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Drop in unmined minerals tax bills is ‘unbelievable’

Unmined minerals tax bills for Letcher County properties are down $2.5 million this year, threatening to bankrupt the county, the school district and the special districts in the county, officials said.

The Letcher County School District appears to be the biggest loser strictly in terms of dollar losses. The mineral property tax bills for the district fell a total of $1,288,097 from the previous year.

“That’s unbelievable,” Letcher County School Superintendent Tony Sergent said. “That’s heartbreaking. We’re just going to have to cut jobs and cut services.”

The decrease appears to be due to the state Revenue Cabinet changing the rate of recovery in the formula used to assess mineral taxes. Glenn T. Waldrop, a spokesman for the Kentucky Revenue Cabinet, said the agency didn’t change the way it computes the value, but some of the variables did change. Variables used in the formula include, “thickness of a coal seam, the price of a ton of coal, the tonnage being mined, and the risk factor involved in investing in coal.” The information is obtained from mineral tax returns filed by the mineral owners.

The figures received by the Letcher County Sheriff ’s Department on Friday show an 83-percent decrease in the unmined coal tax, a 51-percent decrease in the tax on oil reserves, and a 54 percent decrease in natural gas taxes. Limestone, sand and gravel increased to $9,277, up $135 or one percent of the total $9,142 the industry was charged for the 2015 tax year.

Coal taxes dropped by a total of $1.4 million, crude oil by $181,163, and natural gas by $942,889. The taxes are split among the state of Kentucky, Letcher County Fiscal Court, the Letcher County Board of Education, the Soil Conservation District, Extension Service, Board of Health, and Letcher County Public Library District.

County Judge/Executive Jim Ward said he had not heard the figures until The Mountain Eagle called him Monday.

“Gollee!” Ward said. “We’re killed. That will kill us.”

County finance officer D.J. Frazier was shocked.

“Oh my. That’s depressing,” she said.

She said all of that money goes directly into the county’s general fund account, which pays everything from salaries to supplies to loan payments.

The county was expecting a loss, but nothing as great as the tax bills actually show, Ward said. Several changes in the county tax code – including an insurance tax, a payroll tax and a business license fee on mineral extraction industries – have been proposed, but the fiscal court failed to pass them. The business license, $2,500 per facility, would have raised about $4 million a year. The proposal died on a 3-3 vote.

Sheriff Danny Webb said the numbers will be devastating to his office, which has already had to lay off employees and close up after 4 p.m., allowing Kentucky State Police in Hazard to do all dispatched in the evening and at night.

“I would lock the doors, but I can’t afford to buy the lock,” Webb said.

The decrease has hit coal counties the hardest, since the largest decrease in value is in the coal tax. The number of eastern Kentucky mines has declined, but steam coal is selling at an average of 52.45/short ton, down about $5 since 2014. According to figures from The Department of Revenue, production in Letcher County dropped 30 percent in 2016.

“The Department of Revenue’s process by which unmined minerals is assessed has not changed. With significant changes in the coal industry, the fair market value of unmined coal dropped drastically,” Waldrop said. “As constitutionally required, DOR used fair market values for the 2016 assessments. Both coal and other minerals are susceptible to market conditions. An abundance of natural gas throughout the country has contributed to the lower price of natural gas.”

Spot prices for natural gas on the Henry Hub dropped in early 2016, but stabilized by May and have now risen well above the 2015 prices, and are near the levels seen from 2011- 2014, according to the U.S. Department of Energy.

Lexington attorney Joe Childers, who filed the lawsuit that led to the establishment of the unmined minerals tax in 1988 and assisted with the court’s oversight of its implementation until the early 2000s, said he has not looked at the specific figures used by the Department of Revenue in several years, but was surprised that the change in unmined coal could be a negative 83 percent in just one year.

Childers said the formula is closely tied to production, and if the drop in production was 30 percent, the drop in revenue should be close to the same.

“That indicates to me there shouldn’t be an 83 percent drop in assessment,” Childers said. “It should mirror production pretty closely, and it should mirror price pretty closely.”

Kentuckians For The Commonwealth, formerly known as the Kentucky Fair Tax Coalition, which supported the establishment of the unmined minerals tax in 1988, is concerned that the decrease in mineral taxes is only the first problem in what might be an even more financially disastrous year for local governments and individual taxpayers.

“This thing is very much complicated by the governor foreshadowing a special session for tax reform,” said Tyler Offerman, tax justice organizer for KFTC. “We are concerned he may try to change the mineral tax structure further.”

A bill has already been introduced in the last two sessions of the general assembly that would have exempted coal from taxation unless it was under permit on January 1, and the owner had plans to mine it within the next year. Both bills died in committee.

Under the current system, coal planned for mining in the near future is taxed at a higher rate, and that rate reduces to near nothing if the coal will not be mined for 16 or more years.

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