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S Verdon, Paul E
323.3 A handbook of
L13hcto the Montana coal
88 severance tax
MONTANA STATE LIBRARY
S 328.3 L1 3hcto 1 988 c. 1 Verdon "° n " n T
A handbook ol the Montana coal severance
3 0864 00063262 3
A HANDBOOK
Of the
MONTANA COAL SEVERANCE TAX
Prepared for the
COAL TAX OVERSIGHT SUBCOMMITTEE
50th Legislature
by
Paul E. Verdon, Researcher
Research Division
June 1988
Published by
Montana Legislative ccunal
Room 138
State Capitol
Helena, Montana 59620
(406) 444-3064
MEMBERSHIP
COAL TAX OVERSIGHT SUBCOMMITTEE
Rep. George T. (Tom) Asay
Chairman
Rep. Dave Brown
Sen. William P. Yellowtail
Vice Chairman
Sen. John H. Anderson, Jr.
MONTANA LEGISLATIVE COUNCIL
Senator J. D. Lynch, Chairman
Robert B. Person, Executive Director
David D. Bohyer, Director,
Division of Research and Reference Services
Paul E. Verdon
Staff Researcher
Douglas Sternberg
Paralegal
TABLE OF CONTENTS
Page
PREFACE i
THE DEVELOPMENT OF THE COAL MINING INDUSTRY IN
MONTANA 1
LEGISLATIVE HISTORY OF THE MONTANA COAL SEVERANCE TAX
AND ITS PREDECESSOR TAX 13
LEGISLATIVE HISTORY OF THE COAL GROSS PROCEEDS TAX . 2 5
LEGISLATIVE HISTORY OF THE RESOURCE INDEMNITY
TRUST TAX 27
FEDERAL COAL TAXATION 31
LOCAL IMPACT ASSISTANCE FROM COAL SEVERANCE TAX ... 33
COUNTY LAND PLANNING PROGRAM 39
COAL GROSS PROCEEDS TAXED AT 4 5% OF VALUE 41
RESOURCE INDEMNITY TRUST'S PURPOSE TO PRESERVE
VALUES 4 3
CROW LAWSUIT DECISION DIMINISHES STATE'S TAXING
POWER 47
THE EPITOME/COAL: RETROSPECTIVE AND PERSPECTIVE ... 53
Appendix
STATES' TRUST FUNDS ARE DISSIMILAR PEAS IN
A POD A
STATE COAL SEVERANCE AND PRODUCTION TAXES — 1987 . . . . B
COAL SEVERANCE TAX PROCEEDS AND DISTRIBUTIONS,
TRUST FUND EARNINGS C
DISTRIBUTION OF FEDERAL COAL ROYALTIES D
PREFACE
During their first meeting of the 1987-88 biennium, the
members of the Coal Tax Oversight Subcommittee noted the
lack of a single source book containing all of the
historical background information necessary for full
understanding of the genesis, development, and
implementation of Montana's coal severance tax and of the
distribution, utilization, and preservation of its
proceeds. To remedy this failing, the Subcommittee asked
that its staff compile a handbook to embody the
information needed to assess the role of the coal
severance tax in Montana's future from the perspective of
its historical application and in relationship to other
taxes impacting the mineral industry. This document is
the fruit of that request. It is offered not as the final
authority on the subject, but as an easily usable
compendium of the status of the Montana coal severance tax
as the state enters an era of reduced tax rates.
1 1
THE DEVELOPMENT OF THE COAL MINING INDUSTRY IN MONTANA
The abundance of coal in Montana was recognized long
before the final third of the 20th century when the sudden
interruption of the flow of oil sent petroleum prices
soaring and gave readily available coal a new importance
as fuel for steam-electric turbines. The new demand
created an opportunity for enactment of Montana's coal
severance tax in 1975, with its promise of a bonanza for
the state.
A century earlier in the waning days of the bloody summer
of 1876, as General George Crook led his hungry soldiers
across southeastern Montana in pursuit of Crazy Horse's
Sioux warriors, who had two months earlier defeated the
soldiers at Rosebud Creek in a preamble to the event that
engraved Little Bighorn into military history, a reporter
accompanying the command observed and commented upon the
frequent outcroppings of coal. Only a few years later,
after the railroad brought to Montana its insatiable
appetite for fuel, the first significant coal production
in Montana was recorded in 1884 at the Gallatin-Park
County divide between Livingston and Bozeman, followed
soon by the opening of coal fields in the Great Falls and
Cascade County area and the opening of the Red Lodge-
Carbon County mines. Roundup-Musselshell County mines
came into prominence with the arrival of the Milwaukee
Railroad after the turn of the century, and finally, in
the twenties, the Northern Pacific Railroad opened the
extensive seams in the Colstrip area in Rosebud County.
"In reality, the early coal mining years of Montana belong
to the past and their influence and resurrection for the
future is probably nonexistent," wrote Dr. Thomas Finch of
the Montana College of Mineral Science and Technology.
"The mines served special markets and required extractive
techniques that are not economically transfer rable to the
present." Dr. Finch made his comments to the Coal Board's
1988 Montana Coal Symposium held in March.
Coal's initial dominance of the Montana energy scene was
brief, and by the early 1950s coal lost its dominance as
the many advantages of oil and gas and the temporary
sufficiency of hydroelectric power in the Pacific
Northwest rendered coal noncompetitive. After the
railroads' conversion to diesel power decimated the value
of coal, the Northern Pacific Railroad dealt off its
Colstrip reserves to the Montana Power Company, and,
within a decade, the utility company embarked on a long-
range program to produce coal for its own Billings
generating units and later for the Colstrip plants and for
other utility customers in the Midwest. The rapidly
declining United States oil and gas reserves and the
actual and threatened oil embargoes by the Arab producers
in the 1970s attracted to the Powder River Basin mining
companies that laid aside topsoil at a dozen locations in
Montana and in its neighbor states to open the coal beds.
Until the energy boom of the 1970s, Montana normally
contributed less than 1% of U.S. coal production. In
recent years, the state has produced 3% to 4% of the U.S.
total, an output that is limited by distance from markets
and the low energy content of Montana coal.
Dr. Finch traced the background of Montana's century-old
coal industry in his paper entitled History of Montana
Coal Mining , which, with Dr. Finch's permission, is
excerpted here.
. . . Initially, coal was developed to
produce coke and Montana was fortunate in
having coking coal . . .
Aside from the Great Depression, Montana
enjoyed a relatively stable production
through the 1920's and 30's. In fact, mine
production in 1936 was notable as the miners
had the highest production per manshift (10
tons) in the country. Montana's production
capability apparently peaked out at about 4
million tons per year. On an average, 3
million tons per year was a comfortable
output figure from 1910 until the decline of
1950.
During the 20-year hiatus from 1950 to 1970,
Montana coal suffered severely. Our
hydroelectric capability satisfied energy
demands and plentiful gas supplies slashed
coal use to a minimum. Ultimately,
electrical demand surpassed hydro ability and
coal development bloomed. Federal emission
regulations and the energy crunch focused new
interest on Montana's coal resources.
Production zoomed until state taxation
stifled further development and Montana
appears to have settled into a 30 million ton
a year level.
Montana's production may increase slowly and
even be impacted by local consumption. The
future is probably controlled more by
legislation than by quality, mining ability
or demand. As a state containing the largest
reserves of accessible coal, Montana's
contributions to the U. S. economy is [sic]
marginal .
AREA HISTORIES
Bozeman Fields
After initial mining at Lignite in eastern
Montana, the fine coal available near the
right-of-way at the "Bozeman" mines inspired
the Northern Pacific Railroad to develop the
Timberline Mine east of Bozeman in January,
1883. Reportedly, the 10,000 tons of 1883
and the 56,000 tons of 1884 all went for
railroad consumption. Some waste from the
Timberline and the Mountainside Mine a mile
to the west may be seen south of 1-90 between
Bozeman and the pass. Montana's first
sensitivity to out-of-state competition was
apparent in 1886 when a strike at the
Timberline Mine allowed the N.P. to acquire
coal from their mine at Roslyn, Washington.
As usual, many small operations began with
railroad transportation available. In 1882
through 1886 mining of more import began at
Cokedale, five miles west of Livingston on
the east portion of the Bozeman field. Owned
by the Livingston Coal and Coke Company,
Cokedale existed for 20 years until 1906 and
shipped coke from its 100 ovens to the
smelters of Montana. 1893 was a big year
with 58,000 tons of coal coked.
Simultaneously, Montana's best quality coal
was developed at Aldridge and Horr, across
the river and a few miles north of Gardner
[sic]. Ultimately, Montana Coal and Coke
Company - an Anaconda Co. associate -
developed the camp in 1896. Coke had been
shipped to Butte for the 10 years preceding.
A lengthy run of coke ovens still remains.
Despite its place as Montana's best quality
coal, the camp died in 1910. Of some note,
is the unionization by the Western Federation
of Miners in April, 1897.
Significant mining in Park and Gallatin
counties ended by 1910 as production was
displaced by more accessible coal that was
easier and cheaper to mine. Improved intra-
state transportation and equal coking quality
of flat lying seams wrote the demise of this,
the first coal mining area of Montana. The
area produced an average of 70,000 tons per
year for 25 years. Maximum production
occurred from 1895 to 1900 when over 120,000
tons per year were produced.
Great Falls Fields
Interest in Cascade County mining began with
minor development in 1885. Interestingly
enough, the competition and comparison for
the market here was with Fort McLeod and Coal
Bank ( Lethbridge) , Alberta. Ease of mining
and quality led to development at Sand Coulee
in 1887. In September, 1888, rail connection
was completed and heralded an era of mining
that continued until 1947 when dieselization
destroyed the railroad market. The
importance of transportation to this area is
notable as the 1888 Montana production
totaled 41,000 tons and in 1889 it jumped to
363,000 tons. Suddenly, coal was
economically significant to Montana.
Sand Coulee, Stockett and Belt were all
contemporaries and their development was a
function of Great Northern Railroad demand
and Anaconda smelter consumption. The
Castner Mine at Belt opened in 1885, had 100
coke ovens and coked 40,000 tons of coal in
the first year of 1895. The mine was sold to
Anaconda in 1889, and operated until 1913.
Lochray Coal at Sand Coulee replaced this
from 1914 until 1924. The Great Northern
Railroad supplied itself with coal
sequentially from the Merkle Mine in Belt,
the Nelson Mine in Sand Coulee, the
Cottonwood mines in Stockett and finally in
Giffen, south of Stockett. A large portion
of this coal was used for home heating across
Montana and North Dakota.
Overall, the Cascade County mines climbed
steadily to a peak of 1.27 million tons in
the 1918, WWI boom. Employment in the area
reached 1200+ miners, but production wandered
from 300,000 to 600,000 tons for most years.
Production seems to have been quite market
sensitive once Red Lodge in Carbon County
became a strong producer. This sensitivity
implies a poorer coal quality associated with
the difficulties of extracting thick seams
interspliced with thick (1 to 2 feet) shale
partings. These partings do not lend
themselves to easy mechanized mining and
quality control leaving a marginally
competitive reserve.
Lewistown Field
Although not an essential part of Montana's
coal production history, Fergus County
experienced a remarkable, albeit brief boom
in 1909, 1910 and again in 1916 to 1920.
Jumping from a lowly production of 23,000
tons in 1914, the county produced something
in the order of one quarter to one third of a
million tons by 1918 and 1919. It
immediately declined to its former glory,
never to be important again. The field is
considered to be an eastward extension of the
Great Falls' area coal.
Red Lodge-Bear Creek Field
Rocky Fork Coal Co. began development at Red
Lodge in 1887, and by 1891 the mines at this
location were the largest producers in the
state. The company had a ninety-nine year
contract to supply the Northern Pacific
Railroad. Competition with Cascade County's
introduction of mining machinery in 1893 left
them a poor second. The quality of coal is
apparent, however, by the acquisition of
Rocky Fork by Northwestern Improvement Co., a
subsidiary of the Northern Pacific.
In 1895, Carbon County became an identifiable
reality and production stood at 184,000 tons.
By 1906 the Rock Creek East Mine at Red Lodge
belonging to the N.W. Improvement Co.
produced over a third of a million tons, and
the county total was one-half million tons.
Cascade County produced twice as much but had
a poorer lead for the preceding five years.
In 1907, work began on the West Side Mine in
Red Lodge. The two (East and West) became
known locally as the Sunrise and Sunset
mines. This mine combined with the arrival
of the Yellowstone Park spur to open the Bear
Creek Field in 1906 pushed Carbon County over
Cascade County by 1908, and they never looked
back .
