More on Coal Prices

Earlier this week, Ted blogged about coal prices, and suggested that coal prices are not strongly influenced by state policy, and instead are set regionally. This would mean that differences in state taxes on coal production do not play a large role in the price of coal.

The below chart shows the average price of coal for West Virginia and our neighboring states from 1990-2010. And as the chart shows, despite large differences in tax structures, the price of coal in each state rose and fell at the same time. This again suggests that state tax policy has little to do with the price of coal, and that the price of coal is set regionally.
 
Source: EIA Annual Coal Reports

Federal spending slows, so why the deficits?

In the debate over the federal government’s recent budget deficits, many are arguing that government spending over the last couple of years has been out of control. However, the numbers show that is just not true.

 
This chart looks compares the average annual growth rate of government spending by decade since the 1950s. And as you can see, in the past decade, while deficits were growing, federal spending was growing at a rate slower than the historical average (the data for this and all charts in this post come from the Bureau of Economic Analysis).
 
 
In fact, a closer look at the decade shows that federal spending has slowed significantly since the end of the recession. In the years leading up the the recession, federal expenditures grew at an average annual rate of 6.5%. During the recession, that rate jumped to 9.1% per year, in response to the downturn. However, since the end of the recession in 2009, the average annual growth rate of federal spending has fallen to 4.3%, well below average.
 
 
But while federal expenditures have grown at historically slow rates since 2009, the budget deficit has grown to record amounts. Why? Take a look at the growth rates of federal receipts.
 
 
Total federal receipts have grown at an average annual rate of 6.7% since 1950. However, in the 2000s, that rate dropped all the way down to 0.9%. And while tax cuts have played a role in slowing down federal receipts, so did the recession.
 
 
In the years running up before the recession, federal receipts grew at an average annual rate of 6.1%, which was slower than the historical average, likely due to the large Bush-era tax cuts. However during the recession, receipts shrank at an annual rate of 8.3%, which led to the explosion in the size of the deficit. Since then, as the economy improves, so have federal receipts, but not enough to make up the huge losses from the recession.
 
Just how bad was this recession on the federal budget, particularly revenue? Lets compare it to the major recession in the early 1980s. That recession lasted 16 months, while the recession that started in late 2007 lasted 18. These next charts compare average quarterly growth rates of federal expenditures and receipts during the recessions, and in the two years after the recessions ended. For reference, the average quarterly growth rate since 1950 is 1.8% for federal expenditures and 1.7% for federal receipts.
 
 
Both the 1981 recession and the 2007 recession, saw the government spending grow faster than average, at 3% for both. However, the impact on revenues was much greater during the most recent recession. During the 1981 recession, federal receipts declined at an average quarterly rate of 0.5%, while during the 2007 recession, the rate of decline was 3.0%.
 
 
During the recovery after the 1981 recession, federal spending fell back down to average growth rates, while the growth of receipts increased dramatically. The growth rate of federal spending fell dramatically after the 2007 recession, to an average quarterly rate of 0.7%, less than half of the historical average. In fact, the sharp slowdown in government expenditures is likely a reason why the economy remained so sluggish after the recession. And while the growth rate of receipts is back to the historical average, it is below the rate of the 1982 recovery, due to both the slow pace of the recovery and more tax cuts.
 
Below is another chart showing growth in government spending today is slow by recent standards. This chart shows the percent change in federal expenditures by president over the first three years of their terms. And once again, the rhetoric about out of control federal spending under the Obama administration is not backed by reality.
 
 
Federal expenditures in the first three years of the Obama administration have increased 15%, compared to 19% under Bush (II), and 27% under Reagan. After an initial spike in response to the recession, spending growth flattened and has started to fall. 
 
So what does all of this mean? Government spending grew rapidly during the recession, but the rate wasn’t unprecedented. Since the end of the recession, government spending has grown more slowly over the past 3 years than at almost any point in the past 60 years. The leading driver of our large deficits in recent years has been a lack of revenue, caused by a mixture of tax cuts and the recession.

