severance tax - n. A tax imposed by a state on the extraction (severing) of natural resources, such as oil, gas, timber, coal or other minerals.

Compiled from the American Heritage® Dictionary of the English Language, 4th Edition copyright © 2000, Houghton Mifflin Co.

Introduction

The creation of the coal severance tax in 1972, thirty-five years ago, was an important milestone for Kentucky. It recognized that coal was a finite natural resource, an asset of the “commonwealth” and that the people of Kentucky should get more than wages from coal mining.

From the beginning, questions about how and where to spend the monies generated by the coal severance tax have always been present. The counties that have borne the brunt of the environmental, social and economic costs of coal mining have always felt a strong and justified entitlement to those funds. For those communities where coal has dominated the economies and the politics for over 150 years, the severance funds are seen as a potential key resource for creating more diverse, stable and wholesome communities.

Click to see a diagram showing where Coal Severance money goes

Who Controls and Who Benefits?

It took several years of debate after passage of the severance tax before the coal producing counties claims were legislatively recognized.  The 50% “return to the counties,” agreed upon in the late 1970s turned out to be lip service. By 1992 only 7.6 percent of the $2.7 billion dollars that the tax had raised had over twenty years had gone back to the coal counties[*].  Legislation in that year created a four year phased increase, again reaching for the mystical 50%.  This effort once more proved to be in theory only and the funds created from coal severed in the communities throughout Kentucky remains to this day under the controlled and legislative whims in Frankfort.

The Legislature and Kentucky’s Governors have maintained a firm grip on the coal severance funds. They have consistently use “line-item” allocations and state bureaucratic programs to not only direct and restrict the usage of severance funds, but to make appropriations from the portion designated “to be returned” to the local communities.  The Legislature has gone so far as to give coal severance funds back to the coal industry, such as requiring counties to spend severance funds to maintain  “coal-haul roads”, the same roads used and destroyed by the coal companies.  In addition, Kentucky’s Worker’s Compensation Fund, over-burdened by mining caused claims and underpayment by coal companies, is annually propped up by a $19 million dollar “off the top” transfer of severance funds.

A New Raid on Coal Severance Funds

Kentucky currently subsidizes the coal industry with over $97.4 million in tax credits, tax expenditures or direct support, including $26.7 million that comes from the coal severance fund[*].  To add insult to the injury of local coal dependant communities, on August 30, 2007, Kentucky’s Governor Ernie Fletcher signed into law House Bill 1 of the 2007 Second Extraordinary Legislative Session. In the name of economic development, HB 1 uses coal severance funds to subsidize a new wave of coal related industry – the conversion of coal to a gaseous or liquid fuel[*].

Dollar wise, most of the HB1 incentives would be rebates of up to 80% of paid coal severance taxes that would come off the top of the severance fund before any calculations are made to determine how much is returned to the counties. 

This legislation will affect the coal severance funds that counties receive. Counties receive coal severance funds from several programs, each controlled by different calculations but predominately determined by a county’s coal severance contribution. The fiscal impact may not effect counties for six years, as the permitting process may take up to two years, the building phase three years, and the delay in incentive payment one year after operations begin.

The “Fund for the Future”

The severance tax revenues generated from the removal of Kentucky’s natural resources remain a potential key to creating a better future – beyond coal – for Kentucky’s coalfield communities.  We have much to be proud of and to build on, including skilled, eager workers; resilient communities with a rich culture; and beautiful, natural resources such as mountains, forests, and water.  But we must be smart to create a just and prosperous future, and it won’t happen if we continue to not only allow the coal industry to control the economy and wipe out our land, water, homes, and communities but to also let them have Kentucky’s “fund for the future”.

To build a better future, we have to phase out the subsidizing of the coal industry and phase in efforts that invest in our people and our regions.  We can have good jobs and a strong economy if we invest in local people, create excellent schools, and demand a real democracy with a political leadership that will represent the interests of Kentucky, not coal companies. 

There are many possibilities for long-term, sustainable development in the coal regions and the funds generated by the severance taxes on natural resources can provide the monetary resources to seed the future. A secure, stable and prosperous future is possible for our coalfield communities if we demand it and our political leaders have the vision and courage to help make it happen.