Budget Beat – November 30, 2012

People Before Politics

This Monday, December 3, Senator Joe Manchin will meet with religious leaders and families to discuss what he will do to put West Virginia’s people above partisan politics in the current fiscal cliff debate. A reception starts at 9:30AM at John XXIII on Hodges Road in Charleston. The event is free and open to the public. “Lost in the national debate are the voices of hard-working Americans who want nothing more than to feed their kids, keep their jobs, and get a fair shot,” said Stephen N. Smith, executive director of the West Virginia Healthy Kids and Families Coalition, lead sponsor for the event.

Why Do Property Taxes Matter?

While property taxes make up 45 percent of the total revenue for local city and county governments, providing important funding for libraries, public health, police and fire protection, housing and other public services, each year there is talk about their elimination or reduction. Read blog post.

Future Fund the Right Way to Go, Despite Conflicting Projections on Energy Production

Different agencies have different projections on the future production of coal and natural gas. These varying estimates mean different projections on the levels of severance taxes the state can expect. None of this conflicting data, however, should deter efforts to establish a Future Fund. Read blog post.

Raising the Retirement Age – How Would It Affect West Virginians?

Raising the retirement age for Social Security is seen as a possible deficit-reducing measure but how would this change impact West Virginia? Because of the state’s low life expectancy and income, raising the retirement age of Social Security means that the state – and especially the high number workers in low-wage jobs – will benefit far less from Social Security than other states and those with higher incomes. Read blog post.

Does West Virginia Have a Skills Gap or a Wage Gap?

Is there a lack of skilled workers in West Virginia? As of June 2012, there were nearly four jobless West Virginians for every new job opening and the unemployed rate for those with an associate or bachelor’s degree remains elevated. While some manufacturing firms in the state may feel squeezed by global competition to offer lower wages, until they start paying higher wages and offering more job security it is unlikely that they will ever find the skilled workers they need. Read blog post.

WVCBP In the News

During legislative interims this week, there was a discussion of work sharing, an idea that the WVCBP has researched and one that works in 24 other states and the District of Columbia. This alternative to lay-offs allows workers to stay on the job during economic downturns and helps employers retain a trained workforce. In Sunday’s Gazette-Mail, WVCBP board member Rick Wilson did a great job of explaining how work sharing could help West Virginia’s workers and industry. And, in a West Virginia Public News Service article, Policy Analyst Sean O’Leary explained, “They’ve got ten workers, they can lay off two. Or they can have all their employees work four days a week, and they’d collect unemployment benefits on the fifth day.”

Eliminating the Personal Property Tax: A Blog Series – Part 1

It seems every year, proposals are floated to remove West Virginia’s property tax on business personal property or personal property in general. My first report with the WVCBP looked at the fiscal impact of eliminating the property tax on business machinery, equipment, inventory, and other business personal property, as recommended by then Governor Manchin back in 2010. In that report, I found that eliminating the business personal property tax would have a profound impact on state and local government finances, with West Virginia’s schools bearing the brunt of the financial hit.

While the proposal in 2010 never gained traction, the issue has reappeared, most prominently from the West Virginia Chamber of Commerce, which is now looking to exempt, “any or all types of tangible personal property from ad valorem taxation,” not just business personal property. And while the Chamber requests that, “the Legislature to provide measures by which levying bodies may recoup revenues lost as a result” of the exemption, my report and these subsequent blog posts will show that replacing the lost revenue is no easy matter.

In FY 2012, a total of $453 million was raised through taxes on personal property, accounting for more than 30 percent of all property tax revenue in the state.

My next several blog posts will look at the issue of eliminating the personal property tax from several angles. The next few posts will focus on the fiscal impact, with estimates of what is at stake for counties, schools, municipalities, and the state budget.

After that, I’ll examine the claim that the personal property tax inventory puts West Virginia at a disadvantage in attracting jobs and investment, particularly from manufacturing by asking which if states without personal property taxes are attracting more manufacturing jobs and investment than those with personal property taxes. 

Next I’ll look at various tax and business climate indexes to help answer the question if personal property taxes create an unfriendly business environment, according to those who measure such things.

Finally I’ll ask is the personal property tax prohibitively burdensome on businesses. I’ll address this question in two ways: I’ll ask are property taxes higher on businesses in states with personal property taxes, and I’ll look at property taxes as a cost of doing business. The answers to these questions help go a long way to explaining the impact of the personal property tax on jobs and economic growth.

