Taming Rising Health Care Costs

Over last fifty years, the cost of health care has increased dramatically in the United States. In 1960, 5 percent of the nation’s gross domestic product (GDP) went toward health expenditures. By 2008, health expenditures comprised 16.2 percent of GDP. The Congressional Budget Office (CBO) projects that total health care
spending could reach 26 percent by 2035 and 41 percent by 2060. The central factors driving health care spending is the rise in new medical technologies and innovations (drugs, equipment, skills),  chronic illnesses, more long-term care and an aging population.

Growing health care spending over the coming decades will also impact West Virginia’s economy and its ability to provide health care for public employees and vulnerable state populations that participate in programs such as Medicaid and the Children’s Health Insurance Program. A 2009 report produced for the West Virginia Health Care Authority finds that health insurance costs were approximately $13.1 billion or about 21 percent of the state’s economy (Gross State Product) in 2009.The report projected that under 2009 law that health insurance spending will climb to about $24.4 billion by 2019. 

ProjectedWest Virginia Health Care Insurance Spending As a Share GSP


                  Source: WV Health Care Authority (August 2009), CBO,  BEA
        

If West Virginia’s economy grows at the same projected rate as the national economy over the next ten years, total health insurance expenditures could grow from 21 percent to nearly 28 percent of the state’s economy. The sharp rise in health insurance expenditures is also expected to put more stain on the state budget.  In 2009, state government spent about $1.2 billion insuring public employees and vulnerable populations. By 2019, this number is projected to increase to $2.1 billion. As a share of the state’s economy (GSP), this is an increase from 1.8 percent to 2.4 percent. Over the next ten years and beyond, the state will have to find ways to reduce health care costs or find additional revenue to make up the difference.

The good news is that the above projections do not take into account the Patient Protection and Affordable Care Act (Americare) signed into law by President Obama in 2010. Americare is estimated to expand health insurance coverage to over 184,000 West Virginia residents through an expansion of Medicaid, an individual mandate, health insurance subsides for individual and small businesses, and the creation of health exchanges. Americare is also planned to “bend the curve” in health care spending by emphasizing primary care, promoting health public initiatives and research. While the implementation of the Americare could play a significant role in reducing projected costs, the state will need to implement additional policies for containing health care costs over the coming decades. 

A good place to start would be here.

 

The Compromise Tax Cut Plan Favors the Wealthy in West Virginia

The compromise tax plan agreed to by President Obama and congressional Republicans would double the tax cut for the top one percent of earners in West Virginia from the tax cut the President proposed, while offering a smaller tax cut to the poorest West Virginians, and almost no change for the middle class.

The compromise tax cut plan is a result of negotiations between President Obama and congressional Republicans.  Here is a quick description of each proposal and the eventual compromise.
 
President Obama’s original plan included a permanent extension of President Bush’s income tax cuts for those making less than $200,000 (single) and $250,000 (married) annually, the estate tax cut back to 2009 levels, and a permanent Earned Income Tax Credit (EITC) and child credit expansion, and an extension of the Making Work Pay tax credit. The original Obama plan would have added $301 billion to the budget deficit in 2011.
 
The proposal made by congressional Republicans included a permanent extension of the Bush income tax cuts for all income levels, the estate tax cut to below 2009 levels, a cut in payroll taxes, and ending the extensions to the EITC, child tax credit, and Making Work Pay credit.  The Republican proposals would have added $413 billion to the budget deficit in 2011.
 
The compromise plan includes a two year extension of the Bush income tax cuts for all earners, an estate tax cut below 2009 levels for two years, a cut in payroll taxes, and a two year extension of the EITC and the child tax credit, and an end to the Making Work Pay credit. The compromise plan would add $424 billion to the budget deficit in 2011.
 
