WV Coal Tax Relief - Economic Impact - FINAL 02-14-2016 (1)

1February 15, 2016

ECONOMIC IMPACTS FROM A REDUCTION IN WEST VIRGINIAS COAL SEVERANCE TAX RATE

EXECUTIVE SUMMARY

Legislation has been proposed that would reduce the West Virginia Coal Severance Tax ratefrom 5% to 2% (with no change to the 0.35% county share).1 PwC has been asked to evaluatethe economic consequences of such a reduction in the coal severance tax. In this report, wefirst review the economic environment of the coal industry in West Virginia and then estimatethe potential employment impacts from the proposed reduction in the coal severance tax.

Coal mining production and employment have been declining rapidly in the State. While thedecline of the West Virginia coal industry is due to a number of factors that are expected tocontinue, PwC estimates that some of the anticipated decline in coal production and coalemployment could be avoided with the tax reduction. Our base case estimate is that theproposed 3% tax rate reduction would benefit the West Virginia economy by providing:

An increase of 1,864 jobs in West Virginia, including:o 464 direct coal mining jobso 345 direct coal transportation jobso 490 indirect jobs in supplier industries (upstream supply chain)o 565 induced jobs due to household spending by those employed above

An increase of $132 million in labor income paid to West Virginia workers An increase of $299 million in West Virginia GDP

A reduction in the Coal Severance Tax rate will make coal produced in West Virginia more costcompetitive with coal produced in other states, allowing for increased sales of West Virginiacoal and increased coal production in West Virginia. The current 5% tax must be largelyabsorbed by West Virginia coal producers in order for West Virginia coal to be purchased byutilities who can also purchase coal produced in surrounding states (with lower severancetaxes) or substitute lower cost natural gas. The lower net-of-tax price received by West Virginiacoal producers results in lower wages for West Virginia miners and less West Virginia coalproduction than in the absence of the severance tax. Electric utility customers make up for thereduced West Virginia coal production by purchasing more out-of-state coal and natural gas.The requested 3% severance tax rate reduction would work in the opposite direction. With thetax reduction, West Virginia coal producers would receive a higher net-of-tax price for coal andtherefore allow for increased production while remaining cost competitive with coal producedin neighboring states. (Alternatively, if the tax rate reduction is viewed as decreasing prices ofWest Virginia coal to electric utility customers, demand for West Virginia coal will increase, alsoresulting in increases in West Virginia coal production and employment.)

1 See: West Virginia Coal Associations WV Coal Legislative Program 2016.

2ANALYSIS

1. Introduction

Legislation has been proposed that would reduce West Virginias current coal severance tax rate from 5percent to 2 percent for the purpose of making coal more competitive with competing energy sourcesand fuel production from other states, and protecting West Virginia jobs. This report providesbackground information on the current condition of the coal industry, the factors affecting the demandfor coal, the impact of the severance tax on coal markets, and the economic effects of the proposed taxrate reduction, including the impact on jobs, labor income, State GDP, and total output. A technicalappendix provides additional information on the estimation of the economic effects.

2. Background

As the U.S. Energy Information Administration (EIA) reported in the January 8, 2016 Today in Energy,2

Since reaching a high point in 2008, coal production in the United States has continuedto decline. U.S. coal production in 2015 is expected to be about 900 million short tons,10 percent lower than in 2014 and the lowest level since 1986. Regionally, productionfrom the Appalachian Basin has fallen the most. Low natural gas prices, lowerinternational coal demand, and environmental regulations have contributed to decliningU.S. coal production . . . . The largest decline in coal production was in the CentralAppalachian Basin, largely because of its difficult mining geology and high operatingcosts. Coal production in the Central Appalachian Basin in 2015 was 40 percent below itsannual average level over 2010-14.

