Competitive interstate taxation of western coal

This paper analyzes the potential market power of western states in setting coal severance taxes. An attempt to determine the emphasis placed by the western states on the development of their coal resources is also made. Three market structures are analyzed. One involves a western regional cartel, setting taxes collectively. The other cases are noncooperative tax equilibria with Montana and Wyoming competing against each other. We study the effects on these equilibria of changes in each region's relative emphasis on development of coal resources vs tax revenue. The welfare impacts of these tax setting policies are also addressed. The analysis is based on an activity analysis of US coal markets. The results show that the taxes associated with the noncooperative competitive tax equilibria are close to present tax levels. Additionally, we conclude that western states currently are quite efficient extractors of economic rent from coal produced within their boundaries, in terms of welfare loss per dollar of tax revenue collected. 2 figures.