Source:Citizens for Tax Justice and the Institute on Taxation and Economic Policy
 
The clear winners of the compromise tax plan in West Virginia are the top 5% of wage earners, whose tax cut is substantially more from Obama’s original plan, particularly for the top 1%. While the poorest West Virginians benefit more from the compromise plan than they would have from the Republican proposals, they would have been even better off under Obama’s original plan. The middle class fairs about the same under all three plans.
 
So at the end of the day, the major difference between President Obama’s original plan and the compromise plan for West Virginians is an additional $16,000 cut for someone making over $600,000, and an additional $123 billion added to the deficit.

Taxes, wages, and the costs of doing business.

At our recent annual meeting, the keynote speaker, economist and senior fellow at the Center on Budget and Policy Priorities Dr. Robert Tannenwald, talked about how West Virginia should place more emphasis on education, infrastructure, and health, rather than creating tax cuts for businesses as a way to promote economic growth. You can listen to an interview with Dr. Tannenwald here.

One of the key reasons Dr. Tannenwald cites as to why business tax cuts don’t actually promote economic growth was the fact that taxes represent a very small portion of the total costs of doing business. On average, taxes represent about 2-3% of the costs of doing business. This means that even minor changes in the costs of labor, transportation, or utilities can far exceed large reductions in business taxes.

For example, let’s consider business taxes and private wages in West Virginia and our neighboring states. According to the Bureau of Economic Analysis, in 2009, there were 577,386 private wage and salary employees in West Virginia. Private business paid out about $20.7 billion in wages, which gives an average hourly wage of $17.94, using 577,386 employees and 2,000 hours of work in a year.

West Virginia’s average hourly private wage is the lowest of its surrounding states, ranging from $0.69 lower than Kentucky to $6.71 lower than Maryland. The table below shows the value of this wage differential for West Virginia.

 

Hourly Wage Difference from West Virginia

Value of Wage Differential (2000 hours, 577,386 private employment)

KY

+$0.69

$795 million

MD

+$6.71

$7.75 billion

OH

+$2.56

$2.95 billion

PA

+$3.99

$4.61 billion

VA

+$6.38

$7.37 billion

In other words, if businesses in West Virginia paid the same wages as businesses in Kentucky, it would cost them an addition $795 million, an addition $7.75 billion if using Maryland’s wages and so on.

Now compare those numbers to taxes. According to the Council on State Taxation, businesses in West Virginia paid a total of $3.5 billion in state and local taxes in 2009.  And as the above table shows, the entirety of West Virginia’s business taxes can be offset by differences in wages of the surrounding states.

In fact, suppose West Virginia’s business taxes were cut by a third, from $3.5 billion to a little over $2.3 billion. The savings would be erased by only an $1.00 increase in average hourly wages. 

And this exercise only looks at one factor, wages. And if minor changes in wages can offset major tax cuts,
 it is easy to imagine
what changes in other factors like utilities, transportation, benefits, or occupancy can have all at the same time. When the effects of tax cuts can so easily be drowned out, then their efficiency as an economic development tool is certainly questionable.

 

Two federal proposals could worsen West Virginia’s budget problems

Two proposals regarding federal spending and taxes could have a major impact on West Virginia’s budget. First, Republican leaders in the House of Representatives have signaled that they plan to pursue the $105 billion cut in non-security discretionary programs in the 2011 budget first proposed in the “Pledge to America” campaign document. This would be 21.7 percent less than in President Obama’s proposed budget and 21.1 percent less than what was provided in 2010.

Roughly one third of all non-security discretionary spending is composed of grants in aid for state and local governments. This includes funding for K-12 education, housing programs, children and family services like WIC, job training, and law enforcement. While the proposal does not require Congress to cut all non-security programs by the same percentage, other programs that would be eligble for cuts are politically popular, including the National Institutes for Health biomedical research and the Federal Bureau of Investigation law enforcement activities.
 
If lawmakers cut these appropriations to state and local governments by 21.7 percent, or in proportion to the proposed overall reduction, West Virginia would stand to lose $254 million in federal funding in 2011.