The EIAs Short-Term Energy Outlook released February 9, 2016 estimates that U.S. coal production willfall to 834 million tons in 2016, and to 841 million tons in 2017, down from 1 billion tons in 2014, and891 million tons in 2015.3

Other recent EIA data show West Virginia coal production for the quarter ending September 2015 wasdown 13.5 percent over the prior year, with the southern part of the state experiencing a 21.8 percentdecline.4 The demand for coal, and especially West Virginia coal, has declined rapidly and with it, sohave jobs. Since the first quarter of 2012 through September 30, 2015, West Virginia coal miningemployment has fallen by about 8,400 jobs or 37 percent (see Figure 1).5 Jobs fell 13 percent within the6 months from March 31 through September 30, 2015,6 with more losses announced since then.7 Coalsale revenues have declined faster than tonnage because coal prices also have fallen (see Figure 2).8

Major coal companies are in bankruptcy, including Alpha Natural Resources Inc., Arch Coal Inc., Patriot

2 http://www.eia.gov/todayinenergy/detail.cfm?id=24472 (downloaded January 11, 2016)3 http://www.eia.gov/forecasts/steo/report/coal.cfm (downloaded January 13 2016)4 http://www.eia.gov/coal/production/quarterly/ (See Table 2 downloaded January 21, 2016)5 http://ledextract.ces.census.gov/ (downloaded 12-24-2015) and www.SNL.com (downloaded December 17,2015). Census data are from state unemployment insurance filings reported through the end of 2014 and thesedata are extended based on SNL reporting through September 30, 2015.6 www.SNL.com (downloaded December 17, 2015)7 http://www.theintelligencer.net/page/content.detail/id/650389/-Significant--Layoffs-Expected-at-Murray-Energy-Mines.html8 http://www.eia.gov/coal/markets/, downloaded January 18, 2016

3Coal Group, and Walter Energy Inc., which has contributed to job losses and increased risks to retireespensions. According to SNL Energy, 49 coal companies have filed for bankruptcy since 2012.9 The Stateand county governments are similarly suffering due to their heavy reliance on tax revenues from coaland coal-related economic activity. Coal severance tax collections, which provide revenues for both theState and the counties, have been on a continuous decline (see Figure 3) at about a 10.5 percent annualrate.

9 https://www.snl.com/InteractiveX/article.aspx?ID=35032322&KPLT=4, reported and downloaded Jan. 11, 2016

4Figure 1. West Virginia Coal Mining Employment, 20122015 Q3

Sources: Census LED indicators and www.SNL.com

Figure 2. NYMEX Central Appalachian Coal Near-Month Settlement Price, 2012present

Source: http://www.eia.gov/coal/nymex/ and www.SNL.com (downloaded February 4, 2016)

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5Figure 3. West Virginia Coal Severance Tax Collections (monthly)

Source: West Virginia Department of Revenue (provided December 21, 2015)

3. Factors Affecting Demand for Coal

Most causes of coals decline are well understood and include challenging environmental restrictions oncoal-powered electricity generation, intense competition from low natural gas prices, and the impact ofthe high value of the dollar on export sales, with U.S. coal export tonnage down 24 percent for the first 3quarters of 2015.10 These factors have led to both immediate and permanent long-term damage to theindustry. Major factors affecting the industry include the following:

Regulatory environment. Global and national concerns with climate change have led to policiesthat are discouraging the use of carbon dioxide emitting fuels, with coal being more carbonintensive than others. While there are a number of regulatory developments affecting theproduction and use of coal, perhaps the most significant is the EPAs Clean Power Plan (CPP)that requires each state to develop plans for statewide carbon dioxide emission standards forexisting fossil fuel-fired electric generating units. The CPP would reduce CO2 emissions 32percent as measured from a 2005 baseline by 2030, with compliance starting in 2022. Several

10 EIA Quarterly Coal Report, Third Quarter, 2015. See: http://www.eia.gov/coal/production/quarterly/ (SeeTables 7 and 8).

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6states have already committed to eliminate coal as a fuel source for their electricity productionwithin the next several years.

