Pulling Apart West Virginia’s Economic Recovery

George Hohmann has an excellent piece (and graph) in today’s Charleston Daily Mail on the uneven recovery among the state’s industry sectors. In a nut shell, since we are an energy state and are heavily reliant on federal transfers (think about our elders: Medicaid/Medicare/Social Security), we’ve seen strong growth in the mining and health care sectors. The growth in these two sectors is the central reason West Virginia has outperformed many other states since the beginning of the recession. From December 2007 to April 2012, West Virginia has lost only 0.1% of its jobs compared to the national average of 3.6%. Among the 50 states and DC, West Virginia ranks 9th best in job performance since the beginning of the recession.

While it is great West Virginia’s economy is “doing better” than most states since the beginning of the recession, there are a few questions that we need to ask. First, does the picture change if we start at the point of recovery (June 2009) instead of the beginning of the recession? This is especially important because West Virginia was about a year late to the recession.  Second, how much of the state’s performance is tied up with federal transfers?
Lastly, how many jobs do we need to get back to pre-recession employment?

Let’s look at each one, starting with going from the beginning of the recovery to today. As discussed above, measuring from the beginning of the recession to today West Virginia ranks in the top ten in the fewest jobs lost.

 However, if we want to measure which states have “recovered” the best from the recession, we need to look at job growth from when the recession officially ended (June 2009) to today. When we do this, the picture changes. The Mountain State now ranks below the nation as a whole and 21 states are recovering better than West Virginia. What this really tells us is that the recession never hit West Virginia as hard as other states (for reasons explained here).

One of the central reasons why the Mountain State performed better since the beginning of the recession is that our state disproportionally benefits from automatic federal stabilizers (e.g. food stamps) and stimulus spending. As the two charts below illustrate, federal transfers (Social Security, Medicaid, Medicare, SNAP, etc.) grew from 24 percent of West Virginia’s personal income at the beginning of the recession to over 26 at the end of 2011.

Meanwhile, the share of income coming from private earnings fell during the recession. Most notable is that when private earnings fell dramatically in 2009 – when West Virginia was being hit the hardest by the recession –  that was the same time that federal transfers grew.

From the first quarter of 2008 to the fourth quarter of 2011, personal income in West Virginia grew from $56.4 billion to $63.1 billion – a gain of $6.7 billion. Over this same time period, private sector earnings grew by  approximately $3.2 billion and federal transfers grew by $2.9 billion. Public sector earnings over this period grew by $911 million, with mining growing by $873 million and health care by $706 million. What these numbers tell us is that West Virginia’s above average performance during the last four years has a lot to with the federal government.  This is because we have an older and poorer population that is disproportionally eligible for federal programs like Medicaid and Social Security.

Lastly, let’s take a look at the jobs deficit in West Virginia. When the recession began in December 2007, the Mountain State had 760,300 jobs.  Since then, the state has experienced 23 months of job loss. Our state’s employment trough occurred in February 2010 when we had 21,300 fewer jobs than we did before the recession started. Now in April, 2012, we have 600 fewer jobs. 

However, West Virginia’s job deficit, or the difference between the number of jobs our state has and the number it needs to regain its pre-recession employment rate, is 23,800. This number includes the 600 jobs the state has lost plus the 23,200 jobs it needs to keep up with the 3.1% growth in population that West Virginia has experienced in the 52 months since the recession began.

 
While the Mountain State has weathered the recession better than most, we still have a long way to go before we can uncork the champagne.  However, this will only happen if we first have a clearer picture of how we’ve got to where we are today.

More Seniors Working in West Virginia

On Friday, Floyd Norris of the New York Times had a piece on the increase in seniors working since 2006.  In West Virginia, we’ve seen a similar pattern. In 2011, approximately 13.2 percent of those 65 and older were employed compared to just 9.0 percent in 2006. In comparison, in 2011 49.9 percent of all West Virginians 16 and older were employed, compared to 53.0 percent in 2006. So while overall, fewer West Virginians are working since the recession, more seniors are. 


Source: WVCBP analysis of BLS data

Source: WVCBP analysis of BLS data

While the increase in seniors working spiked during the recession, it is actually part of a longer term trend in West Virginia. The percentage of those 65 and older working in West Virginia has been growing steadily for over a decade.
 

Source: WVCBP analysis of BLS data

One of the reasons cited for the increase in workers working past retirement age is the loss of wealth created by the bursting housing bubble. As economist David Rosenberg puts it in the linked article, “The fact of the matter is that this aging-but-not-yet-aged segment of the baby boomer class can’t afford to retire. Dreams of the 5,000-square-foot McMansion being a viable retirement asset have morphed into nightmares of a deflationary ball and chain.”