Losing $254 million would have a significant impact on West Virginia’s budget which already faces a $200 million gap in the upcoming year. Severe budget cuts would be unavoidable, which would likely result in public employee layoffs, canceled contracts, lower payments, and benefit cuts. All of these would result in a drag on the already weakened economy.

The other proposal is President Obama’s proposed temporary tax incentive to encourage investment in machinery and equipment. The proposal would allow businesses to immediately deduct the entire cost of capital investments from their gross income, instead of gradually deducting these costs over a period of several years. Since states almost always use the federal definition of taxable income as the starting point for their own calculations, this proposal would impact state tax collections.

The proposal would result in revenue losses in 2011, 2012, and 2013. West Virginia would lose an estimated $223 million in revenue in that time frame. While about 85% of the revenue would be recovered in later years, as the subsequent depreciation deductions would not occur, this does little to ease the immediate fiscal impact, particularly in light of the mentioned potential cuts in state aid and looming budget gap. The revenue loss would likely lead to more cuts in the state budget, placing a further drag on the economy, and erasing any temporary stimulative effect.

More information about the potential cuts in state aid is available here and more information about the proposed tax change is available here.

West Virginia’s General Revenue ‘Reversal of Fortunes’

West Virginia’s combined cash flow for the first four months of FY 2011 resulted in $95.6 million dollars in surplus revenue, a significant reversal of fortunes from the same start in FY 2010.  Figure 1 below shows the cumulative general revenue cash flow from the beginning of the fiscal year starting in July through the end of October during the past four fiscal years.  This data represents the difference between actual and estimated general revenue projections.  

West Virginia’s fortunes have clearly turned for the better compared to the same period from FY 2010 when the state was reeling from The Great Recession.  At the start of FY 2010, West Virginia’s general revenues were running about $17 million dollars behind estimated projections.

The latest general revenue data identifies a $12 million increase in actual revenues over estimated projections in October 2010.  Should this trend continue for the next eight months, West Virginia would end FY 2011 with a projected surplus of nearly $200 million dollars.  

The table below reports the underlying general revenue source of West Virginia’s surplus.  Personal income tax collections have outperformed better than expected.  To date, personal income tax collections account for one-third of the total surplus revenues.  Corporate net income and business franchise taxes account for the next largest share of the state’s surplus, 27.2 percent.  Severance taxes make up 17.6 percent, consumer sales and use tax make up 13.8 percent while business and occupation tax make up a relatively small percent of the total surplus, 4.3 percent.

Personal income taxes and consumer sales tax make up a combined 70 percent of total general revenues and are highly sensitive to downward pressures in the economy.  Therefore, surplus revenues from personal income taxes and consumer sales tax is a significant change in fortunes for West Virginia’s budget outlook.

By comparison, FY 2010 saw a significant decline in personal income tax and consumer sales tax collections as a result of The Great Recession.  West Virginia’s fiscal year would have more bleak had it not been for severance tax collections.   

Today’s surplus in general revenues bodes well for West Virginia’s future budget outlook.  The new acting Governor, Earl Ray Tomblin has the benefit of surplus general revenues which should minimize the need for his administration to look for major cuts in government spending.  The state needs all of its available revenue to help West Virginia’s economy to continue moving forward. 

Government plays key role in keeping people out of poverty

Approximately one in seven West Virginians found themselves in poverty during the recession years of 2008 and 2009. This number would have been even higher without crucial assistance from government programs (Figure 1).

Figure 1. West Virginians in poverty with and without government programs

Source. Current Population Survey, Annual Social and Economic Supplement, 2010. Microdata analysis by author.

If West Virginia families had relied solely on their own resources and on assistance from their employer, relatives and friends, or non-governmental agencies, twice as many people – an additional 272,000 people – would have been in poverty. Without governmental aid, three in ten West Virginians would have found themselves below the poverty line.