While the Supreme Court recently decided to stay the CPP, pending lower court review, theelectric utility industry is already well underway in transitioning away from coal. For example,according to SNL Energy, the President and CEO of the TVA said the EPA's plan was taken intoconsideration when the utility's most recent integrated resource plan was created . . . [and] thestay granted by the high court will not affect the TVA's action in any way."11

Coal-fired electric utilities are being retired or converted to natural gas, and wind, solar, andother renewable energy sources are being constructed and put on-line. The pace of this changeis highlighted in a recent SNL Energy report showing that new electric utility capacity additionsin 2015 were accounted for almost entirely by natural gas and renewables. With 14,468 MW ofcapacity additions, natural gas accounted for 35 percent, wind for 47 percent, solar for 14percent, water 1 percent, and other nonrenewables, including coal, for 2 percent. Together,coal, oil, and geothermal were less than 1 percent.12 Many major investment decisions arebeing made that will affect the demand for coal for years in the future.

Low natural gas prices. Changes in drilling technology have led to a large increase in domesticnatural gas reserves and expanded production, with much of this increase being attributable tothe Marcellus shale.13 According to EIA, between 2010 and 2014, U.S. natural gas productionincreased from 61 billion cubic feet per day (bcf/d) to 75 bcf/d. Over the same period,Marcellus production increased from 2 bcf/d to 13 bcf/d and now is about 16 bcf/d. Thisincrease in supply has pushed down natural gas prices and the lack of pipeline infrastructure inthe region has led to particularly large natural gas price reductions in the Marcellus. Low naturalgas prices are expected to persist for many years and natural gas is now highly cost competitivewith coal and is frequently displacing coal as a fuel source. While there will eventually be somerelief when more natural gas pipelines are completed, the new pipelines opened to date suggestthat any increase in prices will be modest in the near term. As a result, the coal industry hasexperienced new, lower-cost competition not only in West Virginia, but in all the markets whereWest Virginia coal has historically been sold, and this is expect to last into the foreseeablefuture.

Strong U.S. dollar. With the U.S. economy doing well relative to its major trading partners, thevalue of the dollar remains high, which has and will continue to hinder coal exports. Figure 4shows the large decline in coal exports since the beginning of 2012, with the most recent datashowing third quarter of 2015 exports down 55 percent from a recent high in the secondquarter of 2012.

11 See TVA on track with plant retirements despite Clean Power Plan stay, SNL Energy, 2/11/2016.https://www.snl.com/Interactivex/Article.aspx?id=35357588&KPLT=212 See: SNL Energy, Data Dispatch: Gas, wind contribute 82% of capacity additions in 2015, January 7, 2016.https://www.snl.com/InteractiveX/article.aspx?Id=34950800&KPLT=213 The Marcellus shale underlies most of West Virginia and extends into parts of Ohio, Pennsylvania, New York, andMaryland.

7Figure 4. Coal Exports, 20122015 Q3

Source: EIA Quarterly Coal Report, Third Quarter, 2015

4. Impact of Severance Tax on Coal Markets

Under current law, West Virginia imposes a 5-percent severance tax rate on the gross proceeds receivedfrom West Virginia coal production with 4.65 percent going to the States general fund and 0.35 percentto the counties. Reduced tax rates of 1- or 2-percent apply to the production of certain thin-seamscoal.14 An additional 56-cents per ton is used to redeem workers compensation revenue bonds. Thesebonds had been issued to pay off the old workers compensation debt. The Governor proposed in hisExecutive Message with the FY 2017 budget to pay off the remaining debt and terminate the 56-centsper ton severance tax.15 The Senate Finance Committee recently adopted this proposal.

Much of West Virginias coal production is used to generate electricity in West Virginia and other states.In 2014, EIA Form 923 data show 56 million tons of coal mined in West Virginia were used for thispurpose, with 19 million tons used for West Virginia electricity generation and 37 million tons exportedto produce electricity in other states. West Virginia electricity producers also imported 14 million tonsof coal from other states (see Table 1).

14 Coal produced by underground mining methods from seams 37 to 47 thick is taxed at 2% and coal producedfrom seams less than 37 thick is taxed at 1%.15 See: http://www.budget.wv.gov/executivebudget/Documents/VI2017.pdf (p. 6)

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8The high West Virginia severance tax discourages purchases of West Virginia mined coal by both out-of-state and in-state electric utilities.