In 1910, the Bear Creek Mines just east of
Red Lodge belonged to the Washoe Copper Co.
of Butte, Montana Coal and Iron Co. of the
Northern Pacific, Bear Creek Coal,
International Coal and finally but certainly
not by modesty, the Smokeless and Sootless
Coal Co., another Northern Pacific mine. By
1918, 1800 miners in the county had increased
production to nearly 1.8 million tons.
The mines in this area produced high quality
coal that was equally functional in homes,
mine plants and railroads. The quality
maintained the market although the seams
dipped and were rather gassy. Montana's only
major coal mine disaster occurred at Montana
Coal and Iron Company's Smith Mine at Bear
Creek on Feb. 27, 1943. A gas and coal dust
explosion killed 74 miners.
The railroad on the Bear Creek side suspended
operations in July 1953, and the only
remaining mine, the Brophy, trucked into Red
Lodge until the middle 60's. Beartooth Coal,
a subsidiary of Portland General Electric,
attempted to reopen the Brophy No. 2 Mine in
1978 but stopped after a year as bad roof and
decreasing market demands removed any impetus
for new underground mining in Montana.
The depression of the 1930 's seemed to reduce
interest in coal production in this area.
The problems of mechanized mining in split
seams sealed its fate, and maximum demand in
1944 only yielded 637,000 tons.
Roundup-Bull Mountain Field
The Mammoth Coal Seam near Roundup was a
twelve foot acknowledged fact in 1883. The
Bull Mountain Field was awaiting, and it
waited until the Chicago, Milwaukee and St.
Paul Railroad arrived in 1907. By 1908, the
Republic Coal Co., a railroad subsidiary,
opened Republic Mines 1 and 2. Roundup Coal
Co. began the same year. Three years later,
county production stood at 700,000 tons.
Maximum production matched Cascade County in
1918 when 1000+ miners produced 1.2 million
tons. As a testament to the quality and good
mining conditions, production held at about a
million tons per year until the depths of the
depression. The fact that a large percentage
of the coal went for home heating also
stabilized the demand. World War II brought
tonnages back to 1.1 million tons. Natural
gas heating and railroad oil burners promoted
a constant decline from 1946 until the early
1960's.
The Bull Mountain Field contains a number of
minable coal seams of good quality. The
mines had little gas and very good roof
conditions. They were mechanized and showed
good productivity. Consolidation Coal opened
a test pit in 1971, removing 39,000 tons.
The mine didn't materialize as the Bull
Mountain Land Owners Association offered
considerable opposition. The area is still
the scene of a few local mines producing a
total of 20 to 30,000 tons per year by
surface methods. The Bull Mountain Field is
one of the most promising state locals [sic]
after the easily strippable eastern Montana
deposits are considered. It is certainly the
most viable site for underground development.
Colstrip-Rosebud Field
The vast coal resources of Eastern Montana
were apparent from the day Lewis and Clark
noted the "Big Dirty" seam across the river
from Miles City. The Northern Pacific
acquired considerable reserves of coal with
the odd numbered section grants to build the
railroad. In 1913, their geological work
demonstrated 90 million tons of strippable
coal with less than 100 feet of overburden
located south of Forsyth.
Following a 400 ton test burn, work began,
and in December 1923 the spur to Colstrip was
complete. Foley Brothers of Minneapolis
contracted to mine the coal and create the
town. By 1925, the power line from Billings
arrived and an electric dragline and shovel
were in full swing. Coal was loaded directly
into rail cars in the pit and taken to the
main line. The use of electric locomotives
in the pit created the first all electric
mine in the United States. By 1927, Colstrip
produced 730,000 tons, outproducing all areas
except Roundup.
Since surface mining was barely out of its
infancy, the Colstrip operation was a major
phenomenon in the west. Production averaged
50 tons per man-shift and mining statistics
were awry. The possibilities of low cost
coal were enormous, but aside from rail
consumption the market was nebulous. The
19445 [sic] production highs of slightly over
2.5 million tons per year adequately
demonstrated the future of Montana's
strippable coal.
Waiting for a market, the mine closed in 1957
as dieselization became universal. Happily,
the equipment and productivity waited
patiently for Montana Power to enter the
steam-electric generation era.
Modern History
Although Colstrip demonstrated the real
potential of Montana coal, the state
production declined to a mediocre 300,000
tons in 1960 — a level below the first big
year of 1889 when Cascade County came on
stream. This actually reflected the
condition of coal mining throughout the U. S.
8
Everyone awaited new market developments for
our most plentiful energy source.
The consumption of utility coal began
modestly in 1958 when Montana-Dakota
Utilities started their plant in Sidney. The
coal was mined at Savage by their subsidiary,
Knife River Coal Co. By 1965, a fairly
maximum consumption of 300,000 tons per year
was reached.
The demand for steam-electric coal finally
arrived when Montana Power Co. acquired
Colstrip and its equipment and in 1968 began
production for their steam plant in Billings.
Almost simultaneously, Peabody Coal began
operations at their Big Sky Mine just south
of Colstrip in 1969. These operations
preceded the energy crisis and are tribute to
rail accessibility, Northern Pacific
marketing, and foresight by the parent
companies. Decker Coal emerged in 1970 after
running a 19 mile spur from Sheridan,
Wyoming .
Although the energy crisis had not made
itself fully apparent, Montana's low sulfur
coal was in demand due to Federal regulation
of emissions. Westmoreland Resources'
Absaloka Mine came on stream in 1974 and
these initial mines all reaped the benefit of
energy crisis contracts. By 1976, both
Decker and Colstrip were part of the top ten
U.S. mines.
Contemporary environmental concerns and
mining growth met head on in Montana. The
1973 Legislature passed reclamation laws that
concerned surface mining — particularly the
enforcement aspects. Before this had
significant impact, however, similar Federal
legislation passed to restore Montana's
competitive position. The ultimate blow to
marketing came in 1975 when the Legislature
adopted a 30% severance tax.
Whether this tax exists as a direct attack on
mining or as a defensive mechanism to
ameliorate mining impact is a moot question.
Regardless of its intent, the ultimate impact
was the immediate cessation of mine
development. The existing mines passed on
the tax through their active contracts and
new contracts for Montana slid to Wyoming.
The only mine opened since 1974 is the Spring
Creek Mine of Nerco located near Decker.
This mine opened in 1980 on the leading edge
of the coal market collapse. Capable of 10
million+ tons per year, they produced
slightly more than 2 million tons in 1983.
Although the world coal market is poor,
recovery seems prevalent with growth in 1984
averaging 9% over 1983. This isn't new
growth, just reproduction over the previous 3
year's [sic] decline. Montana's surface
minable coal reserves are marketable because
of their low sulfur content and relatively
low stripping ratios. Proposed Federal
legislation on utility coal exhaust scrubbing
may remove a portion of the low sulfur
desirability. The low stripping ratio tends
to be offset by the high tax. Within a few
years it is conceivable that Montana will
drop from its 10th place in state production
(3.7% nationally). We have already dropped
4.5 million tons from the 33.3 million tons
of 1981 to 28.8 million in 1983. Wyoming,
the largest state producer and our adjacent
competitor produced a new high of 112 million
tons in 1983.
Conclusion
Montana's coal mining history over the past
100 years has covered a large portion of our
minable resources. The work before 1960
satisfied the smelters, mines, railroads and
home heating requirements. The coal deposits
that were economic early were developed by
rail accessibility as is coal now.
The early competitive coals were remarkable
for their coking qualities but suffered from
partings requiring hand sorting within and
without the mine. The strongest underground
reserves are located south of Roundup in the
Bull Mountain Field. They will probably lie
in wait of higher demand and prices. They
certainly represent an excellent source of
domestic coal for home heating if gas prices
usurp the convenience of piped energy.
The strippable resources of eastern Montana
are tremendous and could supply a significant
portion of U.S. demand for many years.
Further development will be constrained by
taxes, Federal regulations and rail access.
10
This last point will slow development even if
the first two did not exist.
It is difficult to locate many of the old
mines now and when the Abandoned Mine
Reclamation Fund is applied everywhere, only
stories will remain. It is doubtful that any
of the early coal mining areas will ever see
sizeable production again.
11
12
LEGISLATIVE HISTORY OF THE MONTANA COAL SEVERANCE
TAX AND ITS PREDECESSOR TAX
Chapter No. 155, Laws of 1921 imposed a coal mines
license tax of 5 cents per ton on coal mined in
Montana.
Chapter No. 200, Laws of 1939 exempted the first 50,000
tons of a mine's annual production from the coal
mines license tax.
Chapter No. 244, Laws of 1967 limited the application
of the coal mines license tax to strip mines only.
Chapter No. 245, Laws of 1967 allowed the licensee a
credit against the coal mines license tax of one-half
of the reasonable value of reclamation work performed
on strip-mined lands.
Chapter No. 355, Laws of 1971 limited the credit for
on-site reclamation work to a maximum of 1 cent
per ton on the coal mined; reduced the amount of
coal exempt from taxation annually to 5,000 tons;
and revised the tax rate according to Btu content
per pound of coal:
6.000 Btu or less, 4 cents per ton;
6.001 to 7,500 Btu, 6 cents per ton;
7,501 to 9,000 Btu, 8 cents per ton; and
9,001 Btu and above, 10 cents per ton.
Chapter No. 432, Laws of 1973 removed the tax credit
for on-site reclamation work and increased the tax
rate based on Btu content per pound of coal:
7.000 Btu or less, 12 cents per ton;
7.001 to 8,000 Btu, 22 cents per ton;
13
8,001 to 9,000 Btu, 34 cents per ton; and
9,001 Btu and above, 40 cents per ton; and
allocated 1 cent per ton of the strip mine coal
license tax to the general fund of the county in
which the coal was mined and deposited the balance
of the revenue in the state general fund.
Chapter No. 250, Laws of 1974 increased to 3 cents per
ton the portion of the coal mines license tax
allocated to the general fund of the county where
the coal was mined.
Chapter No. 499, Laws of 1975 approved and submitted to
the people for ratification a constitutional
amendment requiring the deposit into a permanent
trust fund of a portion of the proceeds of the
coal severance tax with the principal of the trust
to remain inviolate unless three-fourths of the
members of the Legislature vote to appropriate
money from the principal. The earnings of the
trust are available, however, for appropriation by
the Legislature. At least one-fourth of the coal
severance tax proceeds were to be deposited into
the trust until December 31, 1979, after which at
least one-half must be deposited. Approved by the
voters of Montana at the November 1976 election.
Chapter No. 501, Laws of 1975 allocated from the coal
mines license tax or coal severance tax 2.5% of
total collections until December 31, 1979, and
thereafter 4% of total collections to the
alternative energy research development and
demonstration account.
Chapter No. 502, Laws of 1975 allocated portions of the
coal mines license tax or coal severance tax:
14
27.5% until July 1, 1979, and thereafter 35%
to the local impact and education trust fund
account;
until July 1, 1979, 10% to the coal area
highway improvement account;
10% to equalization aid for public schools;
until December 31, 1979, 1% to the county
land planning fund;
2.5% to the renewable resource development
bond account; and
until July 1, 1979, 2.5% for acquisition of
sites and areas for state parks, state
recreational areas, state monuments, or state
historical sites, and after June 30, 1979, 5%
to the trust and legacy fund, income from
which may be appropriated for acquisitions of
sites and areas described above; and
authorized the Coal Board to award grants not to
exceed seven-elevenths of the revenue paid into
the local impact and education trust fund account
and after June 30, 1979, not to exceed three-
sevenths of that revenue.
Chapter No. 525, Laws of 1975 removed coal from
application of the law on net proceeds of mines
and made coal subject to gross proceeds under the
property tax system; imposed a graduated severance
tax on coal, applicable to any producer who
produces 5,000 tons or more during a quarter-year:
surface mined, ranging from 12 cents per ton
or 20% of value, whichever is greater, for
coal of less than 7,000 Btu per pound to 40
cents per ton or 30% of value, whichever is
greater, for coal of more than 9,000 Btu per
pound;
underground mined, ranging from 5 cents per
15
ton or 3% of value, whichever is greater, for
coal of less than 7,000 Btu per pound to 12
cents per ton or 4% of value, whichever is
greater, for coal of more than 9,000 Btu per
pound;
allocated 3 cents per ton or 4% of the severance
tax on coal mined in a county, whichever is
higher, to that county until January 1, 1980,
after which the allocation became 3 cents per ton
or 3.5%, whichever is higher, of the severance
tax; and deposited in the general funds the
remaining proceeds not allocated by another
statute; and
allowed the Department of Revenue, in cases when
the coal miner is using the produced coal in an
energy conversion or other manufacturing process
or a person sells coal under a contract which is
not an arm's-length agreement or when a person
neglects or refuses to file a statement and tax
return, to impute a value to the coal that
approximates the market value f.o.b. mine.