While the housing bubble was less severe in West Virginia, its effects and those of the rest of the financial crisis continue to have an impact on our workforce.

The Middle Class Creates Jobs, Not Business

Brad Delong sends us to this great speech (and presentation) from venture capitalist Nick Hanauer, which was recently banned from TED. More on that here.

His remarks remind me of the Robert Reich axiom: You can’t have a strong economy without a strong middle class. While businesses and the 1% love tax cuts, it has more to do with rent-seeking instead of economic growth. Businesses need customers i.e. aggravate demand, not tax cuts that make up less than three percent of the cost of doing businesses. And as Sean points out, we hear this all the time in West Virginia – especially about the business personal property tax. All together, this tax makes up less than one half of one percent of the cost of doing business. Econ 101 would tell us that reducing your business costs by 0.5% would not be a big enough incentive to drive business location decisions and that this cost could easily be made up by increased productivity, lower compensation and utility costs, and cheaper occupancy costs. It really is just a matter of mathematics.

At any rate, this is a great speech:

It is astounding how significantly one idea can shape a society and its policies.  Consider this one.

If taxes on the rich go up, job creation will go down.  

This idea is an article of faith for republicans and seldom challenged by democrats and has shaped much of today’s economic landscape.

But sometimes the ideas that we know to be true are dead wrong. For thousands of years people were sure that earth was at the center of the universe.  It’s not, and an astronomer who still believed that it was, would do some lousy astronomy.  

In the same way, a policy maker who believed that the rich and businesses are “job creators” and therefore should not be taxed, would make equally bad policy.  

I have started or helped start, dozens of businesses and initially hired lots of people.
But if no one could have afforded to buy what we had to sell, my businesses would all have failed and all those jobs would have
evaporated.

That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is a “circle of life” like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring.
In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me. 

So when businesspeople take credit for creating jobs, it’s a little like squirrels taking credit for creating evolution. In fact, it’s the other way around.

Anyone who’s ever run a business knows that hiring more people is a capitalists course of last resort, something we do only when increasing customer demand requires it.  In this sense, calling ourselves job creators isn’t just inaccurate, it’s disingenuous.

That’s why our current policies are so upside down. When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer.

Since 1980 the share of income for the richest Americans has more than tripled while effective tax rates have declined by close to 50%.  

If it were true that lower tax rates and more wealth for the wealthy  would lead to more job creation, then today we would be drowning in jobs.  And yet unemployment and under-employment is at record highs.

Another reason this idea is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the median American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men.
Like everyone else, we go out to eat with friends and family only occasionally.

I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or cars or enjoy any meals out. Or to make up for the decreasing consumption of the vast majority of American families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.  
Here’s an incredible fact.  If the typical American family still got today the same share of income they earned in 1980, they would earn about 25% more and have an astounding $13,000 more a year. Where would the economy be if that were the case?

Significant privileges have come to capitalists like me for being perceived as “job creators” at the center of the economic universe, and the language and metaphors we use to defend the fairness of the current social and economic arrangements is telling. For instance, it is a small step from “job creator” to “The Creator”. We did not accidentally choose this language. It is only honest to admit that calling oneself a “job creator” is both an assertion about how economics works and the a claim on status and privileges. 

The extraordinary differential between a 15% tax rate on capital gains, dividends, and carried interest for capitalists, and the 35% top marginal rate on work for ordinary Americans is a privilege that is hard to justify without just a touch of deification 
We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Rather they are a consequence of an eco-systemic  feedback loop animated by middle-class consumers, and when they thrive, businesses grow and hire, and owners profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So here’s an idea worth spreading.  

In a capitalist economy, the true job creators are consumers, the middle class.  And taxing the rich to make investments that grow the middle class, is the single smartest thing we can do for the middle class, the poor and the rich.

Thank You.

What Could Tax Reform Look Like?

The clarion call for tax reform continues to sound in West Virginia, as the business community continues to rail against the state’s business personal property tax, regardless of a lack of evidence.

So what would tax reform look like in West Virginia? First, let’s go ahead an eliminate the business personal property tax. We know that the business personal property tax brings in about $250 million in revenue. While most of property tax revenue goes to local governments, for simplicity’s sake, I’m going to treat all revenue together, and assume distribution issues would be dealt with later (hey, it works for the Tax Department).
 