West Virginias severance tax of 5 percent, plus 56 cents per ton, is higher than the severance taximposed in the states to which West Virginia exports coal as well as the states from which West Virginiaimports coal.

Table 1 shows the coal imported for electricity production in 2014 by each West Virginia power plantand the state in which the coal was mined. Of these states, Illinois imposes no severance tax. Kentuckyimposes a severance tax of 4.5 percent of the gross value of all coal severed and/or processed duringthe reporting period. In Maryland, a county coal severance tax of 30 cents per ton is imposed on surfacemined coal that is reported to the Bureau of Mines. The Ohio severance tax rate is 10 cents per ton withan additional tax of 1.2 cents per ton of coal imposed on coal mined by surface mining methods. Anadditional tax of 14 cents per ton of coal is imposed on coal produced from an area under a coal miningand reclamation permit. Depending on the balance in the states reclamation fund, this tax can varybetween 12 cents and 16 cents per ton. Pennsylvania imposes no coal severance tax.

Table 1. West Virginia Coal Imports for Electricity Generation (short tons)by West Virginia Plant and Coal Mining State, 2014

Source: EIA Form 923, http://www.eia.gov/electricity/data/eia923/

Table 2 shows the states to which West Virginia mined coal was delivered to electric utilities in 2014.Some these states also were significant coal producing states, such as Ohio and Pennsylvania where 8million tons were delivered to each in 2014. Various factors affect the cost of delivered coal, such asquality, quantity, and transportation. In order to make these sales, the West Virginia producer had toovercome the excess of the West Virginia severance tax over the minimal severance tax on Ohio coaland no severance tax imposed on Pennsylvania coal. Had the West Virginia severance tax been lower,sales of West Virginia coal to these and other states would likely have been greater.

IL KY MD OH PA Grand TotalCeredo 143,662 524,162 737,177 1,405,001FirstEnergy Fort Martin Power Station 100,332 14,185 360,109 474,626FirstEnergy Pleasants Power Station 53,601 3,034,838 3,088,439John E Amos 450,997 1,526,332 38,059 2,015,388Kammer 5,305 11,731 200,232 217,268Kanawha River 9,562 9,562Longview Power LLC 1,527,336 1,527,336Mitchell (WV) 675,818 675,818Mountaineer 8,674 1,155,930 75,007 1,239,611Mt Storm 2,021,142 1,139,354 3,160,496Philip Sporn 93,779 93,779PPG Natrium Plant 89,478 89,478Grand Total 143,662 1,922,230 2,021,142 5,832,494 4,077,274 13,996,802

Coal Imported from Mines in:WV Electricity Plant

9Table 2. West Virginia Exports for Electricity Generation in Other States, 2014

Source: EIA Form 923, http://www.eia.gov/electricity/data/eia923/

5. Economic Impact of Reducing Severance Tax Rate

The economic impact of the proposed rate cut from 5 percent to 2 percent will depend on how it affectsthe behavior of coal buyer and sellers.16 We first discuss how economic theory describes buyer andseller behavior and then present the results of our modeling.

a. Buyer and seller behavior

Whether West Virginias 5-percent severance tax is ultimately borne by the producer or the consumer isnot entirely clear. In a legal and accounting sense, the severance tax is, in many cases, passed forwardto the utility by contract. It also may be indirectly passed forward because the coal producer includes itin the delivered price as a cost of production when bidding for a contract. The utility, in turn, typically isallowed by a public utility commission to pass forward fuel costs, including the severance tax, tocustomers as part of the price of electricity.

In an economic sense, however, the utility must seek the lowest cost of fuel required to operate theplant. If the delivered price of West Virginia coal exceeds that of fuel from another supplier, the West

16 The proposed reduction from the current 5-percent rate to 2-percent would not affect the 0.35 percent going tothe counties or the thin seams tax rate.

