KY Policy Blog

Coal County Services Harmed by Severance Tax Collapse at Time of Transition

By Anna Baumann
February 24, 2016

A steep decline in the production of coal in recent years has reduced severance tax dollars going to Kentucky’s General Fund and back to coal counties, stretching already tight state and local budgets even further. In 2015, coal severance tax receipts were just 62 percent of what they were at their peak in 2009, and the forecast for the biennium estimates that in 2018, they’ll be down $185 million from 2009 receipts.

In yesterday’s meeting of the House Appropriations and Revenue Committee, legislators heard testimony from coal county judge executives whose severance tax revenues currently range from just 10 to 20 percent of what they were in 2009. The consequences of declining funds have included:

  • Layoffs and bans on overtime;
  • Shuttered community centers and recycling centers;
  • Higher sanitation bills and 911 fees;
  • Drastically reduced meals to senior citizens;
  • And federal dollars left on the table due to constrained local funds.

Going forward, the judges testified, too little revenue will jeopardize their ability to fulfill state-mandated duties including sanitation, parks, county jails, animal control and fire and rescue.

Unfortunately, given the tight budget situation Kentucky faces, many others have come before the legislature to explain that proposed cuts threaten their statutory and constitutional duties, as well. Declining coal severance taxes are just one cause of erosion in the state’s General Fund, a problem that is creating competition for inadequate dollars across all budget areas including public schools, higher education and health and human services.

Inadequate revenue has also meant less revenue sharing with local governments, which has dropped from 3.2 percent of Kentucky’s economy in 2009 to just 2.8 percent in 2013, the most recent date for which data are available (a loss of about $630 million). With less state support to invest in local services and infrastructure, school boards, city and county governments and special districts have leveraged what limited authority they have to raise revenue. Accordingly, in recent years there has been a push to expand the set of revenue raising tools available to local governments by allowing communities to levy an additional penny sales tax to pay for projects approved by voters.

Yet one of the problems with the local option sales tax – that it doesn’t work as well in smaller or depressed local economies – applies to coal communities’ general struggle to raise needed revenue: property tax rate hikes on small bases generate little revenue; occupational taxes on communities with high unemployment and low wages are inadequate to meet needs. The loss of coal and the good-paying jobs it once provided has been devastating for these communities. Coal employment has dropped 54 percent since 2011 in Kentucky, according to the Department of Energy Development and Independence.

After hearing the judges’ testimony, legislators expressed an intention to help coal communities. Two different bills in the House would increase severance taxes going back to the counties. In recent years, the General Assembly has used about half of coal severance tax dollars for the state’s General Fund and spent the remainder in coal counties through a combination of bonds for water and sewer projects, development of industrial sites, a variety of education and social programs, numerous local projects earmarked in the budget and grants to local governments for services. The state has also begun funding the Shaping Our Appalachian Region (SOAR) process through an operating grant and monies for a regional development fund.

Of course, increasing the dollars going directly to local governments would mean less in the General Fund to spread across the rest of the budget. But that’s not a good reason to withhold aid from coal counties which have provided Kentucky with decades of cheap energy—especially when dollars are needed to invest in strategies that help transition the economy.

It is, however, more proof that we won’t move forward as a state until we clean up the tax code so we have more to invest in such things as well as the public schools, community colleges, mental health services, child care assistance and other critical programs that help Kentucky communities to thrive.

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