But let’s not stop there, let’s get serious about tax reform. The state with the most favorable business tax climate, Wyoming, doesn’t have a corporate income tax, so instead of reducing ours as planned, let’s assume the state scraps it altogether. This year, a down year for the tax, the corporate net income tax is expected to bring in about $173 million, along with the business franchise tax. Once the BFT is eliminated, the corporate net income tax is expected to bring in about $240 million a year in revenue.
 
So together, eliminating the business personal property tax and the corporate net income tax would cost about $490-500 million per year in lost state and local tax revenue. How could the state handle such a major loss of revenue? For the answer we could again turn to that #1 business tax friendly state, Wyoming.
 
What Wyoming lacks in general business taxes, they make up for in taxes on their natural resources, particularly coal and natural gas. And while rhetoric suggests that West Virginia levies a heavy tax burden on its natural resources, the reality is that our natural resource tax burden is far below a state like Wyoming.
 
How far below? Remembering that Wyoming has the #1 business tax climate according to the Tax Foundation, consider this. Using the governor’s projections in the executive budget and the same methods in our mineral taxation report, I estimate that together, coal and natural gas production will result in $828.5 million in state and local tax revenue in FY 2013. 
 
If West Virginia taxed coal and natural gas at the same overall level as Wyoming, it would yield an estimated $1.3 billion in state and local revenue, an increase of $465.8 million.
 
By adopting Wyoming’s levels of taxation on the coal and natural gas industries, the state could nearly eliminate both the business personal property tax and the corporate net income and business franchise taxes, with less than $35 million in lost revenue. 
 
While there is still $35 million missing from the plan, consider this, Wyoming has a job-killing property tax on business equipment, and they are still #1. We could keep a token tax on business personal property at a fraction of its current level, with little effect on our tax climate, and come out ahead.
 
So, does anybody think this tax proposal would fly in West Virginia? Are higher taxes on coal and natural gas good for business? Those who measure business tax climate seem to think so. But, would the coal and gas industries flee West Virginia to neighboring states? Don’t forget, in the 1990s Wyoming raised their natural resource taxes, while neighboring Montana lowered theirs, creating a large difference in taxation levels between the states. And guess who drilled more gas? Wyoming did, adding 5 times the production value that Montana did.
 
Now of course, there are risks to relying so heavily on one industry for revenue, particularly one as volatile as the mining industry. But it is worth pointing out that there is a reason why states like Wyoming have very low business taxes; they heavily tax their natural resources and have trust funds.
 
If this tax reform isn’t palatable to some, despite its results, maybe we should stop focusing on our business tax climate, and start focusing on improving our economy in other ways.

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1,500 Coal Mining Jobs Created Since Obama Took Office (Updated)

Over at Coal Tattoo, Ken Ward has a must read piece on why state politicians and the media avoid having a balanced discussion regarding the impact of the coal industry. One of the central reasons why our state is unable to have a rational discussion is the propaganda and inflammatory rhetoric coming from the coal industry.

According to the narrative, there has been a growing “war on coal” ever since President Obama took office in 2009 and the EPA began cracking down on mountain top removal mining permits. According to industry front groups such as Faces of Coal, West Virginia is smack in the middle of “Obama’s NO JOB ZONE,” as see in this billboard along Interstate 64.

While the Obama administration and the EPA may be taking a harder look at mountain top removal mining permits, a quick look at coal mining employment in West Virginia reveals that since Obama took office in the winter of 2009 coal mining employment has grown by over 1,500 jobs or by 7.4%. If we measure from the end of the national recession in June 2009 (or the 2nd Quarter of 2009) to the third-quarter of 2011 (the latest available data), employment in the coal mining industry has grown by 3,100. For comparison, total employment in West Virginia has only grown by 2.9% over this period.

Looking over the last two decades, annual West Virginia coal mining employment was higher in 2011 than at anytime over the last 17 years, according to Workforce West Virginia.  In 1995, there were 22,669 workers employed in coal mining (SIC Code 12) compared to 22,693 during the first three quarters of 2011 (NAICS Code 2121). If you include coal mining support activities (NAICS 213113) – which are separated out when the Census switched to using NACIS Codes in 2001 – employment in coal mining was at 24,515 in 2011 compared to 22,669 in 1995. Any way you look at it, coal mining employment is at a two-decade high.

This all being said, the rise in coal mining jobs has very little to do with the actions of the Obama administration and the EPA. The rise in coal mining employment over this period is due more to the recent spike in coal prices from 2005 to 2011, steady decline of productivity, and the counter-cyclical nature of the energy industry during recessions. While there is a good chance that coal employment will be lower in 2012 do to a decline in customer demand for West Virginia coal – which is reflected in the 2012 drop in coal spot prices – this again will not be related to actions by the Obama administration.

