The West Virginia Senate passed a bill on Wednesday that would sharply reduce the state's severance tax rate on oil, natural gas and coal production.

Republican-sponsored SB 705 passed the chamber by a vote of 19-15 along party lines. Just one Democratic senator broke ranks and voted with Republicans, who billed the legislation as necessary given the prolonged downturn in coal markets and depressed oil and natural gas prices.

The bill would lower the state's 5% oil, natural gas and coal severance tax to 4% in July 2017 and to 3% in July 2018. In all, the bill would lower the industries taxes by 40% by 2019. An analysis for the bill has not yet been released so it's unclear what it would ultimately cost the state.

The legislation comes at a time when West Virginia faces an $800 million budget deficit in fiscal year 2016, which begins in July. A large part of the shortfall is due to a dramatic decline in severance tax collections. Last year, Democratic Gov. Earl Ray Tomblin announced $170 million in budget cuts for state agencies, saying severance tax collections through November were running nearly $80 million below estimates as a result of low commodity prices (see Shale Daily, Oct. 6, 2015).

Tomblin does not support SB 705, saying the state can’t afford to lose the revenue. The bill was initially intended to lower severance taxes on the beleaguered coal industry, which had reportedly lobbied for it, but in an attempt to thwart the legislation, Democrats added an amendment to include the cuts for oil and gas. The Republicans, however, included them.

The bill was introduced in the House of Delegates on Thursday, where it was sent to the House Finance Committee. The state's 2016 legislative session ends March 12. It's unclear if the bill has enough support to pass the house.

The legislation comes on the heels of SB 419, which passed the legislature late last month and was signed into law on Feb. 29 by the governor, who recommended it. That bill eliminates the volumetric fees that natural gas and coal producers had paid in addition to the state's severance tax (see Shale Daily, Feb. 12). The state tax department said the fees would have generated $110 million in FY 2016.

The fees were passed in 2005 to generate revenue to pay the state's workers compensation debts. The law had imposed a 4.7 cent/Mcf fee on natural gas production and a 56 cent/ton fee on coal production. Those fees, however, were always meant to be phased out when the debts were paid off.