Montana Coal Tax Cut to Spur Investment

After years of defending its record-high coal tax, Montana has voluntarily reduced the tax in an experiment to determine whether lower taxes will spur new mining and coal sales.

State officials hope to get their first reading on the experiment by mid-June, when Northern States Power Co. of Minnesota awards a new coal contract for up to 2.5 million tons a year.

That contract is the only one on the horizon as Montana coal interests, environmentalists and policy- makers watch what Gov. Ted Schwinden has called the state’s “window of opportunity.”

Schwinden used the term during his successful effort to give coal producers one-third off the 30% severance tax for any new coal contracts signed or extended between Jan. 1, 1985, and June 30, 1987.

Schwinden, saying the tax credit should force coal companies to “put up or shut up” about high coal taxes, surprised nearly everyone when he proposed the rebate plan to the Legislature in January.

Nation’s Highest Tax

His proposal came after the state had spent more than five years defending its controversial coal tax--the nation’s highest--against well-financed attacks by utilities, consumers and politicians in Midwestern states that buy Montana’s low-sulfur coal to generate power.

Montana fought congressional efforts to forcibly reduce the tax and went to the U.S. Supreme Court to successfully defend its constitutional right to set its own natural resource taxation levels.

Schwinden says his tax credit will “show that the state can set its own tax policy. It allows us to demonstrate to the courts and Congress that these are responsible people in the Legislature and this state, exercising our 10th Amendment rights in a responsible way.”

The governor says his experiment also “puts the ball in the industry’s court” to come up with new business.

‘Cautiously Optimistic’

James Mockler, director of the Montana Coal Council, says he is “cautiously optimistic” that the tax credit may help one of three Montana coal producers win the Northern States Power contract from four competitors in Wyoming, which has coal taxes of 17%.

He also sees the experiment as nurturing continued discussions about a permanent coal tax reduction.

Mockler says the legislation is significant because it shows that the governor and Legislature realize that Montana’s coal industry, which produced an estimated 33 million tons last year after a two-year decline, is not healthy and that the 30% severance tax is one cause.

“It’s a positive sign that Montana is willing to change its policies to protect its industry,” he said.

Critics of the rebate plan say the governor’s legislation is nothing more than a foundation for a permanent tax reduction that could cost the state $740 million in revenue during the next 20 years.

State Sen. Thomas Towe, a Democrat from Billings who led the battle for the 30% tax during the 1970s, says the “window of opportunity” will prove nothing.

Towe argues that, if no contracts are signed during the period, coal interests will argue that the opportunity was not long enough. And if any are signed, they will proclaim the experiment a success.

But Schwinden says the tax credit plan is an opportunity for both taxpayers and coal producers to win.

“If coal producers are able to increase production because of the incentive, they will win major new long-term contracts and the extension of existing ones. Montana taxpayers will win because the tax base is enlarged and our economy improved,” he said when he introduced the idea.