Two programs in particular proved to be the greatest anti-poverty tools. Social Security had the largest effect, keeping nearly 217,000 people out of poverty. This roughly equals the combined population of Charleston, Huntington, Morgantown (including students), Wheeling, and Parkersburg! The effectiveness of this program might be dampened in 2010 and 2011, because benefits will not increase by a cost of living allowance.

Unemployment insurance also played a key role in keeping many West Virginians out of poverty. As joblessness rose in the state, more unemployed workers qualified for assistance. In addition, provisions in the Recovery Act that increased weekly benefits and weeks of benefit coverage made unemployment insurance an even more effective anti-poverty program. Without these jobless benefits, an additional 15,000 people in West Virginia would have been in poverty.

Is federal spending out of control?

As the election grows near, if there is a a dominant message to be heard from the candidates on the national level, it’s that federal spending has been out of control and needs to be drastically cut. Advertisements often cite the financial bailouts, the stimulus plan, and the new health care law as examples of the unprecedented spending that is driving up the federal deficit. But is that really the case? This chart shows federal expenditures and receipts since 2000.

Source: U.S. Bureau of Economic Analysis
 
So what can this chart tell us? Well for starters, we began the decade with a surplus, as federal receipts were higher than expenditures. In 2001 the first of what was to be known as the Bush Tax Cuts were enacted, which lowered revenue and dropped receipts below expenditures.  The recession in 2002 and 2003 lowered revenue further, along with the rest of the Bush Tax Cuts, which were enacted in 2003. These factors kept federal receipts flat for a time, never catching up with expenditures again.

During the time before the current recession, there were three main factors driving the increases in expenditures, the war in Afghanistan, the war in Iraq, and the Medicare prescription drug program, all three of which took effect in 2002 and 2003, at the same time tax cuts were depressing revenue, causing the gap between expenditures and receipts that was the source of the federal deficit.

That brings us to more recent history, when the deficit began to really take off. As the chart shows, when the recession began in late 2007, expenditures continued to grow, but not at a significantly greater pace than they had been all decade. But as the economy sputtered to a halt, tax revenues fell, and federal receipts plummeted. 

But spending has been higher, just not for the reasons the political ads would lead you to believe. To start with, the bailouts were a one time cost, and while substantial, it appears the government will get most of its money back. The stimulus bill had a large price tag, but 40 percent of it came from tax cuts. Another significant portion was aid to state and local governments. Only what was left consisted of federal spending. And unlike the 2003 Medicare program, these aren’t new programs, they are temporary measures enacted in response to the recession. The new health care law does create a new program, but according to the Congressional Budget Office, while it does have new spending, it is offset by cost-saving provisions, and actually will lower the deficit over the next ten years. In fact, according to the CBO, the combined costs of bailouts, the stimulus, and the health care law, will be less over the next ten years than costs of the Medicare prescription drug program, enacted back in 2003.

The real source of the increase in spending, just like the decrease in revenues, is due to the recession. Its no secret that the recession put millions of  people out of work and in need of help, and indeed social safety net spending has increased. Between 2007 and 2009, unemployment insurance spending increased by $97 billion, Medicaid spending increased by $46 billion, and SSI, food stamps and other aid increased by $45 billion. This, along with a $73 billion increase in Medicare spending and $90 billion in Social Security spending with many new retirees, is to be completely expected in the face of the extraordinary economic downturn we have faced, and is government spending functioning exactly how it is intended.

Recessions will naturally cause budget deficits, and once the economy fully recovers, tax revenues will rise, safety net spending will fall, and the gap will begin to close. The problem is when the deficit is structural, like what we created in 2003, when new programs and spending were met with large tax cuts.

So while its easy to look at the federal deficit and attribute it to out of control federal spending, that doesn’t tell the complete story and is pretty disingenuous. 