State of plant No. of Plants Short tonsDE 4 70,243FL 78 2,264,698GA 9 159,030IA 12 1,027IN 189 1,361,838KY 49 505,978MA 10 760,439MD 44 877,565MI 89 1,332,931MS 7 286,775NC 233 7,134,627NH 10 102,804NJ 34 530,277NY 25 364,871OH 208 8,241,451PA 134 8,269,385SC 59 1,106,378TN 8 183,000VA 241 3,355,078WI 16 378,196Grand Total 1459 37,286,591

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Virginia coal producer must meet the lower price or lose the contract. In markets where West Virginiaproducers face ample competition from out-of-state coal producers or competing fuels, the tax will belargely borne by the West Virginia producer, resulting in a decline in the West Virginia producers net-of-tax selling price. Only when West Virginia producers face little competition will much of the tax to bepassed forward to the utility.

When the tax is borne by West Virginia producers in the form of a lower net-of-tax selling price of coal,this will lead to a decline in production as some production will no longer be profitable to undertake.Declining production will reduce mining employment and coal mining investment. Reduced profitabilityand reduced production may also place downward pressure on labor compensation. To the extentreturns on investment are reduced, new investment and maintenance of existing investment will bediscouraged and some mines may be shut down.

A reduction in the severance tax rate would operate in the opposite direction. A reduction in the taxrate would lead to a higher net-of-tax price for coal, thereby making some mines profitable to operatethat would otherwise be shut down. Production from existing mines would also be expected to increasewith the higher net-of-tax selling price. Increased production would increase coal mining employmentand coal mine investment.

Set against the background of todays weaker market for coal, the large declines in the demand for WestVirginia coal, and the decline in coal prices, which have led and are expected to continue to lead tomine closures, bankruptcies, and workforce reductions, a reduction in the severance tax rate mayreverse in part or slow these trends. Numerous factors have contributed to todays market for coal andWest Virginias high severance tax rate is not the only or even one of the larger causes. That said, WestVirginia coal production is uniquely burdened by its severance tax because the 5-percent rate is thehighest among all the coal producing states with which it competes.

The economics literature17 on the taxation of natural resources generally assumes severance taxes areborne by the producer and labor. The tax directly increases the cost of production and production willbe lower due to the tax. If the demand for coal is highly responsive or perfectly elastic, any attempt topass through the tax to the buyer will cause the demand for the sellers coal to fall to zero because thebuyer will switch to an alternative fuel source, such as coal from another state or natural gas.Correspondingly, a reduction in the tax rate will reduce production costs allowing more coal to be soldwith higher margins, which will increase production and employment. The tax cut would not be passedalong to the buyer in the form of a lower price because, under the assumption of a perfectly elasticdemand curve, the tax had previously been fully borne by the producer in the form of a lower net-of-taxprice.

An alternative interpretation is that severance taxes are borne at least in part by the buyer, therebyraising prices and reducing the amount of coal purchased. In this alternative, a reduction in the tax ratewill flow through to the buyer to the extent previously borne and will increase the amount of coalpurchased.

17 See, for example, a series of papers published in 1982 by The University of New Mexico School of Law, whichheld a Symposium on the Taxation of Natural Resources where several papers discuss the incidence and economiceffects of severance taxes. See: http://lawschool.unm.edu/nrj/volumes/22/v22_no3.php

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It is also possible for the severance tax to be partially borne by both coal producers and coal buyers. Ifthe responsiveness of the buyer to a change in prices is equal to the responsiveness of the producer to achange in net-of-tax price, the benefit of the tax reduction will be equally shared. In this case thepercentage increase in production from reducing the tax will be half what it would be when demand isperfectly elastic.

Our base case analysis assumes coal producers cannot raise the selling price of coal in response to theseverance tax. We assume that coal production responds positively to an increase in the net-of-taxprice, with a 1 percent increase in price leading to a 1 percent increase in production. As a result, coalproduction will increase in proportion to the reduction in the tax rate; that is, a 3 percentage pointreduction in the tax rate will cause production to increase by 3 percent. Under the alternativeinterpretation where the tax reduction is equally shared, production would increase by 1.5 percent. Wealso present analysis below under this alternative assumption.