State Action and Coal Prices (Wonky)

Robert Semple writes convincingly that gas prices are not set by Presidents, but are set in a global market, and that they are beyond the control of any one country.  As Dean Baker pointed out last week,  “Oil prices in the United States depend on the world market, not just supply and demand in the United States.”

This got me thinking about coal prices and state policy action – for example, how West Virginia’s severance tax on coal might influence the domestic price of coal.

The chart below shows spot market coal prices (2009 dollars) for the five coal regions – Central Appalachia, Northern Appalachia, Illinois Basin, Uintah Basin (CO and UT), and the Powder River Basin in Wyoming. As the chart indicates, coal prices, similar to gas prices in this chart by Semple, tend to rise and fall in the same pattern throughout the country. (The prices differences between Appalachia and other coal regions largely reflect the higher grade coal  – such as metallurgical coal – and the cheaper domestic transportation costs found in Appalachia.)

If Semple’s logic applies equally to coal prices as it does gas prices, than coal prices appear not to be heavily influenced by specific state tax policies, such as a severance tax, but are set regionally. 

If state severance taxes DID play a large role in the price, than it should be reflected in the price of electricity. One way to gauge this assumption is by looking at the average retail electricity costs in West Virginia, a state with a 5% severance tax on coal, and Pennsylvania, a state without a severance tax. According to the US Energy Information Administration, the average retail price of electricity was $9.48 per kilowatt-hour in West Virginia compared to $13.28 in Pennsylvania in December 2011. In Ohio, another state without a severance tax, it was $10.96 per kilowatt-hour. So, it appears that the state’s high tax burden on coal is not reflected in electricity prices.

So, if we assume that the severance tax in West Virginia is not being passed along in the form of higher electricity prices since the prices are put together in a competitive market of demand and supply, than who pays the severance tax?  Much like the discussion about who pays the federal corporate income tax, the argument with the most support is that the tax falls on the owners, or the coal producers in this case. Because most coal producers/stock owners live out of West Virginia, this could be a very exportable tax. Production taxes also tend to be highly inelastic, meaning that changes in tax rates have little affect on production. This is probably because taxes are small part of the costs and are not part of the price-setting mechanism.

If these assumptions are correct, than it gives support to the idea of placing an additional one-percent severance tax on coal to fuel economic diversification.

Taxes and Business Location – The Cracker Test

Today’s news that Shell Oil Company has chosen a site in Pennsylvania as the location for their new cracker facility comes after months of competition between PA, WV, and OH over which state would land the cracker, with each state offering a variety of incentives. (A “cracker facility” converts ethane from natural gas liquids into more profitable chemicals such as ethylene, which are then used to produce plastics and other by-products).

The news also comes on the heels of the Tax Foundation’s Location Matters report, which measured tax differences between states. The cracker situation creates a good test case for the  Location Matters report, and helps answer the question, “Did differences in state taxes influence Shell’s decision?”
 
The table below contains the relevant rankings and effective tax rates for each state from the Tax Foundation Location Matter report.
 

 

Ohio

Pennsylvania

West Virginia

 

Rate

Rank

Rate

Rank

Rate

Rank

Overall New Business

3rd

49th

33rd

New Capital Intensive Manufacturing

3.3%

3rd

6.1%

9th

6.4%

11th

New Labor Intensive Manufacturing

6.2%

3rd

11.8%

26th

10.3%

16th

 
As the table shows, if taxes mattered for business location, it should not have been a competition, Ohio should have been the clear choice. Ohio was ranked 3rd overall for taxes on new businesses, while Pennsylvania, the winner of the cracker competition, was ranked 49th, and West Virginia ranked 33rd.
 
Looking closer at manufacturing taxes, again it is clear that Ohio is obviously the best choice. The effective tax rate on new manufacturing is essentially the same in Pennsylvania and West Virginia, but is cut nearly in half in Ohio, both for labor and capital intensive manufacturing.
 
