Romney/Ryan Budgets: How Would They Impact West Virginia?

While there has been a lot of debate about how President Obama’s environmental policies would hurt West Virginia’s coal industry and economy, there has been very little discussion about the impact of  Governor Romney and Representative Paul Ryan‘s proposed policies on the Mountain State.

Both Romney and Ryan have proposed drastic changes to federal spending and programs that could dramatically impact families in West Virginia. These policies could especially impact elders and low-wage workers in the state.  While both Romney and Ryan have proposed repealing the Affordable Care Act, they have also outlined specific budget proposals that would cut federal programs such as Medicare, Medicaid, Social Security, and non-discretionary federal spending.

West Virginia’s economy is especially vulnerable to cuts in Medicare, Medicaid and Social Security because of its growing elder population and the high number of low-income families in the state. In fact, West Virginia relies more heavily on Medicare, Medicaid and Social Security for its personal income than any other state in the country. 

For example, in 2011 approximately $12.7 billion or 20.5 percent of the state’s $62 billion in personal income came from Medicare, Medicaid, and Social Security. The U.S. average was 12.8 percent.  Among the 50 states and the District of Columbia, West Virginia relies more heavily on these three programs for personal income than any other state in the country (see chart below). As mentioned above, the central reason why West Virginia relies heavily on these three programs is because the state has the second highest share of people over 65 years old in the country. Another reason is our state’s lack of economic diversity and opportunity, the high number of low-wage jobs (Wal-Mart is our #1 employer), and the long history of poverty associated with the booms and busts of the extractive industry. 

For comparison, only 5.5 percent or $3.4 billion of personal income in 2011 was derived from coal mining and natural gas extraction – two of the largest industries in the state. Medicaid comprised 4.4 percent, Medicare 6.6 percent, and Social Security 9.5 percent. Approximately 1 out of 4 state residents (24 percent or 443,911) received Social Security benefits in 2010 and 1 out of 5 (20.5 percent or 373,450) were insured by Medicare and 17.4 percent or 416, 858 were insured through Medicaid in 2009. A total of 113,00 seniors in West Virginia were lifted out of poverty by Social Security.

So how would Romney and Ryan’s proposed federal budget policies would impact the Mountain State? Let first look at the three programs discussed above.

Medicare: Rep. Ryan’s 2012 budget (which passed the House in March of 2012) would raise the eligibility age of Medicare from 65 to 67 and would replace Medicare’s guarantee of health coverage with premium-support payments (sometimes called vouchers) to seniors starting in 2023. The first change would mean many our state residents who are 65 or 66 years-old would lose health coverage because they would not have access to Medicare, employer-based plan (or PEIA if they are state employees or school teachers), or the health care exchanges. They would be forced to buy coverage in the individual market, which many could not afford. Because of the limited growth in premium support payments in the Ryan budget, the Congressional Budget Office projects that by 2022 an average 67-year-old beneficiary would see their out-of-pocket expenses nearly double – from $6,150 to $12,500 – compared to traditional Medicare. The Romney budget to cap total federal government spending at 20 percent  would reduce Medicare by $1 trillion from 2014-2022, according to a recent report by the Center on Budget and Policy Priorities. In 2011, WV received $4.1 billion in Medicare transfers or about 0.75% of total U.S. Medicare transfers. Assuming the same share of US costs, this would amount to $7.5 billion of lost Medicare payments in WV from 2014-2022.

Medicaid: Rep. Ryan’s budget would repeal the Affordable Care Act, thereby repealing the ACA Medicaid expansion, and turn Medicaid into a block grant program. According to a recent Kaiser Family Foundation report, this would reduce federal Medicaid spending by $1.7 trillion between 2013 and 2022. All together, this would reduce Medicaid spending in West Virginia by 38% or $15.9 billion over this time period. The report also points out that this would reduce enrollment in Medicaid between 216,000 and 259,000. If WV wants to avoid the cuts due to the block grant it will have to spend an additional $1.2 to $2 billion from 2013 to 2022.  An analysis of Romney’s budget shows that federal Medicaid spending would be reduced between 44 percent and 61 percent or $1.5 and $1.9 trillion from 2014 to 2022. 