Chapter No. 164, Laws of 1977 revised the exemption
from the coal severance tax to the first 20,000
tons of production each year.
Chapter No. 540, Laws of 1977 revised the distribution
of coal severance tax proceeds to conform with the
constitutional amendment creating the permanent
trust by applying statutory allocations to the
remainder of the proceeds after the trust fund
deposit and made these changes in allocations:
until January 1, 1980, to the county, 2% of
the severance tax on the coal mined in that
county;
increased the allocation to the alternative
16
energy research development and demonstration
account to 5% after December 31, 1979;
for fiscal years 1978 and 1979, 13% to the
coal area highway improvement account;
approved use for operation or maintenance as
well as acquisition of sites and areas of
one-half of the 2.5% allocation under Chapter
No. 502, Laws of 1975, and the deposit of the
remaining one-half in a trust for parks
acquisition or management and allowing income
from the trust to be appropriated for
acquisition, operation, and maintenance;
changed to seven-fifteenths the portion of
the allocation to the local impact and
education trust that the Coal Board could
award in grants after June 30, 1979; and
required that each county receive $3,000 per
year from the allocation for county land
planning plus a share of the balance of the
allocation that was to be apportioned among
the counties 40% according to the ratio of
each county's land area and 60% according to
the ratio of each county's population.
Chapter No. 549, Laws of 1977 appropriated from the
earmarked revenue account established for the
acquisition of parks sites and areas $50,000 for
the preservation and protection of works of art in
the Capitol and approved that purpose among the
uses for the income from the trust fund created in
Chapter No. 540, Laws of 1977.
Chapter No. 653, Laws of 1979 amended 15-35-108, MCA,
to provide that in addition to parks acquisition
and maintenance the income from the trust fund,
established in Chapter No. 540, Laws of 1977, be
17
appropriated one-third for protection of works of
art in the Capitol and other cultural and
aesthetic projects and two-thirds for the
acquisition, operation, and maintenance of sites
and areas described in 23-1-102, MCA (state parks,
recreational areas, monuments, or historical
sites) .
Chapter No. 694, Laws of 1979 allocated 1% of the coal
severance tax proceeds remaining after the
permanent trust deposit to the State Library
Commission to provide basic library service for
the residents of all counties through library
federations and for payment of the costs of
participating in regional and national networking.
Chapter No. 479, Laws of 1981 reduced the amount
allocated to alternative energy research from 5%
to 4.5% and allocated 0.5% to conservation
district operations.
Chapter No. 505, Laws of 1981 allocated 1.25% of the
coal severance tax proceeds to water development;
established within the constitutional permanent
trust three subfunds:
the coal severance tax bond subfund into
which the constitutionally dedicated receipts
from the coal severance tax must be
deposited;
the coal severance tax permanent subfund; and
the coal severance tax income subfund.
On each December 31 and June 30, the state
treasurer shall transfer to the coal severance tax
permanent subfund all money in the coal severance
tax bond subfund except the amount necessary to
18
meet all principal and interest payments on bonds
payable from the coal severance tax bond subfund.
Income and earnings from all subfunds must be
transferred to and retained in the coal severance
tax income subfund.
Initiative No. 95 (approved by the people November 2,
1982) required that one-fourth of all future
deposits in the permanent coal tax trust fund be
invested in the Montana economy, not through
direct loans but through emphasis on investments
in new or expanding enterprises; and created an
economic development fund, using a portion of the
interest from the coal tax trust fund.
Chapter No. 149, Laws of 1983 qualified the requirement
to retain in the coal severance tax income fund
income and earnings "until appropriated by the
legislature" .
Chapter No. 298, Laws of 1983 changed the designation
of the "subfunds" created in Chapter No. 505, Laws
of 1981, to "funds".
Chapter No. 303, Laws of 1983 increased the exemption
from the coal severance tax to 50,000 tons a year
but required a person who produced more than
50,000 tons a year to pay severance tax on all
production over 20,000 tons.
Chapter No. 326, Laws of 1983 amended 15-35-107, MCA,
to require the Department of Revenue to impute a
value on coal whenever the operator of a mine
requests the department to do so and whenever the
operator of a coal mine refines the coal by
drying, cleaning, or other processing designed to
19
improve the quality of the coal, and in the latter
instance "market value f.o.b. mine" means the
value of the coal subsequent to primary and
secondary crushing but prior to drying, cleaning,
or other processing. The imputed value is also to
be used for reporting the value of coal for
purposes of gross proceeds taxation.
Chapter No. 541, Laws of 1983 created the highway
reconstruction trust account and allocated to that
account for fiscal year 1987, 6% and for fiscal
years 1988 through 1993, 12% of the total proceeds
of the coal severance tax.
Chapter No. 677, Laws of 1983 created the Montana in-
state investment fund consisting of one-fourth of
the revenue deposited in the permanent coal tax
trust fund and the principal payments on all
investments made from that fund.
Chapter No. 246, Laws of 1985 amended 15-35-108, MCA,
to provide that for fiscal years 1986 through 1989
two-thirds of the income from the parks
acquisition trust may be used for the acquisition,
development, operation, and maintenance of any
sites and areas described in 23-1-102, MCA, and
after June 30, 1989, for the acquisition of sites
and areas described in 23-1-102 (state parks,
recreational areas, monuments, or historical
sites) and the development, operation, and
maintenance of sites acquired under
15-35-108(3) (f ) (ii), MCA.
Chapter No. 338, Laws of 1985 required that 15% of the
earnings of Montana in-state investment fund be
deposited in the permanent coal tax trust fund and
20
become part of the in-state investment fund.
Chapter No. 512, Laws of 1985 changed from "[o]n each
December 31 and June 30" to "from time to time"
the requirement stating when the state treasurer
must transfer money from the coal severance tax
bond fund to the coal severance tax permanent
fund.
Chapter No. 636, Laws of 1985 , the "New Coal Production
Incentive Act of 1985," allowed a tax credit of
33 1/3% of the severance tax on incremental coal
produced and purchased under an existing agreement
that was extended between January 1, 1985, and
June 30, 1987, for at least 5 years or under a new
agreement that was executed between January 1,
1985, and June 30, 1987.
Chapter No. 715, Laws of 1985 for fiscal years 1986 and
1987 only reduced the allocation to the
alternative energy research development and
demonstration account from 4.5% to 2.5% and the
allocation to the local impact and education trust
fund account from 37.5% to 26% of the coal
severance tax proceeds; allocated an additional 4%
to the highway reconstruction trust account for
fiscal years 1986 and 1987 only (these allocations
are applied against the severance tax proceeds
remaining after the permanent trust fund deposit
and the previous allocation to the highway
reconstruction trust account); and, after June 30,
1985, reduced to 23.08% the portion of the
allocation to the local impact and education trust
fund that the Coal Board could use to award grants
and loans.
21
Chapter No. 3, Laws of Special Session, June 1986
reallocated to the general fund for fiscal years
1987 through 1989 the 5% allocation to the parks
acquisition trust and struck the provision that
limited the use of two-thirds of the trust income
after June 30, 1989, only for sites and areas
acquired with funds allocated under 15-35-
108(3) (f ) (ii) , MCA.
Chapter No. 5, Laws of Special Session, June 1986
transferred to the general fund from the Coal
Board's allocation for grants and loans $680,000
for fiscal year 1986 and $1 million for fiscal
year 1987.
Chapter No. 19, Laws of Special Session, June 1986
revised the distribution formula for coal
severance tax proceeds by:
increasing to 30% for fiscal year 1987 the
allocation to state equalization aid to
public schools,
decreasing to 6% the allocation for fiscal
year 1987 to the local impact and education
trust fund, and
setting the share of the local impact and
education trust fund available to the Coal
Board for grants and loans after June 30,
1987, to seven-fifteenths of the revenue paid
in.
Chapter No. 608, Laws of 1987 reduced the coal
severance tax to a maximum of 25% in fiscal year
1990 and to a maximum of 20% after June 30, 1991,
with the following further reductions contingent
upon the production and sale of 32.2 million tons
22
of coal (which equals the average annual
production for calendar years 1983 through 1986)
during fiscal year 1988:
maximum of 25% during fiscal 1989 and 1990;
maximum of 20% during fiscal year 1991; and
maximum of 15% after June 30, 1991.
(The act also reduced the tax rates in the New
Coal Production Incentive Tax Credit Act to
conform with these rates.)
Chapter No. 461, Laws of 1987 required deposit in the
technology investment program debt service fund
from the coal severance tax permanent trust fund
such amounts, not to exceed $38 million, as are
necessary from time to time, after application of
all other money in the technology investment
program debt service fund, to pay principal of and
premium, if any, and interest on obligations when
due. After all obligations have been paid, any
interest, principal, royalty, and other payments
received by the Science and Technology Development
Board with respect to technology investments made
from money in the technology development account
must be deposited in the coal severance tax
permanent trust fund.
Chapter No. 662, Laws of 1987 revised the allocations
of the coal severance tax proceeds remaining after
the deposit in the permanent trust and the
allocation to the highway reconstruction trust
account by making certain selective changes and
authorizing one new use in the Growth through
Agriculture Act:
decreased from 6% to 4% until June 30, 1989,
to the local impact account and thereafter
23
20% to the local impact and education trust
fund account and 17.5% to the local impact
account; and
increased from 30% to 44.2% until June 30,
1989, and thereafter 10% to the state
equalization aid to public schools account;
allocated 2% to the Montana Growth through
Agriculture Act;
struck the 5% allocation to the general fund
made in Chapter No. 3, Laws of Special
Session, June 1986;
required that 2% of the earnings of the
permanent trust be redeposited in the trust
each year;
established a local impact account separate
from the education trust fund account, and
authorized the Coal Board to make grants and
loans from the local impact account;
directed that 10% of the income from the
education trust fund account go to the
Superintendent of Public Instruction for
postsecondary vocational-technical centers
and adult basic education programs, and of
the remaining 90% of the income 75% goes into
the state equalization aid to public schools
account and 25% goes to the Board of Regents
of Higher Education for use of the
institutions of higher education subject to
the appropriations of the Legislature; and
for fiscal years 1988 and 1989, reduced from
15% to 2% the portion of the earnings of the
coal severance tax trust fund that must be
deposited in the trust.
24
LEGISLATIVE HISTORY OF THE COAL GROSS PROCEEDS TAX
Chapter No. 525, Laws of 1975 required each person
mining coal to report by March 31 of each year to
the Department of Revenue the gross yield from
each mine during the preceding calendar year and
the value of the production. The department is
required by July 1 of each year to notify the
county assessor of each county in which coal mines
are situated of the gross proceeds of those mines
for the purpose of taxation. Section 84-301,
R.C.M. 1947, was amended to except coal mines from
net proceeds taxation under Class One of the
property classification system, to include the
gross proceeds of underground coal mines in Class
Three, to be taxed at 33 1/3% of full and true
value, and the gross proceeds of strip mined coal
in Class Nine, taxed at 45% of full and true
value.
Chapter No. 693, Laws of 1979 revised the property tax
classification system to designate in Class Two
gross proceeds of underground coal mines and gross
proceeds of coal strip mines while maintaining the
taxable value at 33 1/3% and 45%, respectively.
Chapter No. 326, Laws of 1983 provided that whenever
the value of coal is imputed by the Department of
Revenue under the coal severance tax law that
imputed value is also used for the purposes of
reporting the value of the gross yield of coal for
taxation as gross proceeds.
25
26
LEGISLATIVE HISTORY OF THE RESOURCE INDEMNITY TRUST TAX
Chapter No. 497, Laws of 1973 was the Montana Resource
Indemnity Trust Act and was intended to provide
security against loss or damage to our environment
from the extraction of nonrenewable natural
resources. Any person mining or producing
minerals was required to pay an annual tax of $25
plus 0.5% of the gross value of the product in
excess of $5,000. The tax payment is due on March
31 on the products of the preceding calendar year
and is deposited in the resource indemnity trust
account. After the principal of the trust and its
accrued earnings equal $10 million, the net
earnings may be appropriated. If the trust
reaches $100 million, all net earnings and tax
receipts shall be appropriated and expended
provided that the balance never falls below $100
million thereafter. Any funds made available must
be used to improve the total environment and
rectify damage thereto.