With Pennsylvania chosen as the site of Shell’s cracker facility, the Location Matters argument has failed the cracker test. By using business taxes as the metric, Ohio should have been the clear cut choice, but it wasn’t. 
 
Maybe next our policymakers in West Virginia will focus less on tax breaks and more on strengthening our workforce, updating our infrastructure, and investing in higher eductation.

Permanent Mineral Trust Fund: When Would It Be Fully Operational?

Yesterday, our sister group in Kentucky – the Kentucky Center for Economic Policy – released a report advocating the creation of a coal severance tax trust fund. As readers know, this is something we’ve been pushing in West Virginia for over two years. So, it is great news to read that the idea is being proposed in our neighboring state of Kentucky.

One thing that was mentioned in the KCEP report that we failed to highlight in our report, was when the permanent fund will be fully ‘capitalized.” That is, at what point would annual dividends from the fund surpass the annual severance tax revenues.

As you can see from the chart, this would happen in about 20 years or 2033 if the fund began in 2013. At this point, the interest payments, or dividends, would be enough to equal the annual injection of severance tax revenue. By 2035, the fund would receive an estimate $176 million in severance taxes (1% of total severance tax collections) and be able to pay out $198 million in interest income toward economic diversification projections.

(Note: The figures are based on 2012 EIA projections of coal/natural gas price and production.)

Medicaid Looms, but Who’s Talking About Revenue?

Here’s an article that appeared in the Gazette about the strain Medicaid is putting on the state’s budget. Due to the loss of stimulus funds, the declining federal match rate (which is tied to rising income in the state), and rising health care costs, state officials are scrambling to find a way to keep Medicaid funded. Right now, the state is facing a projected $170 million shortfall in Medicaid funding for FY 2014, after various spending cuts reduced the shortfall from $200 million.

What’s missing from the conversation about funding Medicaid is a discussion about the other side of the budget coin – revenue, and in particular,  business tax cuts. While there is plenty of concern over how to keep Medicaid funded without neglecting the state’s other needs, the lost revenue from the business tax cuts that started in 2006 with the Tax Modernization Project have remained the elephant in the room.
 
Since January of 2007, the business franchise tax and corporate net income tax rates have been dropping, costing the state millions in revenue each year. The estimates for FY 2013 show that revenue from these two taxes is nearly $100 million below their FY 2006 levels, a decline of nearly 30%.
 
While the recession played a role in declining revenues in recent years, the decline in corporate income and business franchise tax revenue isn’t entirely attributable to the recession. After falling during the recession, both personal income and sales tax revenue have increased since FY 2006, as Figure 1 below shows.
 
Figure 1: Percent Change in Revenue since FY 2006
Source: WV Department of Revenue
 
According to the WV Department of Revenue, these tax cuts have will have reduced revenue by a total of $205 million between 2009 and 2013. But they are not over yet. The rates are scheduled to continue to fall for another 3 years, costing the state even more revenue. As the figure below shows, the tax cuts will have cost the state another $637 million between 2014 and 2017, and nearly $200 million per year when full enacted (figure 2)
 
Figure 2: Revenue Impact of Corporate Net Income and Business Franchise Tax Cuts
Source: WV Department of Revenue
 
So, should the question be, “How can we fund Medicaid when there is so much strain on the state’s budget?” or should the question be, “Why are we cutting business taxes when there is so much strain on the state’s budget?”

Higher Education Investment Needs Our Attention

In his Friday column,  Paul Krugman points out that state expenditures for higher ed has fallen by 12 percent over the last five years after adjusting for inflation. Krugman highlights that one result of this disinvestment has been a 70 percent growth in inflation-adjusted tuition at public four-year colleges over the last decade. This got me thinking. Is West Virginia investing enough in high ed? The answer, as we point out in this year’s budget brief, is no.

First, let’s look at our state’s investment in higher education over the last decade. As the chart below shows, state investment in higher education declined significantly over the last 10 years – decreasing by about 11 percent after adjusting for inflation. This is only one percentage point below the 12 percent that Krugman cites in his column.