Social Security: While Ryan is on record of supporting the privatization of Social Security and his Road Map for American’s Future  includes plans to partially privatize the program, his budget proposal did not include any drastic changes to Social Security. Romney has been on record advocating for raising the retirement age, indexing benefits, and not increasing the payroll tax to shore up the solvency of the program. A recent report from the Center for Economic and Policy Research shows that this would hit low-income families the hardest and would increase income inequality.

Romney and Ryan’s budget would also dramatically reduce spending on a whole host of other federal programs. For example, under Romney’s budget would require deep cuts in SNAP (food stamps), Children’s Health Insurance Program (SCHIP), and  non-discretionary programs such as aid to elementary and secondary education, veterans’ health care, law enforcement, highways and mass transit, national parks, environmental protection, biomedical and scientific research, housing assistance, the weather service, and air traffic controllers. A recent analysis of Ryan’s budget shows that it would make deep cuts in SNAP that would impact WV. Of the proposed $134 billion in SNAP cuts in Ryan’s budget from 2013-2022, it would cost WV approximately $840 million over this ten year period. Under Ryan’s budget  plan, West Virginia would also lose an estimated 22 percent or $195 million in federal funding for education, clean water, law enforcement, and other state and local services in 2014 alone. Ryan’s plan also would shift other very large costs to West Virginia  by reducing sharply federal funding for highway construction and other transportation projects.

While it is unclear how these policies would unfold if Romney and Ryan are elected in November, it is very clear that they would have a dramatic impact on West Virginia’s economy and especially the state’s  elderly and working families.  While Obama’s proposed regulations on air-pollution and green house gases will impact  the state’s coal economy, it is abundantly clear that Romney/Ryan plans to repeal the Affordable Care Act, drastically reduce federal spending over the coming decades, turn Medicaid into a block grant, and replace Medicare with a voucher plan will have a far greater and pervasive impact on working families in the Mountain State.

Income Inequality Growing in Mountain State

A recent article from Governing Magazine shows that West Virginia had the largest increase in income inequality from 2010 to 2011. While West Virginia has traditionally had lower levels of income inequality compared to most states, income inequality in the Mountain State is now nearly the same as the national average. 



The graph below uses the GINI Index from the American Community Survey to measure the income inequality of households in West Virginia and the United States. The index varies between zero and one. A value of 1 indicates perfect inequality – where only one household has any income – and a zero value indicates perfect equality  –  where all households have equal income. 



Last year, West Virginia had the 12th highest income inequality in the country.  The state with the highest income inequality in 2011 was New York (0.5338). Wyoming, another state heavily reliant on extractive industry, had the lowest rate of income inequality (0.4081). 


As the chart above shows, West Virginia and the country have grown more unequal over the last six years. In 2006, 25 states had higher income inequality than West Virginia compared. In fact, between 2006 and 2011 the Mountain State had the second largest increase in its GINI Index score in the country. Only Rhode Island witnessed larger growth in income inequality.  


Nationally, income inequality has been growing rapidly over the last several decades. For example, the share of total pre-tax income going to the top 1 percent of households was about 9 percent in 1975 compared to 20 percent in 2010. While there are many factors at play – including race and gender disparities, distribution of assets, the rapid rise of CEO pay, education and technology –  the biggest factor is policy that has been  designed to distribute money upward over the past several decades.  Below are a couple of examples.

–  Minimum Wage. According to economist Dean Baker, if the minimum wage had kept pace with productivity growth since the late 1960s, it would be close to $18 an hour today. Unfortunately, West Virginia – unlike 18 other states – does not have a minimum wage above the federal minimum wage of $7.25 an hour. This could be remedied at the federal or state level.

–  Taxes. A recent report by the non-partisan Congressional Research Service (CRS) found that not only are lower federal taxes on the wealthy not associated with higher economic growth, but that they are exacerbating income inequality. CRS concluded that “the top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution…(and that)lower top tax rates may be associated with greater income disparities.” Steps to improve this disparity include increasing the share of taxes paid by the wealthy,  such as taxing capital gains at the same rate (35% instead of 15%) as ordinary income. At the state level – where low and middle income West Virginia pay a higher share of state and local taxes as a share of income – we could create a refundable state Earned Income Tax Credit modeled after the federal one that would reduce tax regressivity and promote work.

