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.