July, coal severance receipts were up 28 percent compared to July 2007 -- $22 million compared to $17 million -- which is a rare bright spot in the state budget right now, but still a lot less than the spot price would lead us to expect, Guess said.

As those coal-purchase contracts expire and the true value of coal in Kentucky soars with the spot price -- assuming the spot price stays this high -- the coal-severance tax really will haul in a lot more money, Guess said. Of course, everyone's utility bills will soar, too, including the state government's, he said. Ninety-two percent of electricity in Kentucky is produced by coal-fired power plants.

Also, coal companies can deduct their transportation costs before the severance tax is levied, and those costs are up, creating bigger deductions, said Randy Murray at the state Revenue Department. So higher gas prices are eating into the taxes from our higher coal prices.

Even when coal severance receipts are booming, only half of that money goes into the General Fund, which pays for the basic operations of state government (the afore-mentioned social workers, educators, state police, etc., etc.). The other half goes to the state Department for Local Government to pay for projects in the coal-producing counties of Western and Eastern Kentucky -- projects originally intended to help with economic development in those regions.