So what about tuition? In 2002, the average tuition at West Virginia’s instate four-year colleges was $2,816 compared to $5,147 in 2011. After adjusting for inflation, this is an increase of about 45 percent over the last decade – not quite the 70 percent that Krugman cites, but noteworthy nonetheless. As the chart below shows, state higher education support per student as fallen by about $2,600 per student over the last decade after adjusting for inflation. What this shows is that the fall off in state support for higher ed is one reason that tuition has grown so dramatically in West Virginia. This is especially troubling given that West Virginia has the lowest share of workers in the country with a college diploma.


So, how can we do better? First, the state will need to reduce the hyper-growth of corrections spending that is crowding out higher education in the budget. This is because higher ed and corrections are both part of the 40 percent of the general revenue budget that is discretionary, unlike like k-12 and Medicaid that are mandatory spending. When one program grows faster than others, it tends to crowd out the revenue that is needed from other programs such as higher ed.

Second, we need to think out of the box (I know, I hate that term too, but it’s Friday) Our sister group in Washington State has one idea that might work. They call it “pay it forward.” It allows “students in public institutions of higher education pay no tuition up-front, in exchange for agreeing to pay 3.0% of their annual income over the next 30 years. In so doing, they “pay forward” the opportunity for future students to do the same.” Sounds promising, but it will definitely take some educating (pun intended) to get policy makers and others around this idea.

Another option is to get the federal government to close the tuition gap by redirecting tax subsidies to pay for free college education. As Michael Konczal astonishingly points out, we are probably paying more to finance student debt through the federal tax code ($22.7 billion) each year than it would cost to provide free public higher education ($15-$30 billion).

Lastly, the state could simply allocate more funds to higher education institutions. My best guess is that if we could find $300-600 million dollars it would allow the state to make in-state college tuition free. Now that would create a wonderful business climate, unlike some other ideas.

No matter what option we pursue, something needs to happen soon. As Krugman points out, we do not want “ignorance is strength” to be our new state motto.

Location Matters, Except for Taxes

On the heels of their 2012 State Business Tax Climate Index is a new report from the Tax Foundation,  called Location Matters: A Comparative Analysis of State Tax Costs on Business. What’s the difference? While the State Business Tax Climate attempted to measure the “business friendliness” of each state’s tax system, the Location Matters report attempts to measure the actual tax liability in each state. The report calculates effective tax rates as a share of profits for specific industries, both for existing mature businesses and for new businesses. It also makes adjustments for certain tax incentives (which is good). The study also includes an index for overall business tax responsibilities for both new and mature businesses.

Earlier, I showed that a state’s Business Tax Climate didn’t matter much for job growth, so what about the new Location Matters index? I compared employment growth in each state from June 2009 (the official end of the recession and start of the new business cycle) to December 2011 to each of the report’s industry tax burdens that had a closely related NAICS code employment sector. Let’s start with total employment growth and the overall index. (Sources for all charts are BLS and Tax Foundation)
 
 
As shown above, there is no obvious connection between the Tax Foundation’s new index of business tax burden and employment growth among the states. The index scores for both mature and new firms had very weak correlation with employment, with correlation coefficients of -0.11 and -0.17 respectively. 
 
Next we’ll look at the Tax Foundation’s data for Retail.
 
 
Again, there is no obvious connection between the Tax Foundation’s measure of effective tax rates on retail and employment growth in the retail trade sector. The effective tax rates for both mature and new retail firms had a very weak correlation with retail employment growth, with correlation coefficients of -0.02 and -0.12 respectively.

The top 5 performing states had a higher average tax rate on mature retail firms (17.0%) than the 5 worst performing states (14.1%). For new retail, the 5 best and 5 worst performing states had the same average tax rate (31.5%).

Next is data for a Distribution Center

Again, the effective tax rates for both mature and new distribution centers had a very weak correlation with transportation and warehousing employment growth, with correlation coefficients of 0.16 and 0.09 respectively.

