MORGANTOWN – One of the factors that helped sink Amendment 2, with its associated plan to reimburse counties for lost property taxes from state budget surpluses, is the certainty – cited regularly by opponents – that surpluses are uncertain.
Natural gas severance tax revenues played a significant role in Fiscal Year 2022’s $1.308 billion surplus and is still playing a role in this year’s – standing at $575 million at the end of October.
John Deskins, director of WVU’s Bureau of Business and Economic Research, gave legislators a look on Monday at the role severance taxes are playing and how their contribution could diminish before the fiscal year is over.
He addressed the Joint Committee on Natural Gas Development meeting at Cacapon State Park, where legislators were gathered for November interims.
He presented a picture of the volatility of natural gas prices over the years, using Louisiana-based Henry Hub pipeline prices, which run a bit higher in general than West Virginia’s.
During COVID, he showed them, the price had fallen to below $2 per 1,000 cubic feet (mcf) in mid-2020 and spiked to $8.80 in August. The U.S. Energy Information Administration reported it fell to $5.66 in October and predicts it will sit around $6 this winter.
Natural gas production and liquefied natural gas exports have both soared, Deskins said, but both increases are tied to improved technology – ever-improving horizontal well production and new pipeline infrastructure allowing LNG to reach export facilities to go to market. “This is all just catching up with where demand has been for a long time.”
How did natural gas prices swell the surplus? Deskins explained that the budget was built on a natural gas price of $2.25 per mcf, with severance tax revenue budgeted at $92 million. The reality was more than double: $5 per mcf and $205 million in tax revenue.
That created a severance tax surplus of $113 million, about 20% of the total FY ’23 surplus to date, he said.
There are three other factors that swelled the surplus that he didn’t have time to calculate in detail, he said, but could for a future meeting: higher natural gas prices boost corporate tax collections and accompany higher coal prices, and increase property taxes from royalty owners.
And throw in a fourth factor: 40-year high inflation, he said.
But when the prices fall, he advised, the surplus will fall with it. He showed a bar graph that illustrated the current surplus with natural gas contributing $113 million; but at the predicted lower mid-2023 price, that contribution is cut in half.
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