CBO Says Stimulus is Still Boosting the Economy

A new report from the Congressional Budget Office (CBO) shows that the American Recovery and Reinvestment Act (ARRA) or stimulus bill, has continued to boost the economy throughout 2011, and will continue to do so through 2012 and into 2013.

According to the report, the stimulus increased employment in the 4th quarter of 2011 by between 400,000 and 2.6 million jobs. Without the stimulus, the unemployment rate would have been between 0.2 and 1.1 points higher, and GDP would have been between 0.2% and 1.5% lower.
 
The stimulus proved to be effective during the worst of the recession, when the economy was at its weakest. The CBO report finds that the impact of the stimulus peaked in the 3rd quarter of 2010, when between 700,000 and 3.6 million jobs could be attributed to the stimulus’s economic impact. Without the stimulus, the unemployment rate could have peaked at 11.5%. Instead, the stimulus held the unemployment rate below 10%.
 
The following tables apply the findings from the CBO report to West Virginia. To estimate the figures for the state, I assumed the ratio between the state’s actual employment and unemployment numbers and the national numbers would have remained the same absent the stimulus. While the CBO report offered two estimates of the stimulus’s impact, one of high effectiveness and one of low effectiveness, I used the average of the two for the tables.
 
Employment in WV, Actual and Estimate without Stimulus
Sources: WVCBP analysis of CBO and BLS data
 
According to the analysis, the stimulus boosted employment in West Virginia by an estimated 5,800 jobs in the 4th quarter of 2011. The economic impact of the stimulus peaked in the 3rd quarter of 2010, when in increased employment in West Virginia by nearly 11,000 jobs. Using the high effectiveness estimate from the CBO report, the stimulus’s impact peaked at over 18,000 jobs in the 3rd quarter of 2010, and increased employment by more than 10,000 jobs at the end of 2011.
 
Unemployment Rate in WV, Actual and Estimate Without Stimulus
 
Sources: WVCBP analysis of CBO and BLS data
 
According to the analysis, the stimulus reduced West Virginia’s unemployment rate from 8.6% to 8.0% in the 4th quarter of 2011. At its peak, the economic impact from the stimulus lowered West Virginia’s unemployment rate from 10.4% to 9.2% during the 3rd quarter of 2010. Using the high effectiveness estimate from the CBO report, the state’s unemployment rate could have reached 11.5%. Instead, the state’s unemployment rate never went over 9.6%.
 
The CBO report also shows, that while fading, the stimulus will continue to have an effect throughout 2012 and 2013. The stimulus is expected to boost GDP by 0.8% in 2012 and 0.4% in 2013, lower the unemployment rate by 0.6 points in 2012 and 0.3 point in 2013, and increase employment by 1.1 million jobs in 2012 and 500,000 in 2013. The stimulus also increased the number of full time workers throughout the recession, and is expected to continue to do so through 2013.

No Income Tax Doesn’t = Low Taxes

There has been a lot of noise lately in the policy community about a new report out of Oklahoma, recommending the elimination of the personal income tax. The report claims that the nine states with no personal income tax have performed better economically than the nine states with the highest personal income taxes.

The Institute on Taxation and Economic policy debunks the report, showing that the no tax states actually are not outperforming the the high tax states. While the ITEP report addresses some of the flaws in the Oklahoma report, I’m taking a different approach.
 
The Oklahoma report compares the nine states with no personal income tax with the nine states with the highest marginal personal income tax rate. The report also compares the states with the lowest overall tax burden with the states with the highest overall tax burden. However, these two comparisons are not the same.
 
For example, the state of Washington is one of the no income tax states. However, according to ITEP, its overall state and local tax burden on middle class income is 11.2%, which is a higher overall rate than 7 of the 9 “no income tax” states. Why? What state’s like Washington lack in income taxes, they make up for in property and sales taxes. 
 
By focusing on the income tax, the report misses out on these other local taxes we all pay. And while the report does attempt to show that overall tax burden matters, the report advocates the elimination of the income tax, despite the fact that states with no income taxes don’t necessarily have lower tax burdens. And I definitely don’t think the conclusion the authors wanted us to take away from the report is that high property and sales taxes lead to economic growth.
 
The same problem applies to business taxes in the “no income tax” states. Despite little to no evidence, there is a steady drumbeat that business taxes are all that matter for economic growth. So I doubt that many would advocate replacing the personal income tax with higher business taxes, but that is exactly the conclusion one could come away with from the Oklahoma report. According to numbers from the Council on State Taxation, the “no income tax” states tend to have higher business taxes than the “high” tax states, as the table below shows.
 