As an example of our base case analysis, if 100 million tons were mined in the absence of a policychange, 3 million additional tons would be mined with the 3 percentage point tax rate reduction. Theanalysis can also account for a continuation of the declining market for coal. For example, if the demandfor West Virginia coal were expected to fall to 90 million tons without any policy change, the demandcould be expressed as instead falling to 92.7 million tons with the policy change. That is, the severancetax cut would reduce the decline by 2.7 million tons.

b. Economic impact

The IMPLAN Model18 is used to quantify economic effects of a reduction in the coal severance tax ratefrom 5 percent to 2 percent on West Virginias coal mining industry. The results are summarized belowand a more detailed description is provided in the appendix.

In describing these economic impacts, three separate channels are considered the direct impact, theindirect impact, and the induced impact that in aggregate provide a measure of the total economicimpact of the proposed severance tax reduction on the West Virginia coal mining industry. The directimpact is measured in terms of the jobs, labor income, and value added within the coal mining industry.The indirect impact is measured in terms of the jobs, labor income, and value added19 occurringthroughout the supply chain of the coal mining industry. The induced impact is measured in terms ofthe jobs, labor income, and value added resulting from household spending of labor and proprietor'sincome earned either directly or indirectly from the coal mining industry's spending. Because the coaltransportation industry (trucking, rail, and water borne shipping) is required to deliver coal to end users,it is included in the direct industry impacts.

These economic impacts represent all of the backward linkages of the West Virginia coal mining industrywith its suppliers. They do not capture forward linkages (i.e., the economic impact on production in

18 IMPLAN Group LLC, IMPLAN System (data and software),16905 Northcross Dr., Suite 120, Huntersville, NC28078 www.IMPLAN.com19 Value added refers to the additional value created at a particular stage of production. It is a measure of theoverall importance of an industry and represents the industry's portion of West Virginia gross domestic product("GDP"). Value added consists of: employee compensation, proprietors' income, income to capital owners fromproperty, and indirect business taxes (including excise taxes, property taxes, fees, licenses, and sales taxes paid bybusinesses).

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sectors that use coal as an input, such as electricity generation, steelmaking, or all the goods andservices that rely on those industries).

The economic impacts are gross impacts associated with the increased coal production. For example,they do not account for employment reductions in other sectors of the West Virginia economy asindividuals gain (or maintain) employment in coal production.

These estimates were developed using the IMPLAN model based on 2013 data, with adjustments toreflect 2015. The model shows 20,052 West Virginia coal mining jobs in 2013, while currentemployment is approximately 15,000 full-time and part-time jobs (see Figure 1). For 2015 as a whole,total coal mining employment was down by 23 percent from 2013 levels. The IMPLAN model also showscoal transportation employment with 7,341 jobs, or 37 percent of 2013 coal mining jobs. Thesetransportation jobs also will be directly affected by any change in the demand for West Virginia coal.They have similarly been reduced by 23 percent to reflect current employment levels. The direct impactof the decline in coal production on coal transportation can be observed in railroad statistics.Association of American Railroads data on coal shipments by rail for the U.S. as a whole illustrate thedecline during 2015 (see Figure 5).

Figure 5. U.S. Average Weekly Coal Shipments by Carload, 20122015

Source: Association of American Railroads (see: https://www.aar.org/Pages/Freight-Rail-Traffic-Data.aspx#monthlyrailtraffic), downloaded January 31, 2016.

The impact of providing a 3-percent cut in the severance tax rate is first modeled using a 3-percentincrease in production. This is estimated to result in 464 direct coal mining jobs, 345 directtransportation jobs, 490 indirect jobs in supplier industries, and 565 induced jobs arising from thehousehold purchases of the miners, coal transporters, and support jobs. In total, this tax rate reductionwould result in 1,864 West Virginia jobs. The labor income from these jobs, which includes wages andfringe benefits, totals $132 million. The associated value added (GDP), which measures the WestVirginia economic activity at all stages of production, totals $299 million. The total output associatedwith these jobs is $555 million.

