Shrinkage in the Labor Force

There has a been a lot of chatter about the shrinkage in the U.S. labor force. Brad Delong takes us to two fed studies and Rorty Bomb provides the analysis. This graph from Ezra Klein shows the long-term and accelerated decline in labor force participation:

 

As the graph points out, the labor force participation rate in the U.S. is at a 30-year low. The labor force participation rate is the number of people that are either employed or unemployed divided by those 16 and older that are not institutionalized. Two stories have emerged to explain the decline: long-term demographic trends and the recent recession, with each explanation accounting for about half of the decline. The retiring of the baby-boomers is the central demographic factor that is causing a drop in labor force participation. The other crucial factor is the increasing number of workers leaving the workforce because they are discouraged (U-5 in BLS nomenclature) and can’t find work. These trends could have serious implications for the nation and West Virginia.

Let’s look at some West Virginia numbers. West Virginia has the lowest rate of labor participation in the nation at 54.3 percent – nearly 10 percentage points below the U.S. average. West Virginia has also seen a lot more fluctuation in its rate over the last three decades. West Virginia’s lower participation rate is now at a 21-year low, while nationally the rate is at a 30 year low.
 


Similar to the nation as a whole, West Virginia has seen a sharp decline in labor participation among males and a steady increase among females. In 1979, the rate was 71.3 percent for males compared to 59.9 percent in 2011. Females, on the other hand, have increased their participation in the labor force from 38.8 percent compared to 48.9 percent over this 32-year time period.
 

As we noted previously in Jobs Count:

The labor force participation rate rises and falls with demographic and population shifts, changes in disability rates, and structural reasons. During an economic downturn, labor force participation usually declines because unemployed workers give up looking for work due to a lack of employment opportunities or leave the labor force to pursue more education. When more jobs are added, the rate tends to increase as people return to work or seek employment. What is unusual about the current decline in West Virginia’s labor force participation rate is that it coincides with job growth in the state. This may indicate that many of the state’s workers do not have the skills to meet the demands of the current job market.

West Virginia’s participation rate could decline more in the future, because the state’s working age population (20-64) is projected to shrink by 104,000 from 2010 to 2035. This demographic change alone could lower West Virginia’s labor force participation rate 5.2 percentage points over the next 25
years, from 54.3 percent to 49.1 percent.

While there are many factors contributing to West Virginia’s low labor force participation, including a large and informal and rural economy, lack of economic opportunity, gender, deep poverty, and cultural issues, However,  one crucial factor is the low educational level of the state’s labor force. In 2010, only 51 percent of the state’s workers had a post-secondary education, ranking West Virginia lowest in the nation. Approximately 26 percent of the labor force had some college experience or an associate’s degree, while only 25 percent had a bachelor’s degree or higher.

By improving post-secondary education attainment rates among adults, particularly those with low skills, West Virginia could also meet the demands of future employment needs.

One More Look at Gestamp Deal

George Hohmann does a great job breaking down the Gestamp deal in his Sunday column. (see here and here for background info).  Hohmann makes the following observations:

 

* It can be argued that without incentives, Gestamp would not be coming to South Charleston and the stamping plant would remain idle.

* The $25 million in loans the state has agreed to extend to Gestamp presumably will be paid back over time, so they are not a gift.

* Although O’Leary estimates the incentives will save Gestamp $12.5 million in property taxes, the company and the Kanawha County Commission will likely come to terms on a payment in lieu of taxes, or PILOT, whereby the company would agree to make payments to the county to help fund essential services like schools.

* If Gestamp agrees to pay the county about 70 percent of what it would normally owe in property taxes, to cover schools, the value of the incentive package would be reduced by about $8.7 million.

* Gestamp has agreed to invest a minimum of $100 million. Burdette has said this investment will be in equipment and could go as high as $150 million.

These are all excellent observations.  I would just like to add a few other points. 

While we will never know for sure that the state’s tax incentives “sealed the deal,” the state could have had Gestamp certify that they would not have located without the incentives. As a recent Pew study showed, the state of Minnesota requires a written statement from businesses before they receive tax breaks from the Job Opportunity Building Zone Program. This is a reform that is worthy of adoption.

Regarding the $25 million in loans from the EDA to Gestamp, it is important to keep in mind that these are low-interest subsidized loans. Presumably, this means Gestamp will save thousands in interest payments getting a loan from the EDA instead of a private bank. It is also important to point out that Gestamp is a multibillion-dollar company. It probably does not need help from the state to secure a loan, while there are plenty of small and medium size companies that do not have access to capital.

If there is going to be a PILOT negotiated between Kanawha County and Gestamp and a large portion of the diverted revenue goes to schools that would certainly ensure that Gestamp has skin in the game. The problem is that we do not know how this is going to be worked out. It would have been better to know a head of time if Gestamp was going to agree to a PILOT, but it is unclear when and if they will. What incentive does Gestamp have to sign a PILOT agreement?