Chapter No. 505, Laws of 1981 required that, beginning
in fiscal year 1982 when the balance in the
resource indemnity trust account exceeds $10
million, 30% of the interest income of the account
must be earmarked for water development.
Chapter No. 226, Laws of 1983 revised the reporting
procedures to require quarterly reports filed not
more than 60 days after the end of the calendar
quarter and changed the deadline for payment of
the annual tax to March 1 for production during
the preceding calendar year.
Chapter No. 241, Laws of 1983 required that, beginning
27
in fiscal year 1986, 6% of the interest earned by
the resource indemnity trust account be allocated
to the Department of Health and Environmental
Sciences to be used to implement the Montana
Hazardous Waste Act and the federal Comprehensive
Environmental Response, Compensation, and
Liability Act of 1980 (CERCLA). Funds remaining
unexpended at the end of each fiscal year will
revert to the resource indemnity trust interest
account.
Chapter No. 716, Laws of 1985 required that the
allocation authorized in Chapter No. 241 above be
appropriated for each full biennium as necessary
to obtain matching federal funds.
House Bill No. 922, Laws of 1985 appropriated to the
Department of Natural Resources and Conservation
(DNRC) the balance in the resource indemnity trust
interest account to be awarded in a program of
legislatively prioritized grants. The
environmental contingency account was established,
and, at the beginning of each fiscal year, 5% of
the funds appropriated to DNRC from the resource
indemnity trust interest account was to be
deposited into the environmental contingency
account. Funds from the environmental contingency
account, which was capped at $1 million, were to
be appropriated to meet unanticipated needs in
certain public services, and interest on the funds
in the account was to be deposited in the resource
indemnity trust interest account.
Chapter No. 408, Laws of 1987 required that, beginning
in fiscal 1988, 12% of the interest income of the
resource indemnity trust fund must be allocated to
28
the hazardous waste/CERCLA account.
Chapter No. 418, Laws of 1987 amended the legislative
policy section of the Montana Resource Indemnity
Trust Act "to indemnify its citizens for the loss
of long-term value resulting from the depletion of
its mineral resource base and for environmental
damage caused by mineral development. ... by
establishing a permanent resource indemnity trust
from the proceeds of a tax levied on mineral
extraction and by allocating spendable trust
revenues :
(1) to protect and restore the environment from
damages resulting from mineral development; and
(2) to support a variety of development programs
that benefit the economy of the state and the
lives of Montana citizens."
Also established was the Reclamation and
Development Grant Program to fund projects that
"indemnify the people of the state for the effects
of mineral development on public resources and
that meet other crucial needs serving the public
interest and the total environment. . ." and
established eligibility requirements, evaluation
criteria, and conditions of grants. At the
beginning of each biennium, an amount of not more
than $175,000 is allocated from the interest
income of the resource indemnity trust fund to the
environmental contingency account except that no
allocation is made if the balance in that account
exceeds $750,000 at the beginning of any biennium
and, if the balance is less than $750,000, an
amount, up to $175,000, sufficient to restore that
balance is allocated.
29
C hapter No. 555, Laws of 1987 required that, beginning
in fiscal year 1990, 4% of the interest income of
the resource indemnity trust fund must be
allocated to the environmental quality protection
fund.
30
FEDERAL COAL TAXATION
Just as every other state in the Union, Montana is
subject to all taxes on coal production imposed by the
U.S. Congress.
In addition to the coal severance tax and the resource
indemnity trust tax imposed at the state level and the
coal gross proceeds tax imposed at the county level,
these federal taxes are also paid on Montana surface-
mined coal:
Abandoned Mine Reclamation Tax consisting of 10%
of the f.o.b. mine price up to a maximum of 10
cents per ton for lignite or 35 cents per ton for
all other types of coal
Black Lung Tax of 4.4% of the f.o.b. mine price or
55 cents per ton, whichever is less, is paid to a
fund for black lung disease victims despite the
fact that this disease is primarily suffered by
underground miners.
31
32
LOCAL IMPACT ASSISTANCE FROM COAL SEVERANCE TAX
Boom Multiplies Need for Public Facilities
The sudden growth of the surface mining coal industry
in southeastern Montana in the early 1970s created
instant demands for public facilities and services.
The need for roads, schools, hospitals, law
enforcement, recreation, and other public facilities
and services demanded rapid response and imposed
financial burdens upon the small ranching and farming
communities and sparsely settled counties that were
impossible to satisfy from traditional tax sources.
Impact Assistance Authorized
To remedy this situation, the 1975 Legislature created
the seven-member Coal Board and authorized it to award
grants anually of up to seven-elevenths of the portion
of the severance tax proceeds paid into the local
impact and education trust fund to assist local
governmental units in meeting the local impact of coal
development by enabling them to adequately provide
governmental services and facilities which are needed
as a direct consequence of coal development. Such
grants shall be awarded on the basis of: (a) need; (b)
degree of severity of impact from the coal development;
(c) availability of funds; and (d) degree of local
effort in meeting these needs. (90-6-205 and 90-6-206,
MCA)
Prioritization Based on Impact Population Growth
Chapter 502, Laws of 1975, also made a provision for
the designation of "counties, towns, school districts
and other governmental units which have had or expect
33
to have an increase in estimated population of at least
ten percent (10%) during any three (3) years since 1972
as a result of the impact of coal development. The
coal board shall .. .award at least fifty percent (50%)
of all grants... to these designated governmental
units." Subsequent amendment provided five overlapping
and consecutive 3-year periods encompassing 7 calendar
years to determine population growth to qualify an
impact area. The amendment included as an eligible
impact area any local governmental unit located within
50 miles on an all-weather road of a new coal mine
producing 1 million tons a year or of a steam-
generating or other coal-burning facility that will
consume 1 million tons of Montana-mined coal each year.
In Chapter No. 540, Laws of 1977, after the permanent
coal tax trust fund was created by the constitutional
amend-ment approved by the people in 1976, the share of
the revenue paid into the local impact and education
trust fund available to the Coal Board for local impact
grants was reduced to seven-fifteenths after June 30,
1979. That apportionment was reduced to 23.08%
effective July 1, 1985, by Chapter 715, Laws of 1985.
Chapter No. 5, Special Laws of June 1986, made all
revenue paid into the local impact and education trust
fund available for grants and loans but effectively
reduced the authorization by appropriating to the
general fund $1,680,000 of the money previously
allocated for local impact assistance during the 1986-
87 biennium.
Local Impact and Education Trust Fund Accounts
Separated
From its inception in 1975, the law allocating portions
34
of the coal severance tax revenue recognized the local
impact and education trust fund as a single entity from
which the Coal Board received a share to be used to
provide grants or loans for mitigation of local
impacts. Any portion of that allocation unused at the
end of a fiscal year reverted to the principal of the
education trust fund.
The 1987 Legislature, however, in Chapter No. 662, Laws
of 1987, for the first time segregated the two purposes
by separating the local impact account from the
education trust fund account. An allocation was
provided for local impact during the 1988-89 biennium
but not for the education trust fund. Under the terms
of that act, the allocation to the education trust fund
will be reinstated after July 1, 1989.
Statutory Allocations for Local Impact Aid
Table 1
COAL SEVERANCE TAX ALLOCATIONS TO COAL BOARD FOR
LOCAL IMPACT AID ACCORDING TO THE MCA EFFECTIVE
FOR PERIODS BEGINNING
July 1, 1975 17.50%
July 1, 1977 12.65%
July 1, 1979 13.13%
Jan. 1, 1980 8.75%
July 1, 1985 3.00%
July 1, 1986 2.64% (less $1,600,000
reallocated to
general fund)
July 1, 1987 1.52%
July 1, 1989 6.65%
Coal Board Grants
According to a report dated April 15, 1988, prepared by
Murdo Campbell, executive officer of the Coal Board,
35
since January 1976, the Coal Board had awarded 199
grants worth $60.7 million to local and state
governmental units and Indian tribes while denying
requests for 94 grants. Table 2 lists the grants
awarded.
Table 2
COAL BOARD GRANTS BY RECIPIENT TYPES
Recipient
No. of
% of
Amount
% of
Govt. Types
Grants
Grants
Awarded
(Mils)
Total
Cities
57
29
$11.8
19
Schools
38
19
30.9
52
Counties
75
37
12.9
21
Indian Tribes
4
2
0.6
1
Special Districts
17
9
3.8
6
State Agencies
8
4
0.7
1
During that same period, according to Campbell's
report, $7,414,993 of statutory allocations for local
impact assistance were unexpended at the ends of the
fiscal years and thus became part of the corpus of the
education trust fund.
Table 3
REVERSIONS OF COAL BOARD ALLOCATIONS
TO EDUCATION TRUST BY FISCAL YEARS
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
TOTAL
I 517
30,944
9,452
154,458
41,927
2,737,630
317,749
2,170,911
383,422
1,567,883
$ 7,414,993
36
Table 4
COAL BOARD GRANTS BY FISCAL YEAR
1988 $ 1,011,872
1987 881,100
1986 1,667,704
1985 7,105,022
1984 7,025,690
1983 6,839,908
1982 4,618,317
1981 5,743,700
1980 7,747,224
1979 3,434,247
1978 2,387,125
1977 10,039,966
1976 2,246,651
TOTAL $60,748,52
37
38
COUNTY LAND PLANNING PROGRAM
When the law creating the coal severance tax in its
present form was enacted in 1975, the Legislature
established a County Land Planning Fund Program to
which was allocated a small fraction of the proceeds of
the severance tax.
The purpose of the program was to help Montana counties
and communities plan, develop, and conserve their land
base, thereby preserving and enhancing community
resources through supporting the work of local planning
boards and other types of community planning and
development activities.
Under the present law, the county land planning fund
receives 0.38% — slightly more than one-third of 1
percent — of the total severance tax revenue. In fiscal
1987, the total allocation to county land planning was
about $336,000. Each county receives a minimum
allocation of $3,000 a year, and the remainder is
distributed according to a formula based 40% on
geographic area and 60% on population. A county can
pass the money through to city planning boards and to
city-county planning boards by the use of interlocal
contracts. A 1985 amendment clarified that land
planning purposes include but are not limited to
comprehensive planning, economic development planning,
and capital improvements planning.
The Department of Commerce distributes the funds
quarterly, assists local governments with identifying
the proper uses for the funds, and helps with
accounting and cash management. Each local governing
body and planning agency which receives funds must
account annually for its expenditures, and any surplus
39
must be returned to the education trust fund at the end
of each odd-numbered fiscal year.
Since fiscal 1976, the County Land Planning Fund
Program has provided Montana's counties with more than
$4.5 million for community planning, and counties have
consistently put about 94% of that money to use each
year .
The following is the tabular history of the county land
planning fund between fiscal years 1976 and 1987,
inclusive:
TABLE 5
COUNTY LAND PLANNING FUND PROGRAM: FUNDS DISTRIBUTED
12/01/87
FY DISTRIBUTED USED
76 $ 220,318.10 <
77 359,060.17
78 281,039.24
79 320,167.91
80 521,007.03
81 352,075.11
82 430,934.23
83 400,224.90
84 414,117.14
85 458,744.29
86 420,945.26
87 336,945.82
TOTALS $4,515,579.20 $4,264,818.22
% USED
SURPLUS
iSURPLUS
202,396.74
91.87
$ 17,921.
,36
8.13
340,159.88
94.74
18,900.
,29
5.26
270,121.28
96.12
10,917.
,96
3.88
300,190.86
93.76
19,977.
,05
6.24
490,078.05
94.06
30,928.
,98
3.83
332,869.83
94.55
19,205.
,28
5.45
402,334.87
93.36
28,599.
,36
6.64
380,473.65
95.06
19,751,
,25
4.94
394,024.57
95.15
20,092,
,57
4.85
442,678.02
96.50
16,066,
.27
3.50
388,190.96
92.22
32,754,
,30
7.78
321,299.51
95.36
15,646,
,31
4.64
94.45 $250,760.98 5.55
Source: George Warn, Management Services Division, Department of
Commerce
40
COAL GROSS PROCEEDS TAXED AT 45% OF VALDE
The 1975 act that created the coal severance tax in its
present form also segregated coal from other minerals
in the property classification system and provided a
mechanism to channel a portion of the value of coal
production to the local governments where the mines are
located.
