Audit commission recommends eliminating Virginia’s coal tax credits

Virginia’s coal tax credits, some of the state’s largest economic incentives, “generate negligible economic benefits” and “no longer appear relevant” in a world where natural gas is rapidly displacing coal, the Joint Legislative Audit and Review Commission told legislators Monday morning ahead of the release of a new report on the efficacy of such incentives. 

Virginia has had two coal tax credits on its books for the past few decades. The Coalfield Employment Enhancement Tax Credit, known as the coalfield tax credit, can be used by any coal-related company and was adopted in 1995 to make Virginia more competitive in the coal markets. The Virginia Coal Employment and Production Incentive Tax Credit, known as the electricity generator tax credit, was first established in 1986 to encourage power plants to buy coal for electricity generation. 

Monday’s JLARC report recommends the General Assembly eliminate both.

Between fiscal year 2010 and fiscal year 2018, Virginia spent about $315 million on the tax credits, but JLARC estimated they generated fewer than 10 jobs, less than $1 million in state GDP and less than $1 million in personal income for every $1 million Virginia spent on them.

By comparison, JLARC Chief Economic Development and Quantitative Analyst Ellen Miller said the median benefits generated by state incentives are 60 jobs, $10 million in state GDP and $5 million in person income per $1 million spent by the state. 

Overall, JLARC estimated that between 2010 and 2018, “the Virginia economy lost 35 jobs, $21 million in Virginia GDP, and $5 million in personal income because of the credits.”

Circumstances have also changed significantly since the tax credits were first introduced. After legislative changes, the coalfield tax credit today applies only to the high-quality metallurgical coal used in steel production, a market in which Virginia has thrived. And “since 2015, Virginia has been as productive or more productive than states in the Central Appalachian region,” said Miller.

Recent changes in global energy markets and the Virginia Clean Economy Act passed by the General Assembly this spring have also curtailed the usefulness of the electricity generator tax credit that incentivizes power plants to use Virginia coal, JLARC found. 

“Natural gas has replaced coal as the major fuel source for power generation in the U.S. and in Virginia,” said Miller. “In fact, most coal-fired power plants in the state have already retired, with about 10 retiring in the past decade.” 

Of Virginia’s three remaining coal-fired power plants, the Chesterfield Power Station is slated to close its coal units by the end of 2024 under the Clean Economy Act and buys all of its coal from out of state, the JLARC report said. The Clover Power Station in Halifax, jointly owned by Dominion and Old Dominion Electric Cooperative, is projected under Dominion’s most recent long-term plan to close by 2025 and in 2018 only bought 26 percent of its coal from Virginia.

The remaining coal-fired plant, the Dominion-owned Virginia City Hybrid Energy Center in Wise County, gets roughly 99 percent of the coal it uses from waste or gob coal at a nearby abandoned mine, rather than recently mined coal, the report says. Consequently, “the credit is not needed to incentivize the plant to purchase Virginia coal,” Miller told legislators Monday.

This is not the first time JLARC has expressed reservations about the coal tax credits. In 2012, the commission warned legislators that despite reducing state tax revenues by more than $30 million in 2008 alone, “declines in Virginia coal mining activity appear unaffected by the tax credits.”

“External and largely uncontrollable factors also appear to drive coal production and employment, suggesting that the credits could only have limited impact,” the 2012 report found.  

Lawmakers, however, have sought to preserve the credits, particularly the coalfield tax credit that expired at the end of 2016 (the electricity generator tax credit has no expiration date).  Former Gov. Terry McAuliffe vetoed attempts to revive it, citing JLARC’s 2012 study to argue that “it would be unwise to spend additional taxpayer dollars on a tax credit that has fallen so short of its intended effectiveness.” In May 2018, Gov. Ralph Northam restored a whittled-down version of the coalfield tax credit.