AN ANALYSIS OF THE EFFECT OF THE PROPOSED AD VALOREM PROPERTY TAXATION OF UNMINED COAL PROPERTY IN KENTUCKY (TAXATION)

The purpose of this study was to determine whether an ad valorem tax on unmined coal would increase the cost of producing Kentucky coal and thereby render it noncompetitive with coal produced in other states. Two models, RAMC (a supply model) and CSTM (a demand model), developed by the United States Department of Energy were used in the study. The proposed tax on unmined coal was included as a regional cost parameter in the RAMC model. In order to determine the affect a tax on unmined coal would have on the price of and demand for Kentucky coal, the elasticity coefficient of coal produced in Kentucky was calculated using the following formula: ln Q = b{dollar}sb{lcub}rm O{rcub}{dollar} + {dollar}sum{dollar} b{dollar}sb{lcub}rm i{rcub}{dollar} Coal Type i + {dollar}beta{dollar} ln P + e. The elasticity coefficient was determined to be {dollar}-{dollar}.783. The negative elasticity indicates that the demand for coal is somewhat inelastic. Thus, a portion of the tax can be passed on to consumers in the form of higher prices. A portion of the tax, however, will be borne by the producer. Three graphs were constructed showing the portion of the tax that would be passed on to consumers and the portion of the tax burden that would be absorbed by the producers. The graphic analysis indicates that approximately half of the tax would be passed on to consumers in the form of a price increase, while the other half of the tax would be absorbed by producers, causing their rate of return to decrease.; In addition, regression analysis was performed in order to determine whether the tax would cause a significant difference in quantity demanded. The results of the general linear model "t Test" indicates that there was no significant difference in the demand for coal produced in Kentucky, regardless of the level of taxation. The results of "Tukey's t Test" also indicate that there was no significant difference in the demand for Kentucky coal. The results of the statistical test could be because of the relatively small size of the tax in relation to the mine mouth price of coal per ton.