In its legislative findings and purposes section,
Chapter No. 525, Laws of 1975, observed that coal
differed from both petroleum and precious metals and
deserved different treatment for taxation purposes.
Coal had previously been subject to taxation under the
net proceeds law at 100% of value in the same manner as
metals. The 1975 law provided that gross proceeds of
coal mines be taxed at 45% of value. After the
Department of Revenue informs the county assessor of
the total value of coal proceeds attributable to that
county in the previous calendar year, the county's
property levy for the year is applied against that
value just as it is levied against other property.
Thus, when the county assessor receives notice of the
gross proceeds value of coal produced in the county
during calendar year 1987 and the mill levies for 1988
are established for the taxing jurisdictions concerned,
each coal producer will be billed for the amount of tax
determined by applying the mill levy against 45% of the
coal gross proceeds.
Coal gross proceeds taxes are a major source of local
government revenue in the three counties where almost
all of Montana's coal production originates.
41
The following is an abstract of the contributions of the
gross proceeds as compiled by the coal industry's principal
advocacy organization.
TABLE 6
GROSS PROCEEDS TAXES ON COAL
In Montana's Three Major Producing Counties
1969 through 1987, Inclusive
Compiled by the Montana Coal Council
From Tax Collection Records of Treasurers
of Big Horn, Rosebud, and Richland Counties
Big Horn County
Decker Mines (1972-87) $ 56,148,867
Spring Creek Mine (1981-87) 8,303,355
Westmoreland Resources (1973-87) 15,553,868
TOTAL Big Horn County (1972-87) $ 80,006,090
Richland County
Knife River Mine (1975-87) $ 2,020,333
Rosebud County
Peabody Coal Company (1969-87) $ 10,014,993
Western Energy Company (1969-87) 36,984,417
TOTAL Rosebud County (1969-87) $ 46,999,410
TOTAL Three Counties (1969-87) $129,025,833
42
RESOURCE INDEMNITY TRUST'S PURPOSE TO PRESERVE VALUES
The 1973 Legislature perceived a need to accumulate
assets to compensate future generations for resources
removed from the state's reserve of natural treasures.
To fulfill this need, the Legislature passed the
Montana Resource Indemnity Trust Act (Chapter No. 497,
Laws of 1973) which following its amendment by Chapter
No. 418, Laws of 1987, states:
It is the policy of this state to indemnify
its citizens for the loss of long-term value
resulting from the depletion of its mineral
resource base and for environmental damage
caused by mineral development. This policy of
indemnification is achieved by establishing a
permanent resource indemnity trust from the
proceeds of a tax levied on mineral
extraction and by allocating spendable trust
revenues: (1) to protect and restore the
environment from damages resulting from
mineral development; and
(2) to support a variety of development
programs that benefit the economy of the
state and the lives of Montana citizens.
That 1973 act also created the resource indemnity
account into which was to be deposited the money
generated by a tax on each producer of $25 plus 0.5% of
the gross value of product in excess of $5,000 each
year extracted from the ground. The tax must be paid
by March 31 on the value of products mined during the
preceding calendar year.
The act required all tax proceeds and all the net
earnings of the account to be invested by the Board of
Investments until the account reached $10 million after
which only the net earnings could be expended until the
account reached $100 million. At that level all tax
proceeds and net earnings could be appropriated by the
43
Legislature as long as the balance never fell below
$100 million.
The Legislature stated in the 1973 Act that: "Any funds
made available under this act shall be used and
expended to improve the total environment and rectify
damage thereto." In House Bill No. 922, the 1985
Legislature stipulated "that future appropriations from
the resource indemnity trust interest account not be
made to fund general operating expenses of state
agencies. "
Despite technical and housekeeping amendments in
intervening sessions, the Resource Indemnity Trust
(RIT) law remained substantially unchanged until
Chapter No. 505, Laws of 1981, created the water
development program and, when the balance in the
resource indemnity trust exceeds $10 million, allocated
30% of the interest earned on that account to the water
development program.
The annual date on which the RIT tax payment is due was
changed to March 1 by Chapter No. 226, Laws of 1983.
Chapter No. 241, Laws of 1983, allocated 6% of the
interest income of the resource indemnity trust,
beginning in fiscal 1986, to the Department of Health
and Environmental Sciences to implement the Montana
Hazardous Waste Act and the federal Comprehensive
Environmental Response, Compensation, and Liability Act
(CERCLA) of 1980.
Beginning in fiscal 1988, the allocation to hazardous
waste/CERCLA was increased to 12% of the RIT income by
Chapter No. 408, Laws of 1987. Chapter No. 418, Laws
of 1987, required that at the beginning of each
44
biennium not more than $175,000 be allocated from the
RIT interest income to the environmental contingency
account, subject to conditions provided in 75-1-1101,
MCA. Chapter No. 555, Laws of 1987, in coordination
with Chapter No. 418, Laws of 1987, required that,
beginning in fiscal year 1990, these allocations be
made from the RIT interest income: 8% to renewable
resource development; 46% to reclamation and
development grants; and 4% to the environmental quality
protection fund.
Table 7
From
Resource Indemnity Tax Collections on Coal
From Montana Department
of Revenue
Fiscal
1974
$ 61,687
Fiscal
1975
239,391
Fiscal
1976
409,810
Fiscal
1977
496,340
Fiscal
1978
522,333
Fiscal
1979
225,681
Fiscal
1980
928,798
Fiscal
1981
825,496
Fiscal
1982
1,000,195
Fiscal
1983
1,897,861
Fiscal
1984
1,300,665
Fiscal
1985
(199,370)
Fiscal
1986
1,171,480
Fiscal
1987
1,090,324
Fiscal
1988
Table 8
1,223,264
Balance in Resource Indemni
.ty Trust Fund
Fiscal Year
Reports, Montana
Board of Inve:
Fiscal
1974 $
1,098,143
Fiscal
1975
3,279,661
Fiscal
1976
5,542,021
Fiscal
1977
8,214,869
Fiscal
1978
10,637,903
Fiscal
1979
12,561,903
Fiscal
1980
16,193,572
Fiscal
1981
20,730,632
Fiscal
1982
27,956,374
Fiscal
1983
35,648,853
Fiscal
1984
42,275,727
Fiscal
1985
46,968,775
Fiscal
1986
53,059,673
Fiscal
1987
57,074,698
45
Table 9
Total Investment Income, Resource Indemnity Trust Fund
From Fiscal Year Reports, Montana Board of Investments
Fiscal 1974 $ 3,485
Fiscal 1975 96,126
Fiscal 1976 321,782
Fiscal 1977 475,082
Fiscal 1978 696,050
Fiscal 1979 956,284
Fiscal 1980 1,243,397
Fiscal 1981 1,767,418
Fiscal 1982 2,544,162
Fiscal 1983 4,021,028
Fiscal 1984 4,509,923
Fiscal 1985 5,509,892
Fiscal 1986 6,548,573
Fiscal 1987 7,205,821
46
CROW LAWSDIT DECISION DIMINISHES STATE'S TAXING POWER
By declining to accept an appeal from a decision of a
lower tribunal, the United States Supreme Court, in
January, 1988, effectively wrote the concluding chapter
in litigation initiated by the Crow Tribe that spanned
10 years and caused the impoundment of many millions of
dollars of coal severance tax proceeds.
The financial ramifications of the Supreme Court's
refusal to review Montana's argument will cause
immediate and substantial flow of money away from the
state or from the fund established to receive the
severance tax payments during the pendency of the
litigation. If the Crow Tribe prevails in its claim of
entitlement to the money, that group of Montana
residents will be enriched by more than $100 million.
But to assure themselves that windfall, the Crows must
successfully resist the petitions of the utility
companies who argue that the tax should be refunded to
them to pass through to their ratepayers who were the
ultimate bearers of that tax burden.
The lawsuit had its genesis in 1978 when the Crow Tribe
sued to enforce its claim to severance tax on coal
mined from the so-called Ceded Strip because the title
to the minerals in that area reposed with the tribe.
The Ceded Strip adjoins the northern boundary of the
Crow Reservation from which it was detached by an act
of Congress in the first decade of this century and
subsequently opened to homesteading. But title to only
the surface rights passed to the settlers; the mineral
title was reserved to the tribe.
Westmoreland Resources, Inc., opened its Absaloka Mine
on Ceded Strip acreage in the early 1970s, and
47
production from that mine became subject to Montana's
30% coal severance tax, which was enacted in 1975.
Until 1983, the severance taxes were paid directly to
the state, and the proceeds were distributed as
prescribed by constitutional dedication and as
allocated by statute.
The federal District Court originally ruled in favor of
the state. That decision was overturned and the case
was remanded by the Ninth Circuit Court of Appeals,
which actions were sustained by the Supreme Court in
1982. Establishment of an escrow account in a Billings
bank was ordered by the federal District Court in 1983.
On retrial, the federal District Court in 1985 again
ruled for the state, a decision which was reversed by
the Ninth Circuit Court in June 1987. The Supreme
Court, in January 1988, refused to hear the state's
appeal. At that point, two main issues remaining to be
resolved were the distribution of the money in the
escrow account and settlement of the tribe's
constructive trust claim for the coal severance tax
payments made before 1983 and the gross proceeds tax
payments since 1975. The common law provides an entity
improperly deprived of funds to which it is entitled
may have a constructive trust placed on those funds.
Lacking a successful claim by creditors, the District
Court could order distribution of the escrow to the
tribe. 1
Because the Department of the Interior refused to
approve an ordinance adopted by the Crow Tribe in the
1970s to tax coal produced from the Ceded Strip, there
now is uncertainty as to whether either the state or
the tribe can tax that production. 2
48
Still subject to some disagreement is the question of
how much of Westmoreland's pre-1983 taxes related to
Crow land and how much to state school land. If this
issue is litigated, the case may not be settled for
several years. 3
The best information available to the Coal Tax
Oversight Subcommittee showed that the total tax
escrowed for production during the 5 years ending
September 30, 1987, was $22,244,230. As of January 12,
1988, interest accrued on the escrow was $5,198,127 for
a total balance of $27,442,357. During that period,
the state collected $8,992,326 in severance tax on coal
mined from its school land. 4
The total severance tax derived from Ceded Strip
production before October 1, 1982, was $53,931,009, of
which $15,525,566 originated from state land and
$38,405,442 from Crow land. With interest accruing at
12% a year, the latter sum has compounded to about $77
million. 5
Obviously, if the state were required to repay this
amount, the only easily accessible source would be the
corpus of the constitutional permanent trust, the
balance of which now exceeds $360 million.
Appropriation from the trust is possible only by a
three-fourths vote of the Legislature. An amendment of
the constitution to allow, under other conditions, the
expenditure for the purpose of paying the Crow claim,
if it develops, could be referred to a vote of the
people by a two-thirds vote of the Legislature.
Expenditure of a sum of that magnitude from the
permanent trust would appreciably diminish the portion
of earnings available to the general fund for
49
appropriation.- This has been a significant fiscal
resource for the Legislature in recent sessions.
The Montana severance tax application to the Ceded
Strip was overturned by the decision of the Ninth
Circuit Court of Appeals which held that:
Montana's coal taxes are preempted by federal
law and policies. They interfere with tribal
economic development and autonomy. The state
interests they promote may or may not be
sufficiently legitimate to overcome these
conflicts, but even if they are, the taxes
are not narrowly tailored in pursuit of these
interests .
In addition, the taxes are void for
interfering with tribal self-government, a
separate and independent barrier to state
regulation of Indian affairs. The mineral
estate of the ceded strip is legally part of
the Crow reservation, and taxing Indian
income derived from activities conducted on
reservation property is prohibited without
congressional consent. Here, Congress did
not consent. Montana's interests in imposing
the coal taxes do not overcome the tribe's
economic and governmental interests in coal
production.
Finally, because taxes on coal mined on the
ceded strip are invalid, taxes on coal from
the reservation proper are likewise invalid.
The district court erred in holding this
question non- justiciable . The taxes impair
the tribe's ability to negotiate leases with
Shell Oil and other coal companies. They
also reduce tribal revenues by impairing the
coal's marketability. 6
On June 10, 1988, the road was apparently cleared for
the Crow Tribe to claim the escrowed funds when the
federal District Court in Billings denied a motion by
several utilities that wanted to join in the lawsuit
and challenge the tribe for rights to the money. The
court ruled that the utilities were too late in trying
50
to enter the lawsuit and the issues they raised should
be a separate lawsuit against Westmoreland. The
utilities argued that the money in the escrow account
is rightfully theirs because they paid it as taxes in a
passthrough agreement with Westmoreland. 7
Three weeks earlier, the court had released about
$556,000 from the escrow to the tribe. The money had
been paid into the escrow since the Supreme Court's
decision in January 1988. 8
The huge sum of money involved, however, makes it
unlikely that the utilities will concede without an
appeal. Thus, a final settlement and distribution of
the escrow funds may still be years in the future.