As Ken notes in his blog, if we can move past the rhetoric and political confusion regarding the plight of the coal industry in our state we might be able to chart a better economic course for our future. However, this will only happen if we first look at the facts.

1,500 Coal Mining Jobs Created Since Obama Took Office

Over at Coal Tattoo, Ken Ward has a must read piece on why state politicians and the media avoid having a balanced discussion regarding the impact of the coal industry. One of the central reasons why our state is unable to have a rational discussion is the propaganda and inflammatory rhetoric coming from the coal industry.

According to the narrative, there has been a growing “war on coal” ever since President Obama took office in 2009 and the EPA began cracking down on mountain top removal mining permits. According to industry front groups such as Faces of Coal, West Virginia is smack in the middle of “Obama’s NO JOB ZONE,” as see in this billboard along Interstate 64.

While the Obama administration and the EPA may be taking a harder look at mountain top removal mining permits, a quick look at coal mining employment in West Virginia reveals that since Obama took office in the winter of 2009 coal mining employment has grown by over 1,500 jobs or by 7.4%. If we measure from the end of the national recession in June 2009 (or the 2nd Quarter of 2009) to the third-quarter of 2011 (the latest available data), employment in the coal mining industry has grown by 3,100. For comparison, total employment in West Virginia has only grown by 2.9% over this period.

This all being said, the rise in coal mining jobs has very little to do with the actions of the Obama administration and the EPA. The rise in coal mining employment over this period is due more to the recent spike in coal prices from 2005 to 2011, steady decline of productivity, and the counter-cyclical nature of the energy industry during recessions. While there is a good chance that coal employment will be lower in 2012 do to a decline in customer demand for West Virginia coal – which is reflected in the 2012 drop in coal spot prices – this again will not be related to actions by the Obama administration.

As Ken notes in his blog, if we can move past the rhetoric and political confusion regarding the plight of the coal industry in our state we might be able to chart a better economic course for our future. However, this will only happen if we first look at the facts.

WV Share of U.S. Coal Production – One Chart

 
Source: www.wvminesafety.org/historicprod.htmand http://www.eia.doe.gov/emeu/aer/txt/stb0702.xls

 

Tax Reform Rhetoric Doesn’t Match Reality

The specter of job killing property taxes in West Virginia reared its head again this week, with the cry for tax reform coming this time from outgoing Bayer CEO Greg Babe, as he presented to Charleston Area Alliance’s 2012 Annual Celebration, reported by the Daily Mail.

The Daily Mail rehashed Mr. Babe’s argument, debunked once before here, in an editorial this morning. Once again zero evidence was offered for the contention that West Virginia’s business personal property tax is a significant deterrent to investment and economic development in the state, particularly for manufacturing. 
 
This time, the Daily Mail also insinuated that Shell’s decision to locate a cracker facility in Pennsylvania was due to the business personal property tax. It took an impressive leap of logic to come to that conclusion, as quoting from the editorial, “Although site criteria, not tax structure, was apparently the deciding factor, the fact remains: Neither Pennsylvania nor Ohio tax these business assets as West Virginia does.” 
 
While editorial admits that taxes weren’t an issue in one breath, it goes ahead and makes it an issue anyway in the next, lack of evidence notwithstanding. And as we all know, the evidence says that if taxes were a major factor, then the no-brainer site location choice would have been in Ohio, just a hop over the border from the actual location in Pennsylvania. 
 

 
As for the idea that the fact the West Virginia taxes both real and personal business property makes us noncompetitive, again the rhetoric doesn’t match reality. According to those who insist that business taxes do matter, West Virginia’s business property taxes outclasses all but one of our neighbors when it comes to business friendliness. In fact, our only border state that has a better so called business property tax climate, Kentucky, is also the only state that taxes business equipment and inventory like West Virginia. So the fact that, “Neither Pennsylvania nor Ohio tax these business assets as West Virginia does,” isn’t a disadvantage for West Virginia, according to the business community’s favored tax analysts.
 
 
A common refrain from tax reformists is to “broaden the base and lower the rates.” And if that is the case, then it is Ohio and Pennsylvania who need property tax reform, not West Virginia. But the Daily Mail is advocating we narrow our base, and raise our rates, so we’ll be more like Ohio and Pennsylvania. That is not tax reform, that is a corporate tax giveaway, and a continuation of the shift away from businesses and onto homeowners.
 
