Blog By: Lauren Chugg

The coal mining industry in Kentucky holds significant importance and enjoys support from entities such as the Kentucky Coal Association.[i] Given the substantial coal production in Kentucky, a key source of revenue is derived through the imposition of a severance tax on mined coal.[ii] The severance tax on coal mined within Kentucky was established in 1972 and was broadened in 1978.[iii] Some states engage in coal mining severance taxes, and others do not. For example, Arkansas, Ohio, Tennessee, and West Virginia have a severance tax on coal, while other states like Illinois do not have a severance tax on coal.[iv] Consequently, companies in states without a severance tax can sell coal at lower prices than those with severance taxes. While the Kentucky coal severance tax brings revenue to the state, it places Kentucky coal companies at a disadvantage in uncompetitive bids to sell coal.

In an attempt to combat Kentucky coal companies at a disadvantage compared to out-of-state coal companies, the Kentucky legislature proposed a solution that would make the Kentucky Public Service Commission more inclined to purchase coal from Kentucky companies.[v] Formally known as Senate Bill 257, this legislation mandated the Commission to assess the reasonableness of fuel costs in contracts and competitive bids, factoring in the exclusion of any severance costs.[vi] Consequently, when analyzing coal contracts, severance taxes would be subtracted from the prices for comparison.[vii] While this law would benefit Kentucky coal miners and companies, it eliminated the competitive edge previously enjoyed by companies in states without severance taxes.[viii]

In response, Foresight Coal Sales, LLC, an Illinois coal company, challenged SB 257, claiming that it violated the Commerce Clause of the United States Constitution.[ix] Under the Commerce Clause, Congress has the power to regulate commerce among the states.[x] In practice, the Commerce Clause requires that state legislation cannot discriminate against interstate commerce.[xi] The Kentucky Attorney General asserted that the policy was valid because, while it might benefit Kentucky coal over some states, without SB 257, Kentucky coal sales remain at a detriment compared to others.[xii] The District Court ruled in favor of the Kentucky Public Service Commission, and in February of this year, the Sixth Circuit Court of Appeals reviewed the decision, reversing in favor of Foresight Coal.[xiii] In their opinion, the Sixth Circuit held that SB 257 discriminated against interstate commerce and therefore was per se invalid.[xiv] The Sixth Circuit explained that SB 257 treats states with a severance tax differently than those without a severance tax on coal,[xv] holding that the bill was purposefully discriminatory against out-of-state coal.[xvi]

The Supreme Court of the United States denied certiorari. SB 257 is now unconstitutional and no longer in effect.[xvii] I believe the Court of Appeals made a mistake. This decision will harm the coal industry in Kentucky. In the second quarter of 2023, coal mines employed over four thousand workers in the U.S.[xviii] Without SB 257, the Commission will return to contracting with coal companies from states without severance taxes instead of Kentucky because the out-of-state companies can offer lower prices. Such a disadvantage to Kentucky will affect coal mine employment in the state—a concern the Kentucky legislature was trying to safeguard in the first place. Without legislation like SB 257, the Commission will choose bids with lower prices, likely from out-of-state coal companies.

Over time, there has been a decline in coal production in Kentucky. In the second quarter of 2000, Kentucky produced over 30 million tons of coal, and in the second quarter of 2023, Kentucky produced under 7 million tons of coal.[xix] This decline will continue, especially in light of Kentucky’s severance tax. The Kentucky legislature should re-evaluate the coal severance tax because of how it may affect Kentucky coal revenue.

In 2023, coal-producing companies received $74 million in coal severance funds.[xx] Directing these funds back to counties that suffer the most from the coal severance tax effectively supports coal companies by assisting their communities. As litigation has indicated, bills like SB 257 will be held invalid. Kentucky should focus on redistributing tax funds in a manner that directly benefits coal mining communities instead of attempting to discount Kentucky coal when comparing bids. Further, the Kentucky legislature should re-evaluate the coal severance tax due to how it may negatively affect Kentucky coal revenue.

[i] Our Mission, Kentucky Coal Association (2023), https://www.kentuckycoal.com/our-mission/ (last viewed Nov. 14, 2023) [[https://perma.cc/FY2V-HWH5].

[ii] Jonathan Roenker, Kentucky’s Coal Severance Tax, Legislative Research Commission (July 11, 2013), https://apps.legislature.ky.gov/lrc/publications/ResearchReports/RR439.pdf [https://perma.cc/5FEL-3UQ9].

[iii] Id.

[iv] Lila McKinley, Mining Taxes in Other States, OLR Research Report (Mar. 8. 2007), https://www.cga.ct.gov/2007/rpt/2007-R-0239.html [https://perma.cc/G87K-MW6Z].

[v] Foresight Coal Sales, LLC v. Chandler, 60 F.4th 288, 293 (6th Cir. 2023).

[vi] Id.

[vii] Id.

[viii] Id. at 294.

[ix] Id.

[x] US. Const. art. I, § 8, cl. 3.

[xi] Foresight, 60 F.4th at 295.

[xii] Id. at 294.

[xiii] Id.

[xiv] Id. at 296.

[xv] Id. at 297.

[xvi] Id. at 300.

[xvii] Perry Cooper, Supreme Court Passes on Kentucky Coal Tax Commerce Clause Case, Bloomberg Tax (Oct. 2, 2023), https://news.bloomberglaw.com/daily-tax-report-state/supreme-court-passes-on-kentucky-coal-tax-commerce-clause-case?context=search&index=1 [https://perma.cc/SKW7-5HDY].

[xviii] Quarterly Coal Dashboard, Kentucky Energy and Environment Cabinet (2022), https://eec.ky.gov/Energy/News-Publications/Pages/quarterly-coal-dashboard.aspx [https://perma.cc/B2F5-FTTY].

[xix] Id.

[xx] $74 million going back to coal-producing communities, marking 10-year high in coal severance funds to counties, Kentucky Association of Counties (June 29, 2023), https://www.kaco.org/articles/74-million-going-back-to-coal-producing-communities-marking-10-year-high-in-coal-severance-funds-to-counties/ [https://perma.cc/ZA4J-SP7S].