The top 5 performing states had a higher average tax rate on mature distribution centers (34.5%) than the 5 worst performing states (26.6%), as well as for new distribution centers, (35.4% for the best, 27.5% for the worst.

The results are similar for manufacturing. The Tax Foundation report calculates separate tax rates for labor and capital intensive manufacturing, and neither has an obvious connection to employment growth in manufacturing with weak correlations, as the charts show. And like retail and distribution, some of the best performing states have higher taxes than some of the worst performing states.

The report also calculates the effective tax rates on corporate headquarters. Looking at the locations of Fortune 500 company headquarters and the Tax Foundation’s rankings demonstrates how meaningless this particular tax measure is. The 5 states with the lowest tax burden on corporate headquarters have 0 Fortune 500 corporate hq’s located within their borders,while the 5 states with the highest tax burden on corporate hq’s have 110.

As shown in the above graphs, there is no obvious connection between low business taxes or business tax climate on the one hand,  and economic growth on the other. In fact, low business taxes don’t necessarily matter for a good business tax climate, if both reports from the Tax Foundation are to be taken at face value. The Tax Foundation ranked West Virginia 23rd in business tax climate, but 48th in mature business tax burden. The opposite is true for our neighbor Ohio, which ranked 39th in business tax climate, but 5th in business tax burden. Regardless of the disparities between tax climate and tax burden, it appears neither have a correlation with employment and economic growth. This is because taxes are a small part of the cost of doing business and that a good workforce and infrastructure require taxes to fund them.

Different states have different tax structures, and businesses will inevitably pay different taxes in different states. But these differences appear to have no obvious impact on a state’s economic growth, no matter how you measure it.

Monday Must Reads: Gas Bubble, City Inequality, and Krugs

Jeff Goodell has an insightful article talking about the “big fracking bubble.” The article also profiles Chesapeake Energy CEO Aubrey McClendon. This is the money quote:

 At Chesapeake, McClendon operated more like a land speculator than an oilman. “Our approach is to go in early, quietly and big,” says Henry Hood, who directs Chesapeake’s land purchases. “We like to get our deals signed before anybody knows what we’re up to and tries to run up prices.” But buying up such huge swaths of land requires huge chunks of cash – and the money often comes not from gas production, but from selling off land or going into debt. After Chesapeake drills a few wells in a region and “proves up” the reserves, it hawks the leases to big oil and gas companies looking to get into the shale-gas game. In 2010, it pocketed $2.2 billion by selling land it bought in Texas for $2,000 an acre to one of China’s largest oil companies for $11,000 an acre. “That’s a five-to-one return on investment,” says Jeff Mobley, Chesapeake’s senior vice president for investor relations.

Of course, this is something West Virginians know a lot about. And this isn’t the first time the subject of a Marcellus gas bubble has been talked about. Last year, the New York Times had an article discussing the work of Deborah Rodgers, a member of the advisory committee of the Federal Reserve Bank of Dallas and one of the first people to question the ‘gas rush.’

On another topic, an Atlantic article and working paper by Richard Florida looks at wage and income inequality in American cities. West Virginia metros appear to be in the middle of the distribution. Rather interesting, Florida finds “that when it comes to the incidence and variation in income inequality across metros, factors like race, poverty and the decline of unions play a much larger role” than “skill-biased technical change and in the structural economic transformation of our economy.”  Of course, these findings are nothing new. We  have been illustrating this point in several of our reports, and it is a point that has been made repeatably by the fine folks at EPI and CEPR for years.

As always, Krugman writes on Mondays and Fridays. Here is his latest on the “States of Depressions” (thank God WV weathered the recession better than most states).

Lastly, the Pittsburgh Post Gazette started an informative and thought provoking series of articles entitled,  “Poverty: Who is talking about it?” According yesterday’s article, one reason we do not talk about poverty is that ‘poor people don’t vote.’