West Virginia Jobs-Employee Mismatch Continues

Less than half of all West Virginia jobs (49%) will require some post-secondary education training beyond high school in 2018,  according to a recent study from the Georgetown Center on Education and the Workforce. West Virginia was the lowest among all the states plus the District of Columbia.  West Virginia ranks 51st in the proportion of its 2018 jobs that will require a Bachelor’s degree.

Among our neighboring states, Maryland and Virginia ranks above the national average.  West Virginia is the only state in the country that has less than half of its jobs requiring less than a college degree. 

There are an inadequate number of good paying jobs to accommodate resident West Virginia college graduates who can earn higher wages outside of West Virginia, especially for workers who’ve earned a Bachelors’ degree.   Consequently, one-third of West Virginia’s most highly qualified college students leave the state in order to find good paying jobs because of the lack of suitable employment. 

While the work participation rate in 2008 for West Virginia public higher education graduates was 54 percent, which included both in-state and out-of-state residents, it was only 67 percent for in-state students.  That is, one-third of resident West Virginia graduates leave the state after graduation.    



In 2008, 2,301 of the 3,692 PROMISE graduates were employed by West Virginia companies after graduating during the 2003-2004 school year, yielding a work participation rate of only 62 percent. 

The inability of West Virginia to create good paying jobs by 2018 combined with the fact that we’re losing about one-third of our resident college graduates will continue to put pressure on West Virginia to compete with our neighboring states. 

How Has the Recession Affected Your Community?

Here is an animated “heat map” that shows how unemployment rates have changed across the state during the recession. While the national recession officially began in late 2007, it didn’t begin to impact West Virginia until late 2008. The map tracks unemployment rates by county from August 2008 to August 2010. As the unemployment rate rises, the colors change from white to green to red to finally gray as the unemployment rate reaches past 15%.

 
Unemployment Rates
Source: West Virginia Center on Budget and Policy analysis of BLS data

US Businesses Hoard Cash While Millions Remain Unemployed

America remains a nation of jobless workers; nearly 15 million Americans have no job to get up to each morning.  Among them are 70,000 West Virginians who also remain unemployed.  While the 2008 US recession officially ended in June 2009 large US corporations are no worse for the wear and tear as they have managed to borrow and hold onto more cash than at any time since 1964. 

American businesses are sitting pat on huge stockpiles of cash refusing to participate in the economic recovery, yet the federal government’s fiscal policy hands are tied because Congress lacks support to double down on its $787 billion dollar ante to stimulate the American economy. 

America needs its large corporate businesses to help pull this economy out of the doldrums – the federal government cannot do it alone.  US businesses, particularly large US corporations, are hoarding cash at record levels and borrowing huge amounts of cash created by the “easy money” monetary policy which lead to record low-interest rates in the bond markets.  Rather than investing this new found cash reserves on equipment, machinery, and the hiring of workers businesses have opted sit out the economic recovery process. 

The total value of all liquid assets held by non-farm non-financial US corporations is $1.84 trillion dollars, equal to 7 percent of corporate America’s total assets ($26.4 trillion dollars).[1]  That last time American companies stockpiled this much cash was in 1964, nearly 50 years ago (see, graph below).   

Critics of government fiscal policy routinely claim that government gets in the way of economic progress because they crowd out private investment.  Despite the fact that large US corporations are in the best position possible to help move this country forward and put millions of unemployed workers back to work, they have folded leaving the federal government alone to do all of the heavy lifting. 

So, the next time you hear pundits claim the federal government, through its fiscal stimulus program, is hurting American businesses or preventing the private sector from taking the initiative ask them about the huge amounts of cash businesses were hoarding.  America needs large US corporations to re-invest back into the American economy to help reduce the nation’s 9.6 unemployment rate





[1] US Federal Reserve’s Z.1, Flow of Funds Account of the US, Total Assets from line 1, Table B.102 and Total Liquid Assets from line 41, Table L. 102.