But first, let’s talk about why property taxes matter.

Property taxes in West Virginia are primarily a local tax, with local governments relying heavily on it for revenue. Property taxes make up 45 percent of the total revenue for local city and county governments, providing important funding for libraries, public health, police and fire protection, housing and other public services.

Property taxes are also an important source of revenue for public education. In FY 2012, over 66 percent of total property tax revenue went to fund elementary and secondary schools in West Virginia. Overall, property tax revenue provides over one-third of total school district funding, helping educate 280,000 students statewide.

Recent Severance Taxes Projections Should Not Deter Establishment of Future Fund

Yesterday, Mark Muchow, the Deputy Secretary of the Department of Revenue, presented at November Legislative Interims on the future of state severance taxes. In his presentation (Severance Tax Trends -November 26, 2012), he found that severance taxes are going to decline and stagnant over the next few years because the boom in shale natural gas production will not be enough to make up for the projected loss in coal production.

While there are no facts about the future, the implications of these projections could impact how the state approaches the establishment of a Future Fund funded by severance tax revenue. 

Below is our updated (August 2012) projected estimates of coal and natural gas severance taxes from 2013 to 2035 . These projections are based on data from the 2012 Annual Energy Outlook published by the Energy Information Administration that includes natural gas projections for the Northeast and coal projections for Central and Northern Appalachia.

Compared to our projections, the state’s projections show a more pessimistic view of future coal severance tax collections over the next five years, while their projections for natural gas severance tax collections are more optimistic than our estimates. In 2017, the state is projecting the state will collect $129.5 million in natural gas severance taxes and $346.5 million in coal severance taxes in 2017 (see link above) – a combined collection of $476 million.  Our estimates, on the other hand, show a combined severance tax collection of $469.4 million, $105.3 million in natural gas and $364.1 million in coal severance taxes.

While the state is projecting stagnant severance tax collections over the next four years, it is important to keep in mind that they are based on somewhat pessimistic projections of coal prices and/or production – which is interesting given that the governor has been quiet about the decline of coal.  For example, “consensus” projections produced by WVU’s Bureau of Business of Economics Research forecast that West Virginia will produce 143 million tons in 2015 while our analysis of EIA projections show 112.5 million tons. It appears that the coal projections that state is using are much lower than our projections or WVU’s consensus projections.

Since projections over the long-term indicate that overall severance taxes will grow to over $750 million by the end of the forecast, policymakers would still be wise to contemplate setting a side a portion of natural gas or coal severance tax revenue in a Future Fund. One of the central reasons for doing so is to avoid the roller coaster ride of severance tax revenues and ultimately to prepare (by providing revenue) for the day that severance taxes no longer make up a big chunk (11 percent) of our state’s budget.

What Does Raising the Social Security Retirement Age Mean for West Virginia?

As part of the “fiscal cliff” and “grand bargain” deficit negotiations, some CEOs, politicians, and pundits are saying that raising the retirement age of Social Security should be on the deficit chopping block despite the fact that it does not contribute to the federal budget deficit. Raising the retirement age is usually premised on the idea that everyone is living longer and that we can afford to raise the age at which we receive Social Security.

The problem with this argument is that some are living much longer than others. As Ezra Klein (and others previously) noted last week in the Washington Post, life expectancy is largely a function of income.

As the above chart shows, male earners in the top half  (top 50%) have seen their life expectancy at 65 rise about 5 years over the last three decades while the bottom half saw their life expectancy at 65 rise barely a year. This is a crucial point for those advocating for an increase in the eligibility age of Social Security because clearly not “everyone” is living longer.

This could be a particularly acute problem in West Virginia, especially since it ranks as one of the poorest states in the country and it benefits more than any other state from Social Security for its income. While we cannot separate life expectancy based on income in the state, we can look at how average life expectancy rates in West Virginia compare to other states.  In 2009, West Virginia had the second lowest life expectancy in the nation at 75.2 years compared to 78.6 nationally. Factors contributing to our state’s low life expectancy is the disproportionally high number of disabled people,  our low per capita and median incomes, and a heavy concentration of workers in physically demanding jobs such as coal mining.  While the average life expectancy for males in the state was 72.3, it was just 78.1 for females, which was the lowest in the nation in 2009.