–  Unionization. As economist Timothy Noah recently pointed out, “if you graph a line charting the decline in union membership and then superimpose another line charting the decline in middle-class income share, the lines will be nearly identical. That is not a coincidence.” One proposal to help revitalize unions in America would be to amend the Civil Right Act to include “disciplining or firing an employee on the basis of seeking union membership” illegal just as it now is on the basis of race, color, sex, religion and national origin.” As Dean Baker has pointed out,   “the fact that unionization rates have plummeted [in the U.S] is almost certainly due in part to policies that have made it more difficult to unionize. Canada, which has a very similar economy and culture, has not experienced a decline in unionization rates of the same magnitude.”

While these are just some examples of how we can curb income inequality in the Mountain State, they would go a long way to giving workers more bargaining power over their declining wages and help ensure that the wealthy pay their fair share in taxes.

Which Tax Proposal is Better for West Virginia?

With a number of tax cuts set to expire at the end of the year, Congressional Republicans have called for extending one tax cut in particular, while endings improvements in tax credits for millions of low and moderate income working families.

As part of the 2009 stimulus bill, several improvements were made to the Earned Income Tax Credit (EITC) and the Child Tax Credit. These improvements were set to expire in 2010, and the Obama administration negotiated their extension with Congressional Republicans in exchange for a reduction in the estate tax (see here for details about the changes to the estate tax).
 
Now, with the tax changes again set to expire, Republican leaders in Congress have proposed extending the estate tax cut, but ending the improvements to the EITC and the CTC.
 
The 2010 estate tax cut only benefits heirs of estates with assets in excess of $3.5 million, $7 million for couples. Only 0.3 percent of estates receive the estate tax cut enacted in 2010, the estates of the other 99.7 percent are already exempt from the tax if policy returns to its 2009 parameters. Reverting back to the 2009 standards would only affect 7,450 estates nationwide, and less than 10 estates in West Virginia. Extending the tax break, however, would cost $119 billion over the next ten years.
 
In contrast, letting the tax credit improvements expire would affect more than 13 million families, with more than 25 million children. In West Virginia more than 77,000 families would be affected, with more than 128,000 children.
 
The impact of these families is substantial. For example, a married couple with three children with earnings at the 2013 poverty line ($27,713) will receive $1,934 less in combined CTC and EITC benefits next year if the improvements expire. A single mother with two children working full time at the minimum wage will receive a CTC of just $173 in 2013 instead of $1,725.
 
The boosting of these tax credits has had a big role in stimulating the economy, with a large bang for the buck, while the estate tax cut has done little to help the slow economy.
 
Policymakers are considering and already enacting cuts to education, infrastructure, heath care, and other programs that help not only the poor, but everyone in the country, in order to address our fiscal problems. Extending the costly estate tax cut for the wealthiest in the country while allowing tax relief for low and moderate income families and children to expire makes little sense, particularly for West Virginia.
 
(For 50 state data see here.)

Do West Virginia Businesses Need More Tax Relief?

In their 2013 Policy Reports, the West Virginia Chamber of Commerce advocates for the creation of a new tax loophole for businesses to avoid paying the state corporate net income and business franchise taxes. The Chamber wants the state to repeal the “sales throw out rule” and ensure that it is not replaced by a “sales throw back rule.”

Sales throw out and throw back rules prevent the creation of tax loophole known as “nowhere income.” When a business produces or sells goods in more than one state, it pays taxes to each state on a portion of its profit. The taxable share due to each state is determined by apportionment formulas in each state’s tax code, which assign some of the profit to the states where the goods are produced, and some to the states where the goods are sold.

However, federal law establishes a threshold level of presence or “nexus” a corporation must have in a state before it can be subjected to a corporate income tax on profit earned in that state. This can block a state from imposing an income tax on its share of a business’s profit if the business has only made sales in that state, and not produced anything. This creates “nowhere income” that is not subject to any income taxes, despite the goods being produced and sold in states with corporate income taxes.
 