“High” Income Tax

No Income Tax

State

Business

Tax Rate

State

Business

Tax Rate

Maine

7.6%

Alaska

11.6%

Vermont

6.8%

Wyoming

9.3%

New York

6.4%

Washington

5.8%

Hawaii

5.4%

South Dakota

5.5%

New Jersey

4.9%

New Hampshire

5.4%

California

4.7%

Texas

5.0%

Ohio

4.5%

Florida

4.9%

Maryland

4.2%

Nevada

4.9%

Oregon

3.8%

Tennessee

4.6% 

 
Both Alaska and Wyoming have higher business taxes than any of the “high” income tax states, while 4 of the “high” income tax states have lower taxes than any of the no income tax states. But again, I strongly doubt the authors of the Oklahoma report want us to conclude that high business tax states have stronger economic growth.
 
So what should be the takeaway? All of the tax burden and tax climate studies end up contradicting each other (see West Virginia’s property tax climate ranking versus the rhetoric around the cracker tax incentive), because they all have to leave out major factors to make their point. Because the factors that do matter to economic growth –  infrastructure, markets, workforce, public services, etc –  have no obvious relationship to low taxes. 

Climate Change – How Important is the Tax Foundation’s State Business Tax Climate Index?

Last month the Tax Foundation released the 2012 edition of their State Business Tax Climate Index, a measure of how business-friendly a state’s tax system is. The overall index is comprised of 5 sub-indexes, measuring the “business-friendliness” of a state’s corporate income, individual income, sales, property, and unemployment insurance taxes. This year, West Virginia ranked 23rd, with an overall score of 5.19 (higher scores being better business). (Interesting side note, despite the “job-killing” rhetoric around West Virginia’s business personal property tax and the $300 million tax incentives to counteract it, according to the Tax Foundation, West Virginia’s property taxes are more business friendly than both Ohio’s and Pennsylvania’s.)

I’ve looked at these business tax climate rankings before, and suggested that a good business tax climate doesn’t necessarily lead to a good economy. This time I’ll take a closer look at the Tax Foundation’s scores to see how much they really do matter. The next four charts compare total nonfarm employment growth in each state with the state’s Business Tax Climate Index Score in FY 2009, FY 2010, FY 2011, and the first half of FY 2012.
 
Sources: Tax Foundation and BLS data
 
As the charts show, for each of the past four years, there has been no obvious connection between a state’s business tax climate and employment growth. In fact, in the year with the strongest correlation between business tax climate and employment growth, FY 2009, the relationship was negative, with a correlation coefficient of -0.10. 
 
The Tax Foundation contends that a state’s tax climate does matter to growth, and that their index is able to predict growth, pointing to a study from Kansas that looks at various tax climate indexes. However the findings of the report aren’t actually a ringing endorsement for Tax Foundation or any other tax climate, stating, “None of the business climate indexes can explain a large proportion of the variation in growth across counties. The best performing business climate indexes explained at most 5% of the variation in relative growth at the borders, suggesting that most of the variation in economic performance is due to factors not captured by state-level business climate measures. This would seem to suggest that business climate is unimportant in driving relative growth among the states.
 
So if the Tax Foundations index can’t explain employment growth, both according to my charts and their own citations, does improving a state’s tax climate matter. This next chart compares changes in state scores with employment growth between FY 2009 and the first half of FY 2012.
 
Sources: Tax Foundation and BLS data
 
Again, there is no obvious connection between improvement in a state’s score and employment growth. In fact the state that had the biggest improvement in score, Washington, had worse employment growth than the state with the biggest decline in score, Virginia. And while North Dakota had the biggest employment growth, their score slightly declined, while the state with the worst employment performance, Nevada, saw their score increase.
 
So what about some other measure of economic strength and performance? Again the answer is the same. The following charts show no obvious connection between a state’s Business Tax Climate Score and median wages, GSP per worker, or unemployment rate for the most recent years available.
 


Sources: Tax Foundation, BEA, and BLS data
 
If you’ve read the blog before, you know what comes next. States with good business climates are those with high quality public services, a 21st century infrastructure, and quality schools and colleges that produce a skilled and well-trained workforce.

 

Getting the Story Right: Mineral Taxation in Wyoming and West Virginia

Last week, I was asked to present before the Senate Economic Development Committee on our projected estimates regarding S.B. 182 – which creates the WV Future Fund proposed by Senate President Jeff Kessler.

During the meeting, Mark Muchow, the Deputy Secretary of the WV Department of Revenue, also presented the committee with a history of the WV severance tax. At the end of his presentation, Muchow also compared the  mining (oil, natural gas, and coal) gross domestic product of Wyoming and West Virginia, showing that Wyoming’s natural resource economy was about twice the size of West Virginia.   In response to questions about the taxation of minerals in Wyoming and West Virginia, Muchow also told legislators that West Virginia taxes mineral property while Wyoming does not.

After doing a little research after the meeting, I discovered that Muchow failed to mention that Wyoming does levy a county gross products tax based on the taxable value of minerals produced in the county. According to the Wyoming Department of Revenue, this ad valorem property tax brought in over $1.2 billion dollars in revenue for Wyoming county governments in 2009 based on 2008 taxable mineral production values. Of the $1.2 billion, approximately $967 million was from coal and natural gas. According to two reports conducted by West Virginia University on the economic impact of the natural gas and coal industry in the state, total West Virginia property tax revenue in 2008 for coal was $90.8 million and $58.3 million for natural gas – a total of $149.1 million. According to these estimates, West Virginia collected about 15.4 percent of the amount in natural gas and coal property taxes that Wyoming collected in 2009.