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Table 3. Impact of a 3-Percent Increase in Coal Production on the West Virginia EconomyBase case analysis

Source: Estimates based on the IMPLAN input-output model, with adjustment for 2015 actuals.

Under our alternative assumption where the benefit of the tax rate reduction is equally shared betweenthe buyer and seller, the impact will be half that of our base case. This impact would result in 932 jobs,$66 million in labor income, $149 million of value added, and $278 million of output.

Both the base case and alternative estimates are based on current levels of production andemployment. To the extent that West Virginias coal mining production and employment continue todecline in future years, these estimates will be correspondingly reduced.

The coal industry is undergoing a rapid transition as coal-fired electric utilities are being retired orconverted to natural gas, and as wind, solar, and other renewable energy sources are constructed andput on-line. This long-term trend is likely to continue. A severance tax reduction, however, can affectthe timing and the magnitude of these changes and contribute to a delay in coal plant retirements, inthe conversion of electric plants from coal to gas, and potentially make it more economic to invest innew clean coal and carbon sequestration technologies.20

20 See, for example, Mississippi Powers planned conversion this year of a natural gas plant to a coal (lignite) plantwith carbon sequestration: https://www.snl.com/interactivex/article.aspx?ID=35019352&KPLT=2

Impact TypeEmployment

(Jobs)Labor Income

($Million)GDP ($Million) Output ($Million)

Direct EffectCoal mining 464 50$ 160$ 281$Coal transportation 345 30$ 46$ 107$Total Direct Effect 809 80$ 206$ 388$

Indirect Effect 490 30$ 53$ 99$Induced Effect 565 22$ 39$ 68$Total Effect 1,864 132$ 299$ 555$

2015

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APPENDIX

ESTIMATING THE IMPACT OF AN INCREASE IN COAL MINING PRODUCTION ON THE WEST VIRGINIA ECONOMY

1. Baseline

In 2013, the West Virginia coal mining sector directly provided some 20,000 full- and part-timejobs in the state, accounting for nearly 24 percent of the coal mining employment in the UnitedStates. An additional 7,300 jobs were required to transport the coal in West Virginia. Coalproduction in the state was valued at $12 billion for the year, which represented 21 percent ofthe total coal production in the country. Table A-1 shows the West Virginia coal industrys directemployment, payroll and benefits, GDP, and output in 2013.

Table A-1. IMPLAN West Virginia Baseline

Source: Estimates based on the IMPLAN input-output model.

2. The Simulation

An input-output model for West Virginia (developed by the IMPLAN Group) was used tosimulate the impact in our base case of a 3 percent increase in coal production by the WestVirginia coal mining sector. The impact estimate consists of the following two components:

a. Impact of the additional West Virginia coal production on the West Virginia coal miningsector (direct impact), its in-state supply chain (indirect impact), and impact attributable toconsumption spending from the additional earnings by the employees of the states coalmining sector and its in-state supply chain (induced impact); and

b. Impact attributable to the transportation of the additional coal products (from the 3 percentincrease in West Virginia coal production) to the final user.

Direct ImpactEmployment

(Jobs)Labor Income


Coal mining 20,052 2,083$ 6,715$ 12,054$Coal transportation

Rail 2,890 253$ 532$ 1,069$Trucking 4,387 276$ 307$ 682$Water 64 5$ 10$ 45$Total transportation 7,341 534$ 849$ 1,796$

Total 27,393 2,617$ 7,564$ 13,850$

2013

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These estimated economic impacts are gross impacts associated with the increased coalproduction. They do not take into account, for example, that individuals who gain employmentin coal production may voluntarily leave employment in other sectors of the West Virginiaeconomy.

