by Suhail Barot
A very interesting (and mostly ignored) report was released recently entitled “The Impact of Coal on the Illinois State Budget, FY2011” by the consulting group Downstream Strategies, in collaboration with the Center for Budget and Tax Accountability. The report was commissioned by several environmental groups and found that the coal industry had a negative $20 million impact on the state’s budget during the 2011 fiscal year. This post discusses the findings in the report and discusses their implications.
The coal industry occupies an outsize role within discussions of the Illinois economy. However, it was found to represent 0.17% of private economic activity within the state. Illinois is not a major U.S. coal producer, as it is responsible for only about 3.2% of U.S. coal production. The coal industry’s production of almost 35 million tons, however, has a very small labor footprint, only directly supporting the employment of 3,481 miners, managers and upper-level staff (Downstream Strategies, pg. 1). Most of this coal is shipped out of state, with Illinois instead importing coal for in-state use, mostly from Wyoming.
These negative impacts arise primarily due to large state expenditures on grant programs to support the industry, particularly through the activities of the Office of Coal Development and the Coal Development Board. While it has been argued that these expenditures are justified due to the tax revenues and economic impact generated by the industry, the new “Impact of Coal” study cited above shows that this does not appear to be the case. Additionally, no evidence showing the efficacy of these programs exists.
From a public policy standpoint, this suggests that grants to the coal industry should be scaled back, and that the state impose a severance tax on coal extraction, which exists in 38 other states. West Virginia and Kentucky have severance taxes ranging from 4.5% to 5%, which are shared with local governments and can help pay for the disproportionate impacts that the industry can have on areas where it is located. These impacts are not quantified by the IL study, but they represent significant costs in areas such as health care for miners and those affected by pollution, environmental clean-up of pollution, ecosystem and watershed damage from mining, damage to roads from coal trucks, and more.
The negative impacts on the budget arise due to three main reasons:
(a) The direct taxes paid by the coal industry ($2.1 million) are much less than the state expenditures on regulatory agencies that oversee and support the industry ($1.4 million, primarily for mine-safety and training) and on tax incentives and grant programs for the industry ($12.6 million).
(b) Estimates of taxes paid by employees working for the coal industry generate about $15.9 million in payments of income, sales and other taxes, which are slightly outweighed by their proportional shares of state expenditures ($16.1 million).
Estimates of taxes paid by those engaged in economic activity indirectly generated by the coal industry (such as machinery, supplies, retail purchases, etc) are estimated at $28.5 million, which are outweighed by their proportional shares of state expenditures.