Upon doing this research, I remembered that Marshall University’s Center for Business and Economic Research conducted two studies surveying the taxation of coal (2010) and natural gas (2011) in the country. After reading the sections of both studies that discussed how Wyoming taxed coal (pg. 26-27) and natural gas (pg.71-72), I discovered that neither of them mentioned Wyoming’s country gross products tax in their analysis. And this is a big deal. Why? Because, in general, the county gross products tax brings in about the same amount of revenue as the state’s severance tax on coal (7%) and natural (6%).

To make sure I was correct, I looked at the citation in the coal taxation report and it sourced an interview with Craig Grenick of Wyoming’s Department of Revenue. So, I contacted Mr. Grenvik and he confirmed that the Marshall studies both failed to mention the county gross products tax in their surveys of coal and natural gas taxation. I thought this was interesting, considering that the principal author of both of these studies, Cal Kent,  has repeatedly questioned our studies over the last two years. For example, just recently Mr. Kent presented this report on the taxation of natural gas in response to our report during legislative interims in November. This report also failed to mention the Wyoming county gross products tax. 

With this in mind, Sean and I put together a chart (see below) showing the effective property and severance tax rates for coal and natural gas in Wyoming and West Virginia in 2008. As you can see, the overall effective property and severance tax rate on coal and natural gas in Wyoming is 9.3%, compared to 5.8% in West Virginia. 


Sources: Wyoming Department of Revenue 2009 Annual Report, EIA Annual Coal Report 2010, EIA natural gas wellhead value and marketed production 2008, West Virginia Tax Department severance tax disaggregation, WVU BBER The West Virginia Coal Economy 2008, WVU BBER The Economic Impact of the Natural Gas Industry and the Marcellus Shale Development in West Virginia in 2009.

*Production value for natural gas in West Virginia is not available from the EIA. Instead, the 5 percent statutory severance tax rate on natural gas was assumed to also be the effective rate to derive the production value. In reality, the effective rate is below 5 percent, due to exemptions and deductions. Therefore, the production value for natural gas is likely higher than presented, in effect lowering the effective rates for property, severance, and total taxes.

So what if West Virginia taxed coal and natural gas property at the same rates as Wyoming? The property tax would have produced $566 million instead of $149 million,  a difference of $415 million – which is actually more than what was collected in state coal and natural gas severance taxes in 2008.

In addition to leaving out the property tax in Wyoming, the CBER and Mr. Kent are also guilty of overestimating the effective rate of the severance tax  on natural gas in West Virginia.  In the above chart, we note that production value for natural gas in West Virginia is not available, and instead we treat the statutory rate as the effective rate to derive at total production value.  Mr. Kent ran into this same problem in this report about the severance tax. On page 6, CBER uses the national average price of gas to derive an effective rate for West Virginia, which comes out to 7.83%. But this is actually higher than the statutory rate, which should never happen, since the deductions and exemptions lower the effective rate below the statutory rate.

How did this happen? The price of gas has been on a roller-coaster ride the past few years, and fell dramatically between 2008 and 2009. But these average prices are calculated by calendar year, while the total severance tax revenue used in the calculation was collected in a fiscal year. When the price ch
anges so dramatically in a calendar year, the use of a fiscal year’s revenue to calculate the effective rate distorts the results. And as the table below shows, 2009 happened to be a year when this distortion was the greatest, and is quite an outlier compared to other available years.


Sources: EIA and WV State Tax Department

The CBER report concluded that West Virginia’s natural gas severance tax was the 4th highest of the 15 states examined, based on 2009’s flawed effective rate calculation, and higher than Wyoming, Alaska, Kentucky, and Texas. But if 2010’s effective rate was used instead, then West Virgina ranks 10th highest, and lower than all of those energy states. However, as page 3 of the CBER report shows, several different calendar and fiscal years were used to compare severance tax revenue between states, making all of the effective rates in the report suspect.

These issues raise the question of what else Mr. Kent has left out or misrepresented in his reports to the legislature over the years. In the debate over the taxation of the coal and natural gas industries, as well as in the debate over the creation of a permanent mineral trust fund, both state officials and Mr. Kent have presented the legislature with incomplete, misleading, and often inaccurate information. These issues highlight the need for an independent and professional fiscal office to inform the public debate over these and other important issues with all of the facts and available evidence. 

The above analysis also clearly shows that West Virginia’s mineral property and severance taxes are not out of line with a conservative state like Wyoming and not a barrier to creating a permanent mineral trust fund. Our only barrier seems to be that we are not doing as good a job as Wyoming in ensuring that our state benefits from its rich natural resources.

Ted Boettner
Sean O’Leary