Another Tax Competitiveness Index Fails To Prove Anything

If you have read our blog before, by now you should be familiar with the variety of “tax climate” or “business friendly” indexes put out by groups like the Tax Foundation. And you should also know that these indexes have repeatedly failed to show any connectionbetween their scores and state economic performance.

Peter Fisher at the Iowa Policy Project takes a look at one more, the The ALEC-Laffer State Economic Competitiveness Index, which was developed by Dr. Arthur Laffer and others and published by the American Legislative Exchange Council (ALEC) as a guide to state policies that promote economic growth.. The index favors the usual suspects in all of these indexes: reduction or abolition of progressive taxes, fewer government services, weaker or non-existent unions.
 
In honor of the five year anniversary of the index, Peter Fisher compares the ALEC ranking of states with their performance over the past 5 years in terms of growth in state GDP (Gross Domestic Product), growth in nonfarm employment, growth in per capita income, and growth in population.
 
And the results,
 
graph
 
“Simply put, the ALEC Outlook Ranking fails to predict economic performance. There is virtually no relation between the ranking in 2007 and a state’s five-year rate of growth in GDP; the correlation is 0.02, almost zero. On another measure, the correlation is only slightly stronger, but in the opposite direction (-0.06): The lower a state was ranked on the A-L Index the better it did in terms of job growth. Other trends were stronger but again in the opposite direction: the less “competitive” a state according to ALEC the more per capita income grew (see chart above).”

Take a look at Peter’s piece over at the Iowa Policy Project for the full breakdown. He concludes, the low-tax, small government policies favored by ALEC and other groups, “…are not a recipe for growth and prosperity. If anything, they are quite the opposite: They are a recipe for economic inequality, low wages, and stagnant incomes that at the same time deprive state and local governments of the revenue needed to maintain the public infrastructure and education systems that are the underpinnings of long term economic growth.” 

Medicaid Expansion and Tax Incentives Show Where Our Priorities Lie

On Thursday Gov. Tomblin stated that he needed more time and information before deciding whether or not the state would move along with the expansion of the state’s Medicaid program as part of the Affordable Care Act. While the health reform law calls for states to increase Medicaid eligibility to 138 percent of the federal poverty line, the Supreme Court’s recent decision has made this provision optional for states. 

Governor Tomblin states he is concerned about the cost of the expansion, despite the fact that it will cover an estimated 120,000 West Virginians without health insurance, and the federal government will cover 93 percent of the costs over 9 years. 
 
The governor is exercising a great deal of caution over a policy that we’ve known about for two years, and was made optional a month ago. And its a policy that will benefit a huge number of West Virginians. Why are we so cautious about a policy that so clearly has a major benefit, when other costly policies are fast tracked with little analysis.
 
For example, the Century Aluminum Bill, with its $20 million severance tax credit, was passed on the same day it was introduced. And state officials simply stated it would be “a wash” for the state, because of new economic activity.
 
The same is true of the cracker bill, which was passed one week after it was introduced. And despite potentially forgoing nearly $300 million in tax revenue, the bare bones fiscal note declared its fiscal impact to be $0, again, because of new economic activity.
 
Both of these example have one thing in common, they focus on subsidizing big billion dollar corporations, with little thought and question to their cost and effectiveness. 
 
Why don’t business tax incentives get the same level of scrutiny as programs that help low-income working West Virginians? It’s a rare sight to see the benefits and costs of a business tax incentive mulled over for months on end, or to have the fiscal analysis on one come out negative. Why doesn’t the state apply the same standards to the Medicaid expansion as it does to business tax incentives. We might find out, like Arkansas did, that expanding coverage results in less uncompensated care and more tax revenue on medical services, and could actually save the state hundreds of millions of dollars.
 
To compare how quickly we act on tax incentives for businesses versus expanding Medicaid, it shows where our priorities lie as a state. It is exceedingly easy and supposedly cost free to help businesses, why isn’t it the same to help our most vulnerable people?

Where is the Money for Child Care?

Starting next year, the state Department of Health and Human Resources plans to cut child care subsidies, affecting 800 families and 1,400 children. According to state officials, the cuts are necessary due to a depletion of surplus federal funds and are expected to save the state $8 million.