State throw back and throw out rules address this loophole by allowing states to capture the nowhere income. The rules require businesses to either to subtract, or throw out, nowhere sales from total sales; or add, or throw back, nowhere sales to in-state sales. Either method affects the apportionment formula, increasing the income apportioned to the taxing state.
 
While the Chamber notes that only West Virginia and Maine employ throw out rules, 25 other states use throw back rules, accomplishing the same thing.
 
Repealing the sales throw out rule without a replacement throw back rule would further reduce taxes on businesses in West Virginia, which raises the question, can we afford to give more tax relief to businesses in the state?
 
Remember, the states business franchise tax is in the process of being eliminated, the the corporate net income tax in falling from 9% to 6.5%.
 
 
And these rate reductions will provide nearly $200 million  per year in tax relief when fully enacted, and have already cost the state millions in forgone revenue.
 
 
As a result, business tax collections have been falling sharply, making the state more reliant on personal income and sales tax revenue, with only rising severance tax revenue keeping the state from experiencing major budget problems.
 
 
All the while, millions are given away through business tax incentives with little accountability or transparency.
 
Businesses in West Virginia have enjoyed hundreds of millions of dollars in tax relief over the past several years, and the state has nothing to show for it but looming budget problems. The creation of more loopholes and giveaways will only create more problems.

Who Doesn’t Pay Federal Income Tax in West Virginia

Recent comments by Mitt Romney about the “47 percent” have prompted discussion about who actually pays taxes and why. Mr. Romney’s sentiment was also recently echoed by West Virginia’s Representative Shelley Moore Capito at last month’s fiscal summit featuring Alan Simpson and Erksine Bowles, when Representative Capito asked about the 47 percent of Americans who pay no taxes.
 
So who all in West Virginia don’t pay federal income taxes, and what does it mean for tax policy? According to Census data, in 2010 about 494,000 of West Virginia’s 966,000 households paid no federal income taxes. The following chart breaks down those 494,000 households.
 
 
 
Contrary to some of the rhetoric surrounding the issue, the so-called 47 percent (or in WV the 51 percent) are not non-contributors who are dependent upon government. In fact, the majority, about 67 percent, are either workers who are paying federal payroll taxes, or the elderly who are retired, but have paid taxes for most of their lives. The importance of those who pay payroll taxes can’t be overstated. Payroll taxes, which are paid by nearly everyone who has ever collected a paycheck, make up more than a third of total federal revenue, and pay for the country’s major entitlement programs: Social Security, Medicare, and Medicaid.
 
The remaining third of those who pay no taxes in West Virginia are the sick and disabled, the unemployed, and students. And as the unemployed rejoin the workforce and students graduate and find jobs, they will begin paying taxes.
 
As for the implications for tax policy, there are two big reasons why many households pay no federal income tax – the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Over the last two decades, these tax credits for low-income working families with children have decreased the number of households paying federal income taxes. Any attempt to increase the number of households paying federal income taxes would have to start with these two tax credits.
 
The great irony of the supposed “dependency” mentality of the 47 percent is that the major reason they don’t pay taxes, the EITC and the CTC, were created to reduce dependency on government. The EITC was created to transform welfare from entitlements into incentives to work. When the EITC was expanded in 1986, President Reagan called it “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.” And it was successful, as the expansion of the EITC moved half a million families off of cash assistance and into the workplace. The same is true of the CTC, which was created by Congressional Republicans and expanded under both Presidents Bush and Obama.
 
Both of these tax credits have reduced poverty, provided economic security, and increased the number of Americans participating in the labor force and contributing to the economy, all while reducing entitlements and dependency on government. 
 
47 percent of Americans and 51 percent of West Virginians may not pay federal income taxes, but it is not because they are entitled and dependent on government. In fact it is the opposite; they are taking advantage of policies that encourage them to work and support their families. And if they aren’t paying federal income taxes today, odds are they have paid in the past or will pay in the future. And even without the federal income tax, virtually everyone pays taxes in some fashion, be it sales taxes, excise taxes, property taxes, or the payroll tax. Whether they are buying groceries or pumping gas, there is no doubt that they are helping to pay for the government services that we all benefit from and use every day.