Coal Severance Taxes

The Effect of Western States' Tax Policy on the U.S. Coal Market

by Michael P. Ward

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Provides theoretical results and some simulation results on the effects of severance tax policy and on Western states' economic incentives to alter it. The principal effect of Western severance taxes is to shift production among states, benefiting the taxing states while penalizing Midwestern and South Central consumers of electricity. The national effects on coal production and its price are minor. The proposed limitation of severance tax rates to 12.5 percent will constrain only Montana and Wyoming. But, the concern over these two states' high tax rates is misleading: Western coal is much cheaper at the minemouth than comparable Eastern coal, so that high rates are applied to a low base. Montana and Wyoming, acting independently, have only modest ability to affect the national market; their economic power would increase greatly if they acted collectively.

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