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NatGas, Coal Are Silver Lining As West Virginia Wades Through Budget Impasse

In the midst of a historic budget impasse, West Virginia's severance tax collections have again provided a glimmer of light, as higher natural gas prices and more coal sales in May helped push state revenue 20% above projections to $350.4 million.

It was the third time in the last four months that overall collections have increased, prompting Revenue Secretary Dave Hardy to conclude during a briefing with reporters this week that the fiscal year (FY) 2017 budget is likely balanced. He added that it would enable the state to increase revenue estimates for the FY2018 budget from $4.055 billion to $4.225 billion.

Since September, severance tax collections have beat the state's estimates, accounting for some of the highest gains in West Virginia's tax base and reflecting "a sharp upswing in natural gas prices and higher coal sales relative to last year," state officials said.

But it remains to be seen how a rosier outlook for revenue will help Democratic Gov. Jim Justice and lawmakers as they continue to wrestle through budget negotiations with just a few weeks before July 1 when FY2018 starts. Without a budget by then, the state faces a partial government shutdown.

"Gas led the way in May, coal led the way in April, but the gain that we're having is still nowhere close to getting us even remotely out of this mess," Justice said of the increasing severance tax collections during a press conference on Tuesday. "Nowhere even remotely close."

The new revenue estimates are still short of Justice's $4.35 billion budget proposal for FY2018. He vetoed a Republican-crafted budget in April over disdain for the millions in spending cuts it included. While Justice has called for no increase in the severance tax rate, he wants to increase the sales tax and lower income tax rates. Lawmakers remain at odds over spending and tax reform, meeting periodically during a special session that began in May to pass a budget.

"It has never stretched this far," said Robert Rupp, a professor of history and political science at West Virginia Wesleyan College, of the stalemate. "Even worse than that, we've never seen both sides being so far apart."

Only a few times in the state's history have two parties controlled the legislature and executive branch, Rupp said. Republicans have only led the legislature for a few years, and Justice, a wealthy businessman who previously had ties to coal before he took office earlier this year, is also new to the job. The budget impasse is a "perfect storm," Rupp said, especially when a tight budget environment and “partisan bickering” are factored in.

"That's why suddenly the spotlight is on a severance tax," He told NGI's Shale Daily. "We say we're getting away from coal; we're not. The gas is also still a crucial resource. The fact is that it's providing some of the only good news that this state has seen economically in the last year."

May severance tax collections were $49.2 million, or 47% above projections for the month. From July 2016 to May, collections have surpassed the $262.5 million projected for the entire FY2017 and are 17% above projections for the 11-month period at $274 million. May severance tax collections were also well above the $32.8 million collected at the same time last year.

West Virginia has long relied on coal and, more recently, natural gas to play an instrumental role in balancing its budget. The state is the nation's second largest coal producer and its seventh largest gas producer, according to the U.S. Energy Information Administration. Combined conventional and unconventional production reached a high of 1.3 Tcf in 2015, the latest period for which data is available.

Producers pay 5% for the value of both coal and natural gas. The legislature eliminated additional volumetric fees last year. The gains of recent months are a reversal for severance tax collections. They trended downward in 2015 because of the steep decline of commodity prices that occurred during the worst of the downturn and forced the state to make spending cuts

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