Leveling Lowering the Playing Field

By Bob Decker
April 9, 2009

Montana’s Coal Trust Fund earned a place in the state constitution in 1977 after voters approved the idea of directing 50 percent of the coal severance tax collected each year into a permanent trust. After the Coal Trust grew to a sizable savings account for the state, the earnings of which funded public works projects, it became eminently raidable. “The rainy day is now” is the chorus lyric that accompanies every wave of effort to get at the principal.

The most successful attack on the Coal Trust was not a raid on the existing balance, however; it was a statute passed by the 1987 Legislature to halve the coal tax rate – from 30 percent to 15 percent. Advocates for the tax reduction argued that it would incentivize coal production in Montana, but state production remained relatively flat, at around 36 million tons annually, for several years after the tax break. During those years, of course, the Coal Trust grew at half its previous speed.

Today, the balance of the Coal Trust is about $800 million, and it has produced more well over $1 billion in earnings, which have been expended on numerous local and state infrastructure projects over the years. In addition, the Trust’s healthy principal has given Montana an excellent bond rating, which has lowered borrowing costs for other major projects in the state.

The coal tax is currently generating about $40 million per year, half of which goes into the Coal Trust. The other 50 percent is appropriated by the Legislature for immediate budgetary purposes, including the state’s long-range building program, conservation districts and the State Library Commission, the State Parks Trust, renewable resources debt service, the Cultural Trust, and other targeted areas, including the state’s general fund.

SB 499, sponsored by Sen. Jeff Essmann (R-Billings), would cut Montana’s coal severance tax in half – from 15 percent to 7.5 percent, for coal produced from existing or new mines that is consumed in power-generating plants or coal-gasification facilities that sequester carbon dioxide.

SB 499 passed the Senate, largely on party lines. In presenting the bill to the House Tax Committee on April 6, Sen. Essmann contended that the bill was “designed to protect the long-term health of the Coal Trust,” and that it would do that by allowing Montana’s coal tax severance rates to compete with those of North Dakota and Wyoming.

Essmann got support for his bill from lobbyists representing Great Northern Properties (alleged to hold the state’s largest portion of coal reserves), Rio Tinto (which operates the state’s largest mine, near Decker), the Montana Coal Council, the Western Environmental Trade Association (a pro-industry group), and the Montana Association of Oil, Gas, and Coal Counties (34 of Montana’s 56 counties).

Opposition to SB 499 was led by former GOP legislator Verner Bertelson, who has been the long-time spokesman for Montanans for the Coal Trust, the nonprofit that has defended the Coal Trust and Montana’s coal tax rates since the late 1970s. Bertelson argued that the budgetary and tax benefits from coal taxation and the existence of the Coal Trust have been steady and significant for Montana for decades, and that the promise of economic bounce from lower tax rates is just as hollow as it is frequent.

Another former legislator, Ray Peck, who served in the House as a Democrat from Havre, testified that he felt regret for having been part of the majority that lowered the coal tax in 1987. Peck said that the lower tax did not elevate coal production and did not boost the state’s economy.

Anne Hedges, lobbyist for the Montana Environmental Information Center, opposed the bill by observing that Montana law does not define carbon dioxide “sequestration,” nor does SB 499 provide any pathway for determining what degree and method of carbon dioxide management would be necessary for a mine to pay lower taxes.

For The Policy Institute, I opposed SB 499 and raised two points:

1) Contrary to the assertion of the bill sponsor and supporting witnesses, the language of the bill did not assure that the current 30 percent tax rate on coal would remain for existing production at Montana mines. In fact, with the growing seriousness of the climate change issue and the increasing probability of regulation to control carbon emissions, it is conceivable that carbon control requirements will be placed on both new and existing power plants in coming years. Such a scenario would make it possible for all coal produced in Montana to be taxed at the lower rate.

2) The argument that Montana must lower its tax rate on coal production to become competitive and “level the playing field” with respect to other states is an argument made for the benefit of industry, not for the financial well being of Montana’s citizens. If advocates for competitive taxes were true to the principal of establishing competitive tax rates for the benefit of the state, they would advocate for higher taxes in Montana on the production of oil and gas. Montana’s tax rates on oil and gas are lower than Wyoming’s rates, for example, yet Wyoming’s oil and gas production has grown much faster than Montana’s in the past decade.

In fact, Montana’s “competitive” tax rates on oil and gas, which are a third lower than Wyoming’s, have cost Montana more than $600 million in lost revenue in the past six years.

For most advocates of lower tax rates on resource extraction, the “competition” is usually between the industry and the state, not between the states. In the past 20 years, Montana’s legislators have consistently competed for industry and have not negotiated assertively and adroitly (i.e., “competed”) for the interests of Montana residents and taxpayers.

The House Tax Committee did not take action on SB 499 on the day of the hearing.

Update: On April 8, the House Tax Committee tabled SB 499.