The Constitutional Challenge to West Virginia’s Coal Severance Tax
December 6, 2005
Like many states with abundant natural resources, West Virginia levies a severance tax on the mining of coal. The tax is generally calculated as 5 percent of the gross receipts of the coal mined in West Virginia.
As much as 20 percent of West Virginia coal is exported to countries outside the United States. However, in some cases the state measures the tax based on the tonnage measured or price used when the coal is delivered (outside of West Virginia) to a ship for export. In all cases, West Virginia does not distinguish between coal destined for export or coal used domestically.
Because the tax applies to coal destined for export, several coal companies challenged the tax as a violation of the Import/Export Clause of the Constitution, which says that “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws.”
In a 3-2 decision, the West Virginia Supreme Court of Appeals rejected the challenge. In its analysis under the Import/Export Clause, the court focused on three areas:
• Did the severance tax harm the ability of the United States to speak with one voice when regulating commercial relations with other countries?
• Did the severance tax impede the federal government’s ability to raise revenue from imported goods?
• Did the severance tax intrude upon fiscal harmony between the states?
In all three cases, the court answered “no.” It rejected the coal companies arguments that the severance tax was harming the competitiveness of U.S. coal exports by increasing their price (and thereby precluding Congress’ power to speak authoritatively on international trade issues): “This mere price increase is not the kind of adverse effect on foreign affairs—like causing retaliation by foreign governments—that we think is required under the (Constitution).” It also pointed out that this reasoning would invalidate a host of state taxes under the Import/Export Clause, such as workers compensation taxes paid by manufacturers who largely export their products.
Though two judges disagreed with the result, they have not yet filed dissenting opinions. It is likely that the decision will be appealed to the U.S. Supreme Court.