Could the state find $8 million in the budget to protect the subsidies and keep child care affordable for working families? I think the answer is yes.
 
First, while state officials cite growing Medicaid costs as a major strain on future budgets, the state’s fiscal health has been outstanding. If anything, state officials have been too pessimistic regarding the state’s budget. For example, the state has been running huge general revenue surpluses every year but two since 2005. This year, the state ended FY 2012 with a nearly $88 million surplus in the general revenue fund. The state has had an average surplus of $106 million per year since 2000.
 
 
In addition, the state has a rainy day fund that is rapidly approaching $1 billion. In 2012, West Virignia’s rainy day fund was equal to 20% of its expenditures. According to the National Association of State Budget Officers, only two states, Alaska and Wyoming, had a rainy day fund with a larger ratio to their expenditures. Only 7 states total had a ratio over 10%, and 12 states had no balance. Nationally, rainy day fund balances were equal to 4.9% of state expenditures, less than a quarter of West Virginia’s funding level.
 
So while the state would appear to be on sound enough financial footing to keep the child care subsidies intact, there are other areas of the budget the state could turn to in order to save $8 million.
 
First up, the continuing business tax cuts. The state’s corporate net income and business franchise tax have been cut every year since 2007, and will continue to fall until 2017. Already these tax cuts have cost the state $123 million in revenue, and when fully enacted, will reduce revenue by nearly $200 million per year. If state officials were to revisit the dubious effectiveness of these tax cuts, perhaps there wouldn’t be a need to cut child care subsidies.
 
 
Some other revenue areas officials could look include:
 
If the state were to make children and working families a top priority, rather than tax cuts, which are overwhelmingly going to businesses, then it would be easy to find a way to protect the child care subsidy.

Falling Coal Mining Productivity Boosts Jobs

As Sean and I have both touched on, one of the central factors causing the decline in Central Appalachia coal production is the exhaustion of thicker, more easy to mine, coal seams.

One way to gauge this trend is by looking at coal productivity. Coal productivity can be measured in two ways. The Energy Information Administration measures productivity as the average number of tons mined by a worker in an hour.  Another way to gauge productivity is by looking at state coal mining real GDP per worker. Lets look at this one first.

As the chart below shows, coal mining output per worker as been declining since 2000 and fell to its lowest point in 2008. Manufacturing – which unlike coal over the period as been shedding jobs – has seen a growth in productivity. In 2000, real coal mining GDP per worker was just about $250,000 compared to just $150,000 in 2010. Manufacturing, on the other hand, grew from about $80,000 per work to almost $100,000 after adjusting for inflation.

Somewhat paradoxically, the decline of coal mining productivity has also been a factor in the rise in coal mining employment over recent years. As the chart below demonstrates, coal mining productivity according to EIA peaked in 2000 – the same year as it did using the alternative measure above – and has declined sharply since this time. However, over this same period coal mining employment rose from about 15,000 to about 20,000.

In 2000, W.Va. mined about 158.3 million tons or about 10,000 tons per worker. In 2010, W.Va. mined 135.2 million tons or about 6,600 tons per worker. While the drop in productivity was certainly a factor in the increase in Central Appalachian coal prices over this period, it was also a big factor in the jump in coal employment.

 

 

Ending Environmental Regulations Won’t Save Central Appalachian Coal

Last month, using new data from the Energy Information Administration (EIA), Ted showed that West Virginia coal production is headed for a steep decline in the coming years, led by falling production in Central Appalachia.

 
According to the EIA, “Appalachian coal production declines substantially from current levels, as coal produced from the extensively mined, higher cost reserves of Central Appalachia is supplanted by lower cost coal from other supply regions,” saying that Appalachian coal is being priced out of the market by cheaper, easier to mine coal from other parts of the country.
 
But the rhetoric around coal in the state from politicians, the coal industry, and prominent media personalities suggests that EPA regulations are to blame for the coming decline of coal in West Virginia, as part of the so-called War on Coal.
 
But what if the coal industry got its way? What if we could guarantee that the EPA would never limit greenhouse gas emissions, allowing utilities to burn as much coal as they want? Would coal production in Central Appalachia reverse its decline? The answer is no.
 