The big question regarding the $100 million investment in equipment is whether it will be purchased in West Virginia or out of state. If the equipment is purchased out of state then sold to the state (so Gestamp can avoid paying personal property taxes) and leased back to Gestamp, it would seem that they are not making an actual investment. If the state holds title to the $100 million in equipment, is Gestamp under any obligation to purchase back the equipment from the state? From reading the MOU, it appears not. 

This all being said, we hope Gastamp honors the deal and that the stamping plant employees hundreds of local workers. It would be a great boon to the state’s economy and Kanawha County. However, it is imperative that state and local government authorities enact some type of recapture or claw back rule that ensures that they will be able to recoup some of their losses if Gestamp fails to meet the job creation and investment obligations.  The state should not be subsidizing companies if they fail to produce.

Gestamp Deal Worth Estimated $84.4 Million

On Wednesday, the Daily Mail reported on the tax incentives offered to Gestamp, the auto parts company that is re-opening the stamping plant in South Charleston. Recently, we looked at the B&O tax incentive, but now with this memo of the agreement between the state and Gestamp, we can take a closer look.


The highlights of the agreement include that Gestamp’s corporate net income tax liability will be zero for at least 13 years, as will their business franchise tax liability. They will also pay no personal property taxes due to the WVEDA holding title on their equipment and the activation of the foreign trade zone. The also will pay no sales tax on the materials and equipment purchased to construct the facility.

Below are three tables, the first an estimate of what they would pay over the course of 13 years with no tax incentives, then an estimate of what they will actually pay, and finally an estimate of the tax savings.

Estimated Taxes Paid, No Incentives

B&O

$7,497,000

Real Property

$3,900,000

Personal Property

$12,539,910

Corporate Net Income

$32,501,460

Business Franchise

$82,000

Sales

$6,000,000

Unemployment

$2,049,300

Total

$64,569,670


Estimated Taxes Paid, With Incentives

B&O

$3,398,500

Real Property

$3,900,000

Personal Property

$0

Corporate Net Income

$0

Business Franchise

$0

Sales

$0

Unemployment

$2,049,300

Total

$9,247,800


Estimated Tax Savings

B&O

$4,198,500

Real Property

$0

Personal Property

$12,539,910

Corporate Net Income

$32,501,460

Business Franchise

$82,000

Sales

$6,000,000

Unemployment

$0

Total

$55,321,870


The total tax savings is estimated to be roughly $55.3 million over 13 years, or $4.3 million per year.

Over the 13 year period, Gestamp would have a total state and local effective tax rate of 0.4%. Without the incentives, the effective tax rate for Gestamp would be 2.6%.   For comparison, using a similar measure, we estimated the effective state and local tax rate on the coal and natural gas industries as a whole in 2008 to be 6.5% and 8.2% respectively. For further comparison, a Gestamp employee earning $50,000 would face a total state and local tax rate of 9.1%.

In addition to the tax incentives, Gestamp will receive $25 million in state loans for investments, plus an additional $2.5 million in forgivable loans for expenses. Gestamp will also receive $240,000 in recruiting assistance from Work Force WV, $800,000 ($2,000 per employee at 400) for training support from the Governor’s Guaranteed Workforce program (which isn’t required to drug test under the governor’s executive order), and up to $500,000 to design training initiatives from the Community & Technical College System of West Virginia. Not mentioned in the memo of agreement was a $15 million low-interest EDA loan given to the Park Corporation in 2007 to update the stamping plant facility with new equipment (see here).

While the B&O tax incentive continues beyond the 13 year time frame, it is unclear what other incentives do as well.

All together, the total value of the subsidies amount to an estimated $84.4 million (or $99.4 million if you include the 2007 EDA loan to Park Corporation that owns the South Charleston Stamping Plant) or $211,000 per job created (400 total jobs) over the 13 year period.  (Again, we welcome anyone with more accurate estimates or more information.) 

It is imperative that policymakers and the public know whether they are getting a strong return on their investment. Unfortunately, under the current system we will not have the ability to evaluate if these state and local tax incentives given to Gestamp are cost-effective or a good use of the public purse. 

It is also important that workers do not shoulder all of the financial risk and tax responsibilities, while corporations like Gestamp, that also place heavy demands on public services and programs, get off not paying their fair share. As Oliver Wendell Holmes said, taxes are what we pay for a civilized society. Everyone needs to pay their fair share, including the “job creators.” 


*Notes*
The time frame of 13 years was used because the memo of understanding estimated that the economic opportunity tax credit and manufacturing tax credit would zero out the tax liability for at least 13 years. 

I assumed that the minimum sales  requirements in the B&O tax incentive would be met in equal increments each year for the CNI, and BFT estimates. I applied the CNI to 20% of sales, the same ratio used in the recent estimates for manufacturing in the Tax Foundation report, “Location Matters”

I assumed the employment numbers in the memo would be met in equal increments each year, until reaching 700 in year 11.

I assumed real property taxes remained at $300,000 for the entire 13 years, the high end of the estimate in the memo.

For personal property, I assumed $45 million depreciated and assessed over the entire 13 years, and $55 million depreciated and assessed over the last 8 years.

For sales I assumed 6% on the $100 million in capital investments.