In combination with the three-stage halving of the
severance tax enacted in House Bill No. 252 in 1987,
this judicial decision substantially diminishes the
importance of coal as a revenue source for the State of
Montana. The long-term impact upon the coal industry
and the economy of Montana is yet to be determined.
51
Notes
Statement to the Coal Tax Oversight Subcommittee,
Feb. 5, 1988, by Clay R. Smith, Assistant Attorney
General, State of Montana
2 Ibid.
3 Ibid.
4 Report to the Coal Tax Oversight Subcommittee,
Feb. 5, 1988, by Terry Johnson, Office of Budget and
Program Planning
5 Ibid.
6 Crow Tribe of Indians v. State of Montana , 819
F.2d 895 (9th Cir. 1987)
7 Judge says utilities have no claim to Crow tax
refund , Great Falls Tribune, June 11, 1988
8 Battin releases $500,000 to Crows , Great Falls
Tribune, May 28, 1988
52
THE EPITOME
COAL: RETROSPECTIVE AND PERSPECTIVE
Montana once was a province of the copper kingdom and
the fruit of the "Richest Hill on Earth" enriched New
York and Los Angeles while the Treasure State got the
leavings. But copper has been dethroned, and coal now
occupies the singular position as the most abundant and
most valuable of Montana's vast and varied proven
mineral resources.
A century after the two minerals became significant
contributors to the Montana economy, the importance of
copper has diminished apace with the reserves in the
major exploitable able deposits. Hundreds of miles to
the east, the recoverable coal under one-third of the
state has hardly been scratched, as it was virtually
unwanted until two decades ago. If Montana's first
hundred years was the century of copper, the second
hundred promises to be the century of coal.
Recognizing such an eventuality and hoping to prevent a
20th century replay of the squandering of the copper
treasure, Montana's lawmakers a decade and a half ago
formulated a plan intended to assure continuing
benefits to the people of the state by taxing the
products of the coal mines to finance impact mitigation
assistance, to help pay the current expenses of state
and local government, and to accumulate a permanent
trust to partially replicate the value of the depleted
resource. A principal vehicle to achieve this
objective was the modernized coal severance tax. In
1975, a half-century-old nominal levy was overhauled
and upgraded to the highest tax of its kind in the
nation, a major revenue device for Montana. But the
industry did not submit to this precedent-setting tax
53
without objection. While pointing to industry growth
in a neighbor state and a concurrent leveling out of
growth and the probable eventual reduction in Montana
coal production, the coal industry laid the blame for
its problems on the 30% coal severance tax.
Ten years later Montana began to respond to the
industry's pleadings with the Schwinden
Administration's proposal in 1985 for a New Coal
Production Incentive Tax Credit, which allowed a one-
third credit on the tax for coal produced under new or
extended contracts during a limited time period.
Subsequent action by the 1987 Legislature in Chapter
No. 608, Laws of 1987, approved a phased reduction of
the maximum tax rate to 25% and 20%, occurring in 1989
and 1990. The act further authorized an accelerated
implementation of an even deeper tax cut conditioned
upon production and sale of 32.2 million tons during
fiscal year 1988 (the average annual output for
calendar years 1983 through 1986) during fiscal year
1988, a threshold which the industry crossed with one-
sixth of the fiscal year remaining, assuring reductions
of the tax rate to 25%, 20%, and 15%, in 1988, 1990,
and 1991, respectively.
The result was that as fiscal year 1989 opened on July
1, 1988, Montana's coal severance tax rate declined by
one-sixth. Two years hence another cut of one-fifth
will occur, and one year later the severance tax will
be slashed by a final one-fourth.
The Legislature's acceptance of a 50% staged reduction
of the severance tax rate was an effort to improve the
state's competitive position in the nation's coal
54
markets and to assist in the revitalization of a
flagging industry.
The spokesmen for the coal industry deny ever claiming
that tax reductions would set Montana mines humming
again with zooming sales to create an expanded base to
offset the lessened levies. They argue, instead, that
the lower tax rate is needed to preserve the current
status by providing a necessary negotiating tool to
bargain for renewals of long-term contracts that will
begin to expire early in the next decade and to provide
enhancement of the Montana mines' competitive positions
in seeking out and attracting new business contingent
with the future's expected burgeoning energy demands
and diversified utilization of coal.
As Montana ended the thirteenth year of its prominence
as the source of the nation's most heavily taxed coal,
uncertainty clouded the state's financial future.
Coupled with general economic problems, the impending
sharp cuts in severance taxes promised to reduce
measurably revenue which since 1976 has contributed
more than $860 million to support general government
and a multitude of special programs while also building
a permanent trust fund. In addition to its value as a
reserve for future Montanans, that trust itself has
become one of the state's most important revenue
sources with 85% or more of its earnings flowing to the
general fund to reduce demands on the taxpayers.
Coal's unlimited promise for Montana is brightened by
technology such as magnetohydrodynamics and coal drying
processes that augur hopefully for a resurgence of the
importance of that mineral in Montana's economic
prospects .
55
Montana's minerals tax policy strives for a balance
between the state's revenue needs and the necessity to
preserve some portion of the value of the resources
extracted from the earth on the one hand and on the
other hand a governmental climate that will encourage
exploration, development, job creation, and general
economic and social betterment for its people.
On the achievement of this goal depends much of our
state's future welfare.
56
APPENDIX A
STATES' TRUST FUNDS APE DISSIMILAR PEAS IN A POD
APPENDIX A
STATES' TRUST FUNDS ARE DISSIMILAR PEAS IN A POD
Of the severance taxes levied in 32 states, only 9 are
applicable to coal, and 10 claim to dedicate portions
of that revenue to trust funds that are similar in name
only.
Few are genuine "trust funds" in the sense that the
corpus is held inviolate in perpetuity while allowing
disbursal of its income to previously designated
beneficiaries or for stipulated purposes with
conditional eventual distribution of the whole at the
expiration of a definite period or upon satisfaction of
prescribed conditions. The states' trusts are as
unlike in structure, purposes, restrictions, and size
as the creative intellects of the legislators who
established them.
These innate differences compound the difficulty of
comparing the states' trust funds. In a Legislative
Finance Paper published in 1982, the National
Conference of State Legislatures designated eight
states, including Montana, as holders of permanent
trusts derived from mineral royalties or severance
taxes. Because of many obvious inaccuracies in that
document, each of the other seven states was contacted
by telephone during preparation of this paper to verify
the existence of the other trusts and to determine the
similarities or dissimilarities between those trusts
and Montana's permanent coal tax trust, which was
created with passage of a constitutional amendment in
1976.
Montana's Permanent Coal Trust
During the first 3 years of its existence, the
permanent trust received 25% of the proceeds of the
coal severance tax. After January 1, 1980, the
constitution requires that 50% of the severance tax
proceeds go into the trust. Until July 1, 1983, all of
the earnings of the trust went to the general fund for
appropriation, but during the following 4 fiscal years,
15% of the earnings were added to the corpus of the
trust. During fiscal years 1988 and 1989, 2% of the
earnings are being dedicated to the trust, and after
June 30, 1989, the portion of earnings dedicated will
return to 15%. These earnings dedications are
statutory and are subject to legislative change
although once assigned to the trust the earnings take
on its characteristics of inviolability.
Montana's Statutory Coal Trusts
Two other trust funds — statutory by origin and lacking
the blessing of constitutional protection against
legislative raids — have been nourished by shares of the
proceeds of the Montana coal severance tax. These are
the education trust and the parks acquisition and
cultural and aesthetics projects trust. Allocations to
these trusts fluctuated from biennium to biennium
according to the Legislature's recognition of the
priorities for the alternative uses of the one-half of
the coal severance tax remaining after the deposit in
the permanent trust. Neither of those two trusts are
receiving any portion of the severance tax proceeds
this biennium, and the education trust corpus was
almost wiped out when the 1987 Legislature appropriated
most of its holdings to fund the Foundation Program.
The parks and cultural trust escaped a raid by the 1987
budget balancers.
Status of Montana's Coal Trusts
After the addition of fiscal 1988 tax collections and
trust fund earnings, the permanent trust balance is
nearing $370 million. The parks and cultural trust
balance is about $16,300,000, and the education trust
balance stands at about $10 million.
Under the current provisions of Montana law, beginning
July 1, 1989, the education trust and the parks
acquisition and cultural projects trust will receive
7.6% and 1.9%, respectively, of the coal severance tax
proceeds. The effective rate of the coal severance tax
will drop from 30% to 25% on July 1, 1988, under the
terms of House Bill No. 252 passed by the 1987
Legislature, and reductions scheduled to become
effective in 1990 and 1991 will further lower the
collections and accordingly the deposits in the trusts
unless coal production and sales increase sufficiently
to offset the tax declines. There is no sign on the
horizon that any such production increment can be
expected. For that reason, it appears likely that
about $5 million will be added to the education trust
in fiscal 1989 and about $1 million will be added to
the parks and cultural trust.
Other States' Permanent Trusts
Without attempting an exhaustive comparison of the
trusts held by other states, telephone interviews were
conducted to verify the existence of those trusts.
These bare facts were elicited.
Only three other states — New Mexico, Wyoming, and North
Dakota — maintain mineral royalties or severance tax-
based trusts that resemble Montana's in permanence and
inviolability.
Largest by far of the state severance tax trusts is
that of New Mexico, now approaching $1.3 billion. Named
the severance tax permanent fund, it was
constitutionally established and receives the balance
of all "severance tax" proceeds after deduction of that
portion which is used to retire debt. Since the
amendment of the state constitution in 1982 to strike
the provision allowing invasion of the trust by three-
fourths vote of the Legislature, no
expenditure from the trust is allowable. The trust's
income is available for appropriation by the
Legislature. Virtually all additions to the trust
originate as severance tax on oil production. 1
In Wyoming, the permanent mineral trust fund balance
was $908,461,000 on June 30, 1987. Although coal
contributed substantially to the trust, most of its
value originated as oil severance tax. The permanent
mineral trust fund is composed of several separately
identifiable entities created with tax revenue from
specific minerals. A significant event with respect to
the trust funds and the severance tax rate occurred in
1986 when dedicated revenue from coal severance taxes
reached $160 million, the statutory trigger to reduce
the tax from 10.5% to 8.5%, a reduction that
anticipated Montana's severance tax cut from 30% to 25%
effective on July 1, 1988. 2
North Dakota law creates two funds — the resources trust
fund and the coal development trust fund — to receive
mineral tax and royalty income, but only the second of
these has the true trust fund characteristics. The
resources trust fund is a holding device in which oil
severance tax proceeds are deposited until the money is
disbursed according to legislative appropriation.
During this biennium, $9.3 million was appropriated,
the expenditure of which will deplete the fund. The
state constitution requires that 15% of coal severance
tax proceeds be deposited in the coal development trust
fund, the value of which is to be maintained
perpetually although money may be loaned to local
communities to assist with mitigation of impacts of
mineral development. Coal loans outstanding now total
$8.4 million, and oil loans total $3, 375, 000. 3
States' Nonpermanent Trust Funds
Four other states that maintain so-called trust funds
but which lack the distinguishing feature of perpetual
protection of the corpus are Louisiana, Minnesota,
Colorado, and Oregon. These might be more accurately
described as special revenue funds whose assets are
subject to appropriation and expenditure and whose
survival depends upon the continued inflow of tax
revenue.