The EIA has modeled this exact scenario, with its “No greenhouse gas concern” case scenario, which projects coal production assuming no greenhouse gas limiting policies are enacted and the market never anticipates any. And according to the projections, even with a guarantee of no carbon tax, no emission limits, no cap and trade system, coal production in Central Appalachia will continue to decline, just as much as in the current baseline projection.
 
 
Under both the reference case, and the no greenhouse gas policy scenario, coal production in Central Appalachia is projected to decline by around 62% between 2009 and 2020. 
 
The same is true of the mercury emission standards enacted in December. While starting a firestorm on controversy in the state, projections from the EIA show a decline in Central Appalachian Coal production with or without the mercury standards. The projections in the 2012 early release AEO were made before the emissions standards were finalized, and were not incorporated into the projections. The final 2012 AEO did include the new rules in the projections, but once again, the effect of the regulations on Central Appalachian coal production was negligible. (Check here for a full list of changes from the 2012 early release to the 2012 official release).
 
 
The reality is that even without greenhouse gas or mercury regulations, coal production in Central Appalachia is going to dramatically decline. Repealing environmental regulations won’t make the remaining coal seams in West Virginia any thicker or easier to mine, and it won’t stop power plants from converting to natural gas. To ignore this reality, and to act as if stopping the EPA will save the coal industry in West Virginia, is shortsighted and dangerous to the state’s future.

WV Medicaid Expansion Makes Cents

The Daily Mail today is trying to scare folks about the Medicaid expansion contained in the Affordable Care Act. Not only does the Daily Mail fail to mention any of the economic and health benefits of providing health insurance to over 121,000 uninsured low-income working families, they insist on using large numbers out of context.

For example, they say the expansion will cost $166 million over the next six years (Kaiser puts the number at $164 million from 2014-2019). Sounds like a lot of money, right? Not really.

In FY 2013 the state general revenue fund was $4.15 billion and it is expected to grow to $4.67 billion by FY 2017. If the budget continues to grow at 3.3% – the annual average growth rate from projected FY2014 to FY2017-  than the total increase in state Medicaid spending will be approximately 0.6% of general revenue spending over this time period. Between 2014 and 2019, there would be just a 2.1%  increase in state Medicaid spending, or a total of $164 million from 2014 to 2019. Not exactly a budget buster.

The important part to remember is that the federal government will pay 100% for the first three years, 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and beyond. Over the first six years, there will be an increase of over $3.7 billion in new federal dollars coming to West Virginia for health care.

According to a 2003 report from WVU, the federal Medicaid multiplier was 1.6 ($1.133.4 million of federal Medicaid spending created an additional $747.6 million in business volume).  For example, this means for every $100 of federal Medicaid spending in the state economy it creates an additional $60 in economic activity – for a total of $160. Given the 93% match rate over the nine years, the state increase in Medicaid spending might be a net gain in state and local tax revenue (more on this later!). Over the first six years, West Virginia will pay just 4.1% of the total costs of expansion.

The fact is expanding Medicaid is a good deal for West Virginia, both economically and morally. For just $1 for every $13 in increased federal aid, West Virginia can:

1) Cover an estimated 121,635 who presently do not have health insurance.

2) Save money on uncompensated care, for instance for mental health, which means savings for taxpayers (We spend $176 million on behavioral health). According to a recent Washington Post article, states may experience enough savings to offset the small increases in state Medicaid costs. The Urban Institute finds that West Virginia will reduce state spending on uncompensated care between $263 and $563 million from 2014 through 2019 with the enactment of the ACA.

3) Improve the health of the state’s workforce. As everyone knows, West Virginia has the lowest workforce participation rate and the highest disability rate in the country. By providing health insurance to low income working families, it can increase productivity by improving their health and it can increase the number of hours worked and the amount of taxes paid.

West Virginia should act quickly to expand Medicaid. It is good economics and will save lives. The federal Medicaid expansion will allow more people to access affordable care, save the health care system millions in uncompensated care costs and bring more than a $3.7 billion in federal health care dollars to our state. This really is a no brainier.