Of course, that whole argument is a moot point when you consider there is no obvious relationship between tax climate and employment growth nor is there any relationship between industry specific tax rates and employment growth, (here’s two more for good measure.) But that lack of evidence didn’t stop the Daily Mail from contending, “State officials must ask themselves if business taxes are worth the loss of industry and jobs that they seem to cause.” They don’t know that business taxes cause job losses, but it feels like they do.
 
Finally, Mr. Babe suggests that West Virginia’s property tax system is unfair to businesses, because the rates on business property are twice that of residential property. Ignoring the fact that this is how it has been since the state’s founding, as our recent analysis of the Gestamp tax deal shed some light on property tax burdens. 
 
According to our analysis and state documents, with no tax incentives in place, a manufacturer like Gestamp would pay an average of 0.7% of their gross income in property taxes per year, and a total of 2.6% of their gross income in total state and local taxes each year. In comparison, a median income earner in West Virginia would pay 1.3% of their income in property taxes and 9.3% of their income in total state and local taxes. 
 
Tax reform like that advocated by the Daily Mail  only serves to continue to shift the burden away from businesses and onto working families. And they openly admit this, when they say tax breaks will be paid for by  taxes on the wages of new employees. (Of course, that same day, the Daily Mail says that our income tax keeps people out of the state, and we should, “rid ourselves of the state income tax altogether,” You can’t have you cake and eat it, too, not to mention that a greater reliance on sales tax is a greater reliance on the poor and middle class. Which they already knew.)
 
If the state wants to create a shared prosperity, we need to face reality. That means investing in our workforceeducation, and our quality of life. Disguising tax giveaways and shifts onto working families as tax reform undercuts our ability to do so.

WV Corporate Taxes On Track for 22-year Low

As Sean pointed out in a recent Charleston Gazette commentary, the decline in corporate net income tax and business franchise tax collections is threatening programs such as Medicaid. With this in mind, let’s take a historical  look at the growth these two taxes. 

As the chart below shows, revenue from the CNIT/BFT is expected to hit a 22-year low in FY 2012, dropping from $221.5 million in FY 1990 to just $173.5 million in FY 2012. It is important to recognize that these are nominal numbers, they are not adjusted for inflation or economic growth. While the CNIT/BFT made up 12.7 percent of general fund revenues in 1990, in 2012 it is expected to be just 4.3 percent. This number could fall even farther.  With just two months to go before the end of FY 2012,  April revenue collections from the CNIT/BFT are running about $10 million behind the original estimate.


While there are several factors contributing to the long-term decline in business tax revenues – including the growth in tax credits, tax loopholes, and the shift toward S corporations –  the central factor impacting the recent and projected decline of business tax revenue is the scheduled reduction of the corporate net income tax rate from 9.0% in 2007 to 6.5% in 2014 and the gradual elimination  of the business franchise tax from 0.7% in 2007 to 0.0% in 2015 (see chart below).

 

As the graph below makes clear, the growth of the state’s two corporate taxes is dismal compared to sales and personal income tax growth over the last two decades. Personal income tax collections have tripled, growing from $517 million in FY90 to $1.6 billion in FY11, while sales and use taxes have doubled from $522 million to $1.1 billion.

Meanwhile, business taxes collections have only grown by a third – growing from $222 million in FY90 to just $303 million in FY11. If the CNIT/BFT grew at the same rates as the personal income and sales and use tax since FY90, the state would have collected $683 million or $487 million respectively in FY11 –  a difference of $380 million or $184 million.

Notice in the above graph that the sharp fall in corporate tax revenue began in FY08 or between July 1, 2007-June 30, 2008. This was the same year that the business tax reductions were put into place.  From FY08 to FY15, the state projects that the personal income tax will grow by 25 percent and the sales tax by 11 percent, However, the CNIT/BFT is projected to decline by 38 percent, from $388 million to $240 million. As we showed in our analysis of the budget last year, according to the WV Dept of Revenue the business tax reductions will reduce reduce revenue by close to $50 million in 2012 and nearly $200 million by 2017.

This is clear evidence that the tax reductions are the central factor causing the projected decline in revenue.

The lost revenue from the corporate tax cuts will make it difficult to adequately fund important programs such as Medicaid. As policymakers plan for next year’s budget and the usual grumblings start on how we cannot afford to pay for programs like college, health care, education, it is important that they recognize that these corporate tax cuts were self-inflicted. The good news is that they can be undone as fast as they where put into place.