Louisiana established the Louisiana investment fund for
enhancement (LIFE) in fiscal year 1981-82 with the
expectation that it would be fed by one-half of the
windfall revenues anticipated from oil and gas
exploration. The collapse of that industry almost
immediately thereafter stymied that hope, and LIFE'S
resources are exhausted. After settlement with the
federal government a decade ago of the dispute over
royalties from offshore oil production, Louisiana
created the education trust fund. By 1986, Louisiana
had received $645 million in oil royalties from the
three- to six-mile zone of which about $545 million was
deposited in the education trust fund to be spent on
current nonbudgetary items for elementary and secondary
schools. 4
In Minnesota, the taconite environmental protection
fund and the northeast Minnesota economic protection
trust fund were created by the Legislature in 1977 as
depletable or expendable entities derived from mineral
production taxes. Appropriated to the taconite
environmental protection fund was $2.9 million for 1987
and $3.9 million for 1988, and these amounts have been
or will be expended. The objective of the northeast
Minnesota economic protection trust fund is the
rehabilitation of that state's Iron Range as its
mineral reserves approach exhaustion. Out of the $1.90
tax collected on each ton of taconite produced, the
fund receives 1.5 cents. Although established with the
intention that only the earnings of the fund should be
expended, the law left a gap big enough to sail an ore
boat through when it granted permission for withdrawals
from the corpus under certain circumstances. The
result has been slow growth and even reduction from
1986 when the balance of the corpus was $31.5 million
until 1988 when the balance was estimated at about
$31.2 million. The law provides a termination date of
January 1, 2002, when the full trust principal will
become available to the beneficiaries. 5
When Colorado's trust fund was established, the
anticipation was that half of the severance tax
proceeds would flow into that fund and the other half
would go directly to local governments. But in
reacting to the financial pressures that are squeezing
all natural resource states, the Legislature for this
biennium diverted the severance tax flow from the trust
fund to the general fund. Balance in the trust fund
this year was reported to be about $19.1 million which
was intended to fund loans to local governments, a
purpose that was never fulfilled. 6
In Oregon, where oil has never been found and natural
gas production is minimal, the 6% severance tax on gas
generates between $40,000 and $60,000 per quarter,
which is deposited in the common school fund. The
earnings of that fund are distributed to the school
districts. The impact of mineral taxes is
insignificant in Oregon, where severance taxes on the
timber harvest contribute much more revenue. 7
Permanent Trust Is Valuable Financial Device
Considered in relationship to the mechanisms employed
by other states to preserve or expend mineral revenues
and the ephemeral nature of unprotected income,
Montana's permanent coal severance tax trust promises
significant future financial benefits despite recent
legislative action to reduce the tax rate. As the coal
severance tax rate falls to no more than half the level
set in 1975, the flow into the trust will diminish
accordingly unless production doubles. Even with
decreased income, however, the trust should surpass
half a billion dollars before the close of the 20th
century, and its earnings output will be increasingly
significant in the state's budgetary process. With
continued nourishment and protection against incursions
to satisfy temporary expenditure demands, the permanent
trust can be expected to become Montana's premier
financial resource.
NOTES
1 Telephone interview June 2, 1988, with Jeff
States, New Mexico State Board of Finance
2 Telephone interview May 31, 1988, with Phil
Harris, mineral valuations section, Wyoming
3 Telephone interview June 1, 1988, with John
Wolstad, North Dakota Legislative Council
4 Telephone interview June 1, 1988, with David
Hoppenstedt, Louisiana state economist
5 Telephone interview June 2, 1988, with Narcisso,
Tax Research Division, Minnesota Department of Revenue
6 Telephone interview June 2, 1988, with Don
Mildenburger , Colorado state controller's office
7 Telephone interview June 2, 1988, with Mr.
Graff, Research Division, Oregon Department of Revenue
APPENDIX B
STATE COAL SEVERANCE AND PRODUCTION TAXES — 19 87
APPENDIX B
STATE COAL SEVERANCE AND PRODUCTION TAXES - 1987
Source: State Tax Guide , Second Edition, Commerce
Clearing House
ALABAMA:
ARKANSAS :
Coal Severance Tax 13.5 cents a ton
(tax will terminate upon the redemption
of and payment of all accrued interest
on bonds issued by the Alabama State
Docks Department pursuant to Act 64,
Laws 1971, for purpose of constructing
any seaport facility or the final
maturity of the bonds, excluding any
bonds issued to refund any or all of the
bonds then outstanding, whichever is
later. )
Coal and Lignite Severance Tax an
additional 20 cents a ton of coal or
lignite severed.
Reports due 20 days after the end of
each month. Any payment of tax due must
accompany the report.
Local Taxes Coal severance tax of 50
cents a ton is imposed by DeKalb County,
Etowah County, and Jackson County. The
State Department of Revenue collects
these taxes at the same time as the
state coal severance tax.
Natural Resources Severance Tax 2 cents
a ton on coal and lignite.
Additional Tax 8 cents a ton on coal.
Reports from producers due on or before
the 25th day of each month. Purchasers,
unless relieved of the duty by the
Commissioner of Revenues, must report
within 20 days after the end of each
month. Payment by producer is due when
report is filed.
COLORADO: Severance Tax 60 cents on each ton of
coal. For each three points of change
in the producers' price index for all
commodities, the tax is increased or
decreased 1%. Until July 1, 1990, the
first 25,000 tons of coal produced in
each quarter are exempt from tax; after
that date the exemption is 8,000 tons a
quarter.
Credit of 50% of the tax is allowed for
production from underground mines and an
additional credit of 50% of the tax is
allowed for the production of lignitic
coal .
Credit for Production from a new
operation or from one which has an
increase in production after June 30,
1980, is allowed:
- equal to the value of approved
contributions by the taxpayer to assist
in solving the impact problems caused by
the new operation;
- an additional 0.75% of approved
contributions for local impact
assistance for each month that any
approved contribution precedes the month
in which the approved contribution is
credited against a taxpayer's severance
tax liability. Total approved
contributions may not exceed 50% of the
taxpayer's anticipated tax liability
during the first 10 years of severance
from the new or expanded operation.
Reports must be filed with the
Department of Revenue by the 15th day of
the fourth month after the end of the
tax year.
Payment must accompany the return except
that if the annual tax is expected to
exceed $1,000, estimated payments are
due April 15, June 15, September 15, and
December 15.
IDAHO:
Mining License Tax includes coal.
Rate 2% of net value of product mined,
Report and Payment due by the 15th day
of the fourth month after the close of
the tax year.
KANSAS :
Severance Tax an excise tax borne
ratably by all producers in proportion
to their respective beneficial interest
in the production.
Rate is $1 a ton.
Reports and Payments are due by the 20th
day of the second month after
production.
Mined Land Conservation and Reclamation
Tax Persons holding surface coal mining
and reclamation permits are charged a
basic fee of $50 plus a per-ton fee
fixed by the Mined Land Conservation and
Reclamation Board between 3 cents and 10
cents per ton of coal extracted each
calendar year.
Payment is due 30 days after the
beginning of each calendar quarter.
KENTUCKY: Coal Severance Tax 4.5% of gross value
with minimum of 50 cents a ton. "Gross
value" is the amount received or
receivable for coal severed and/or
processed and sold during a reporting
period; for coal severed and/or
processed but not sold, gross value is:
(1) the contract price if the coal is
to be sold under an existing contract;
or
(2) the fair market value for that
grade and quality of coal if there is no
existing contract.
Reports must be filed with the
Department of Revenue on or before the
20th day of the month after the month in
which the coal is severed and/or
processed.
Payment must accompany the return.
LOUISIANA: Natural Resources Severance Tax 10
cents a ton on coal.
Reports must be filed by the last day of
each month.
Payment must be made when the report is
filed.
MARYLAND:
Mine Reclamation Surcharge 9 cents for
each ton of coal removed by the open-pit
or strip method assessed by the
Department of Natural Resources. In any
county in which coal is removed, the
county fiscal authority assesses a 6-
cents-a-ton surcharge, payable monthly,
for each ton of coal removed by the
open-pit or strip method.
Local Coal Severance Tax The governing
body of Garrett County and any "code
county" must levy a severance tax of 30
cents a ton for each ton of surface-
mined coal between July 1, 1987, and
June 30, 1989. The tax is payable each
month and was reduced from 40 cents a
ton on July 1, 1987. The Tax was due to
expire on that date but was extended by
the 1987 Legislature for 2 years.
MISSOURI: Land Reclamation Assessment on Surface
Coal Mining Permittee s Every surface
coal mining permittee must pay a monthly
assessment of:
- 30 cents a ton for the first 50,000
tons sold in a calendar year, and
20 cents a ton for the next 50,000
tons sold.
Thereafter, no further assessment is
due from a permittee during any calendar
year. When the total balance in the
land reclamation fund exceeds $7 million
at the close of the state's fiscal year,
no assessment is required except from a
new permittee, who must pay an
assessment until his payments equal
those made by an original permittee of
comparable size. If the fund balance
falls below $7 million, all permittees
must pay assessments. Whenever an
expenditure is made from the fund for
reclamation, a surcharge of 25% of the
assessment rate is imposed in addition
to the regular assessment rate and
remains in effect until such expenses
have been recovered or until the fund
initially reaches $3 million, whichever
occurs first.
Payment is made monthly on the basis of
coal shipped, sold, or otherwise
disposed of.
MONTANA: Severance Tax No severance tax is
imposed on the first 50,000 tons of coal
produced in a calendar year, except that
if a taxpayer produces 50,000 tons in a
calendar year he is liable for tax on
all coal produced in excess of 20,000
tons at these rates:
Fiscal year* 1968 and 1969
Heating Quality Tax Rates
(BTU Per Lb. of Coal) Surface Mining Underground Mining
Under 7,000 12* or 20% of value 5* or 3% of value
7,000 to 8.000 22* or 30% of value 8* or 4% of value
8.000 to 9,000 34* or 30% of value 10* or 4% of value
Over 9,000 40* or 30% of value 12* or 4% of value
For fiscal year 1990
Heating Ouality
(BTU Per Lb. of Coal) Surface Mining Underground Mining
Under 7.000 12* or 13% of value 5* or 3% of value
7,0"0 to 8,000 22* or 2S% of value S* or 4% of value
8.000 to 9.0:0 3-4* or 25% of value 10* or 4% of value
Over 9,000 40* or 2S% of value 12* or 4% of value
For fiscal year 1991 and thereafter
Heating Quality
(BTU Per Lb. of Coal) Surface Mining Underground Mining
Under 7,000 12* or 13% of value 5* or 3% of value
7,00 ) to 8.000 ... 22* or 20% of value 8* or 4% of value
8.CO0 to 9.0:0 34* or 20% of value 10* or 4% of value
Over 9,000 . .. 40* or 20% of value 12* or 4% of value
Since the Department of Revenue
determined that the production and sale
of coal in Montana between July 1, 1987,
and June 30, 1988, exceeded 32.2 million
tons (which is the average total yearly
coal sales for calendar years 1983
through 1986), and since Chapter No.
608, L. 1987, required this level of
production to further reduce the coal
severance tax, the rate of the coal
severance tax on each ton of coal
produced in the state will be:
Foe coal product from July 1, 1988, through June 30, 1990
(BTui&WSU Surface Mining Undergroand Mining
Under 7 COO 12* or 17% of value 5* or 3% of value
TunJ'mn 22* or 25% of value M or 4% of value
148 £ I 1 SS ■.::::::: '■ ' '■& « 25% a vai ue i* or 4% «, v» ue
Over 9 000 .. 40* or 25% of value 1 2* or 4% of value
For coal produced from July 1, 1990. through June 30, 1991
Heating Quality „ , . ... .
(BTU Per Lb. of Coal) Surface Mining Underground Min i n g
Under 7 000 12* or 13% of value 5* or 3% of value
7 000 to 8 000 22* or 20% of value 8< or 4% of value
8C00to900O 34* or 20% of value 10* or 4% of value
Over 9 000 40* or 20% of value 12* or 4% of value
For coal produced after June 30, 1991
Hearing Quality
(BTU Per Lb. of Coal) Surface Mining Underground Mining
Under 7.000 12c or 13% of value 5* or 3% of value
7,000to8.000 22* or 15% of value 8* or 4% of value
8.000 to 9.000 34* or 15% of value 10* or 4% of value
Over9,000 40* or 15% of vaiue 12* or 4% of value
The formula yielding the greater amount
of tax must be used at each point on the
above schedule. "Value" means contract
sales price and includes all royalties
paid, except a portion as follows paid
to the federal government, the State of
Montana, or a recognized Indian tribe:
for quarters ending on and after
September 30, 1984, 15 cents a ton plus
75% of the difference between 15 cents a
ton and the amount of federal, state,
and tribal royalties paid; for quarters
ending on and after September 30, 1985,
15 cents a ton plus 50% of the
difference between 15 cents a ton and
the amount of eligible royalties paid;
for quarters ending on and after
September 30, 1986, 15 cents a ton plus
25% of the difference between 15 cents a
ton and the amount of eligible royalties
paid; and for quarters ending on and
after September 30, 1987, 15 cents a
ton.