3. The Results

The IMPLAN model was used to quantify the economic impacts for this simulation.21

A 3 percent increase in coal production by the West Virginia coal mining sector relative to its2013 baseline level is equivalent to $362 million of additional coal mining output in the state in2013 producers prices. According to the IMPLAN input-output model, the additional coalproduction by the West Virginia coal mining sector would lead to an increase of $73 million inoutput throughout its in-state supply chain (indirect impact) and another $54 million in outputin the West Virginia economy from consumption spending (induced impact).

Additionally, based on government estimates on the transportation margins for the coal miningsector, the 3 percent increase in West Virginia coal production is estimated to generate anadditional $106 million of margins for West Virginias transportation sector (primarily railroad,truck, and water transportation). On average, each $1 million of railroad transportation marginstranslates into 2.7 jobs. The comparable numbers for truck and water transportation are 1.4jobs and 6.4 jobs, respectively. On this basis, we estimate the 3 percent increase in coalproduction in West Virginia would add 362 new jobs to the states transportation sector. Thesenew jobs would similarly generate indirect and induced impacts on the West Virginia economy.

Overall, the 3 percent increase in West Virginia coal production is estimated to generate nearly2,200 new jobs in the state, add $149 million to labor income, contribute $356 million to thestates GDP, and $650 million in total output at the 2013 income level.

Table A-2, below, summarizes the direct, indirect, and induced impacts on the West Virginiaeconomy from a 3 percent increase in the states coal production.

21 IMPLAN is a well-known modeling system developed by the IMPLAN Group LLC for estimating economic impacts and issimilar to the Regional Input-Output Modeling System developed by the U.S. Department of Commerce. The model is primarilybased on government data sources. It can address a wide range of impact topics in a given region (county, State, or the countryas a whole).

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Table A-2. Impact of a 3-Percent Increase in Coal Production on the West Virginia Economy


4. Adjustments for 2015

IMPLAN provides inflators to adjust West Virginia economic activity to 2015 levels from the2013 base year analysis. While this methodology generally provides good results, IMPLAN couldnot have anticipated the decline in energy prices, the fall in the demand for coal, and the joblosses that actually occurred. A two-step process is required to adjust the 2013 results to reflectthe current state of West Virginias coal industry. The first step is to apply IMPLAN inflators tothe 2013 results in Table A-2 to produce the 2015 level impacts in Table A-3.

Table A-3. Impact of a 3-Percent Increase in Coal Production on the West Virginia Economy(before adjustment)


The second step is to adjust the estimated impacts shown in Table A-3 based on the IMPLAN2015 inflators to reflect a more current estimate of 2015 West Virginia coal industry activity.West Virginia coal mining employment has fallen sharply since 2013, with 2015 employment


(Jobs)Labor Income




2013


(Jobs)Labor Income




2015

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down by about 23 percent. Coal tonnage mined declined by about 5 percent from 2013 to 2015.The total value of economic output over the same period, reflecting the decline in both tonnageand prices, is approximately 24 percent. Due to the severity of these effects, the Table A-3results must be adjusted. The direct and induced effects of coal mining employment and laborcompensation are reduced by the actual decline in industry employment. Coal transportationemployment and compensation are more likely to change with coal tonnage than miningemployment, so these amounts are reduced by 5-percent. All indirect employment and laborcompensation effects are also reduced by 5 percent. Because GDP reflects both laborcompensation and output, the same percentages are used based on their relative contributionsto GDP.

Table A-4. Impact of a 3-Percent Increase in Coal Production on the West Virginia Economy(adjusted)

Source: Estimates based on the IMPLAN input-output model, with adjustment for 2015 actuals.

In sum, the base case estimate of a 3-percent increase in the demand for coal would increasetotal West Virginia employment by 1,864 jobs, labor compensation by $132 million, GDP by$299 million, and economic output by $555 million. Under our alternative assumption wherethe benefit of the tax rate reduction is equally shared between the buyer and seller, the impactwill be half that of our base case leading to a 1.5-percent increase in the demand for coal. Thisimpact would result in 932 jobs, $66 million in labor income, $149 million of value added, and$278 million of output.


(Jobs)Labor Income




2015

WV Coal Tax Relief - Economic Impact - FINAL 02-14-2016 (1)

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