8
New Coal Production Incentive Tax Credit
Coal mine operators are entitled to a
new coal production incentive tax credit
equal to:
(1) 33.3% of the tax for incremental
production sold during calendar years
1985 and 1986;
(2) 50% for incremental production sold
from January 1, 1987, until June 30,
1988; and
(3) 40% for incremental production sold
from July 1, 1988, until June 30, 1990,
but if the production quota on which the
additional tax reductions are based is
not met, the tax credit for this period
is 50% for fiscal year 1989 and 40% for
fiscal year 1990.
A coal mine operator is entitled to the
new coal production incentive tax credit
on incremental production for the entire
term of an agreement if the incremental
production resulted from coal purchases
under an existing agreement that was
extended between January 1, 1985, and
December 31, 1988, for at least a 5-year
period or under a new agreement that was
executed between January 1, 1985, and
December 31, 1988. The rates of credit
allowed are identical to those shown in
paragraphs (1), (2), and (3) above, and
25% for any incremental production sold
from July 1, 1990, until June 30, 1991,
and 25% after June 30, 1991, if the
production quota on which the additional
tax reductions are based has not been
met .
The effective tax rate on qualifying
incremental production is 15% after the
above credits are applied.
Reports of tonnage produced, average Btu
value, contract sales price, and other
information required by the Department
of Revenue are due 30 days after the
close of each calendar quarter.
Payment must accompany the quarterly
report.
Resource Indemnity Trust Tax All
producers of minerals from the surface
or subsurface are subject to an annual
tax based on the gross value of the
product .
Rate is $25 plus 0.5% of the gross value
of the product if in excess of $5,000.
Reports are due 60 days after the end of
each calendar quarter.
Payment is due with the quarterly
report .
NEW MEXICO: Resource Excise Tax is imposed for the
privilege of severing and processing
10
natural resources. A "service tax" is
also imposed on natural resources
severed or processed and owned by
another person that are not otherwise
taxable, and the tax is the same as
would be imposed on an owner of natural
resources for performing the same
function. No resource tax is due on any
natural resource that is processed in
New Mexico and on which the processors 1
tax has been paid.
Rates are: resource tax, 0.75%;
processors' tax, 0.75%; service tax,
0.7 5%.
Reports must be filed by the payment due
date which is the 25th of the month
following the month in which the first
of the following occurs: sale,
transportation out of New Mexico, or
consumption. If liability is less than
$100 a month, tax may be reported and
paid semiannually.
Severance Tax The taxable value is
gross value less rental or royalty
payments belonging to the United States
or New Mexico.
Rate Surface coal $1,081 a ton
(combination of 57 cents severance tax
and 51.1 cents required surtax) and
underground coal $1,043 a ton (a
combination of 55 cents severance tax
and 49.3 cents required surtax). On
11
July 1 of each year, the rate is
increased by a surtax equal to the
increase in the consumer price index
since 1976.
Reports and Payments are due by the 25th
of the next month.
NORTH DAKOTA: Severance Tax is imposed on all coal
severed for sale or for industrial
purposed by coal mines within the state.
Exempt is coal used primarily for
heating buildings in the state, coal
used by the state or any political
subdivision, coal used for the
generation of electricity for multiple
uses, and coal used in agricultural
processing or sugar beet refining plants
located within North Dakota or adjacent
states .
Rate is 75 cents a ton plus an
additional 2 cents a ton between July 1,
1987, and June 30, 1989. The tax rate
is reduced by 50% for coal burned in a
cogeneration facility designed to use
renewable resources to generate 10% or
more of its energy output. ( HB 106 5,
passed by the 1987 Legislature, reduced
North Dakota's coal severance tax.
Formerly the tax was imposed at the rate
of 85 cents a ton plus 1 cent for each
4-point increase in the wholesale price
index as determined semiannually by the
State Tax Commissioner. For the first
half of calendar year 1987, the total
12
rate was $1.04 a ton.)
Reports and Payments are due within 25
days after the end of each month.
OHIO: Severance Tax applicable at rate of 7
cents a ton plus an additional 1 cent a
ton to pay the state's expenses in
reclaiming coal-mined lands that the
operator failed to reclaim. The 1-cent
additional tax will cease to be imposed
when, at the close of any fiscal year,
revenues are sufficient to complete
reclamation of such lands. A second
additional tax of 1 cent a ton is
imposed during any year in which it is
necessary to bring the balance of the
reclamation supplemental forfeiture
account to $2 million.
Reports and Payments are due within 45
days after the end of each calendar
quarter except that the Tax Commissioner
may order that payments be made weekly
or more frequently if necessary.
SOOTH DAKOTA: Severance Tax is imposed on "energy
minerals" which means any mineral fuel
used in the production of energy,
including coal and lignite. The taxable
value of any "energy mineral" that has:
been sold is the sale price less any
rental or royalty payment belonging to
the United States or South Dakota or its
political subdivisions, or
13
not been sold is the market value
less any rental or royalty payment due
the United States or South Dakota or its
political subdivisions.
Rate is 4.5% of taxable value.
Reports and Payments are due within 30
days after the end of each calendar
quarter .
Conservation Tax of 2.4 mills of taxable
value is also due on any energy minerals
severed in the state.
TENNESSEE: Severance Tax is levied against every
interest owner to the extent of his
interest .
Rate 20 cents a ton.
Reports and Payments are due by the 15th
of the month following accrual.
VIRGINIA: Coal Surface Mining Reclamation Tax is
imposed by the Virginia Coal Surface
Mining Control and Reclamation Act 30
days after the end of any calendar
quarter during which the total balance
in the coal surface mining reclamation
fund is less than $500,000, and all
operators participating in the fund must
pay:
(1) 2 cents per clean ton of coal
produced by a surface mining operation;
14
(2) 1 cent per clean ton of coal
produced by a deep mining operation; and
(3) 0.5 cent per clean ton of coal
processed or loaded by preparation or
loading facilities.
At the end of any calendar quarter
during which the total balance in the
fund, including interest thereon,
exceeds $1 million, payments will cease
until again required. Any operator not
having, prior to the date of filing an
application for a coal surface mining
permit, a minimum of 5 years of
satisfactory coal surface mining
operation in the commonwealth must pay
applicable taxes at twice the rate for a
period of one year from the date of
issuance of the permit. No operator
must pay reclamation tax on total coal
production in excess of 5 million tons
per calendar year regardless of the
number of permits held by that operator.
No operator holding more than one type
of mining permit will pay tax at a rate
in excess of 2.5 cents per ton on coal
originally surface mined by that
operator or in excess of 1.5 cents per
ton on coal originally deep mined by
that operator.
Payment is due 30 days after the end of
each calendar quarter.
15
Local Coal Severance Tax A county may
levy a tax of not more than 1% of the
value of gross receipts of coal severed
in the county. Proceeds go into a local
road improvement fund. (Information
from Virginia Legislative Services
7/15/87. )
WEST VIRGINIA: Severance Tax imposed on the gross value
of the production, as shown by the gross
proceeds derived from the sale thereof
by the producer, at the following rates,
including an additional severance tax of
0.35% on coal for the benefit of
counties and municipalities beginning
on:
July 1, 1987 - 3.85%
July 1, 1988 - 3.88%
July 1, 1989 - 3.91%
July 1, 1990 - 3.94%
July 1, 1991 - 3.97%
July 1, 1992, and thereafter - 4%.
Every taxpayer is allowed an annual
credit of $500 against the taxes due, to
be applied at the rate of $41.67 per
month for each month the taxpayer was
engaged in business in the state
exercising a taxable privilege.
A credit is allowed for business
investment and jobs expansion,
industrial expansion and revitalization,
research and development projects, coal
loading facilities and, after June 30,
16
1987, housing development projects.
A credit is allowed for any coal coking
facility company granted a low-interest
loan by the Office of Community and
Industrial Development, for the building
of coal processing facilities for the
making of coke for steel production.
The credit is allowed for 5 years from
the date the reduced-rate loan is
issued.
Reports and Payments are to be filed
with the Tax Commissioner. An annual
return is due on or before the
expiration of one month after the end of
the tax year.
Taxes are due and payable in periodic
installments: for taxpayers whose
estimated liability exceeds $1,000 a
month, the tax is due and payable in
monthly installments on or before the
last day of the month following the
month in which the tax accrued; for
taxpayers whose estimated tax liability
is $1,000 a month or less, the tax is
due and payable in quarterly
installments on or before the last day
of the month following the quarter in
which the tax accrued.
WYOMING: Mining Excise and Severance Taxes
Persons extracting trona, coal,
petroleum, natural gas, oil shale, any
other fossil fuel, or any valuable
17
deposit must pay an excise tax based on
the value of the gross product
extracted. In addition, a severance tax
is levied upon the privilege of
extracting or producing coal based on a
percentage of the value of the gross
product of the coal extracted or
produced. The Department of Revenue and
Taxation computes the value of the gross
production returned for the preceding
calendar year, computes the amount of
tax levied, and notifies each taxpayer
of the amount due on or before the first
weekday in July.
Rates — Coal Excise Tax Coal produced
during the year (effective until January
1 next following the year in which
revenue produced by this tax totals $160
million) 2%. (The $160 million
threshold was passed last year with
prepayment of anticipated taxes by coal
producers. Litigation now in the courts
seeks to determine if the 2% increment
should be eliminated at the beginning of
1987 or 1988. Reduction of the total
tax rate from 10.5% to 8.5% is assured,
however, no later than the beginning of
1988. )
Mineral Excise Taxes Uranium, trona,
coal (except underground coal),
petroleum, natural gas, oil shale, or
any other fossil fuel - 2%.
Additional tax on any valuable deposits
18
(except stripper production and
underground coal) - 2%.
Additional excise tax on trona, coal
(except underground coal), and uranium
(effective until January 1 next
following the year in which revenue
produced by this tax totals $250
million) - 1.5%.
Additional excise tax on the privilege
of extracting coal (except underground
coal) - 3%.
Underground coal - 7.25%.
Enactment of HB No. 330 (Chapter 97) by
the 1987 Wyoming Legislature provides a
contingent ceiling on mineral excise
taxes as applied to coal. When the
application of mineral excise taxes
results in a tax of more than 80 cents
per ton of coal, the coal is exempt from
the tax that exceeds 80 cents per ton.
This exemption is applicable to:
(1) new agreements entered into between
March 31, 1987, and March 31, 1989,
if the application of taxes results
in a tax in excess of 80 cents on a
ton of coal at the time the
agreement is entered and the coal
is first produced under the
agreement; production and delivery
of coal actually commences under
the agreement between March 31,
19
1987, and March 31, 1989; the coal
is transported and consumed outside
the borders of Wyoming; and the new
contract or agreement is not the
result of the purchaser breaching a
contract with another Wyoming
producer; or
(2) a contract or agreement that
existed on January 1, 1987, or a
modification to that contract or
agreement occurring between March
31, 1987, and March 31, 1989,
between a Wyoming coal producer and
a purchaser for consumption in an
electrical generating facility
located in Wyoming to the extent
that the producer's annual
production and deliveries under the
contract exceeds the average annual
tonnage of coal delivered during
calendar years 1985 and 1986. The
exemption applies to the amount of
additional coal produced in
calendar year 1987 or 1988 and
thereafter, so long as the
additional coal is produced and
delivered annually. If the annual
deliveries after calendar year 1988
fall below the average of the 1985
and 1986 production, the exemption
will no longer apply even if
subsequent production exceeds the
average of the 1985 and 1986
production.
20
Collection Quarterly tax payments are
due May 15 for first quarter production,
August 15 for second quarter production,
November 15 for third quarter
production, and March 1 for fourth
quarter production. Annually by May 15
the Department of Revenue and Taxation
will determine the gross production
returned for the preceding year and
compute tax liabilities. Quarterly
taxes paid will be credited and each
taxpayer will be notified of the amount
so determined and the balance or refund
due. Any balance due is delinquent if
not paid within 30 days after receipt of
notification. Quarterly payment
requirements may be waived for taxpayers
whose tax for the preceding year was
less than $2,000.
21
22
APPENDIX C
COAL SEVERANCE TAX PROCEEDS AND DISTRIBUTIONS,
TRUST FUND EARNINGS
APPENDIX C
COAL SEVERANCE TAX PROCEEDS AND DISTRIBUTIONS,
TRUST FUND EARNINGS
The following tabulations and graphs prepared by the
Governor's Office of Budget and Program Planning
provide a yearly analysis of the proceeds of the coal
severance tax since its enactment in 1975 and of the
distribution of that money and the purposes for which
it was appropriated.
Also included is a yearly analysis of the earnings of
the various trust funds created from coal severance tax
proceeds .
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