Looking more closely at individual counties in West Virginia you see even more evidence that females are not living longer. Among the state’s 55 counties, 18 saw a decline in female life expectancy over the last two decades. In McDowell County, which is one of the poorest counties in the state and nation,  female life expectancy declined by 1.7 years, from 75.8 in 1987 to 74.1 in 2009. 

There is also a large racial gap in life expectancy. In 2009, the average life expectancy for black males was nearly three years shorter than white males, 69.6 compared to 72.5. White females are living nearly three in a half years longer than black females in the state (78.1 compared to 74.7) . As the graph below shows, black females have also witnessed a decline in life expectancy over the last two decades, from 75.1 to 74.7.

It also important to keep in mind that the above life expectancy rates are “averages.” This means that a majority of folks in the state are below the average, especially lower-income folks who tend to not live as long. Because of the state’s low life expectancy and income, raising the retirement age of Social Security means that the state – and especially the high number workers in low wage jobs – will benefit far less from Social Security than other states and those with higher incomes. 

Raising the retirement will also hurt workers in the state that work in physically demanding jobs that tend to retire before 65, such as coal miners and construction workers. In contrast, people with desk jobs, like me, are likely to work well beyond 65.

Keeping all of this mind when debating whether to raise the Social Security retirement age is not only important to our state’s working families and economy, but it is also important if we want to live longer and keep more of our seniors out of poverty.

 

 

 

Is West Virginia’s “Skills Gap” Really a Wage Gap?

We often hear that one of the state’s biggest economic problems is a skills mismatch. More specifically, we are told that manufacturing firms in the state cannot find enough qualified workers and that this is holding up our state’s economic recovery. The problem with this argument, as we’ve pointed out before, is that it is largely a myth. While West Virginia certainly has a very low share of workers with an associate and bachelor’s degree, there is little evidence that this is why the state’s manufacturing firms cannot find skilled workers.

As economist Mark Price at the Keystone Research Center pointed out last week in the New York Times, if there was a skills gap in manufacturing we would expect to see a corresponding rise in wages as a employers compete for fewer skilled workers.  As New York Times reporter Adam Davidson notes in the same article:

In a recent study by the Boston Consulting Group, “outside a few small cities that rely on the oil industry, there weren’t many places where manufacturing wages were going up and employers still couldn’t find enough workers. “Trying to hire high-skilled workers at rock-bottom rates,” the Boston Group study asserted, “is not a skills gap.” The study’s conclusion, however, was scarier. Many skilled workers have simply chosen to apply their skills elsewhere rather than work for less, and few young people choose to invest in training for jobs that pay fast-food wages. As a result, the United States may soon have a hard time competing in the global economy.

So, are we seeing a rise in manufacturing wages in West Virginia? As the graph below highlights, the short answer is no. The average hourly earnings of manufacturing production workers has declined since the recession began in 2008,  while the average hourly wage for all private sector production workers has has grown over this period.  

While under-education is a major long-term problem in the state’s labor market, its doubtful that the recession fundamentally changed the structure of the economy in terms of supply and demand for skills and education. As of June 2012, there were nearly four jobless West Virginians for every new job opening and the unemployed rate for those with an associate or bachelor’s degree remains elevated. While some manufacturing firms in the state may feel squeezed by global competition to offer lower wages, until they start paying higher wages and offering more job security it is unlikely that they will ever find the skilled workers they need. 

Budget Beat – November 23, 2012

October Jobs Count – State Adds Jobs For First Time in Months

October’s jobs numbers showed a reversal from previous months with the state adding instead of losing jobs. While this is good news, West Virginia is still not keeping up with the national average in terms of jobs growth. The biggest winner in October was the mining and logging sector which increased jobs by 2.5 percent. A Closer Look on page two explained the potential impact of the fiscal cliff in terms of how many jobs could be lost if the fiscal cliff is not averted. Read Jobs Count.

Bargaining for Higher Wages Can Curb Income Inequality in Mountain State

One of this week’s blog posts addressed the problem of income inequality in West Virginia and the rest of the nation. Ensuring that low-income workers can join unions and bargain collectively with employers to raise their wages is an important step, especially in a state like West Virginia that has a disproportionally high share of low-wage jobs that traps many residents in poverty. Read blog post.

Fiscal Cliff Could Damage West Virginia’s Economy

The fiscal cliff is in the news every day and a blog post this week highlighted a Pew report’s analysis of what might happen here in West Virginia were it to take effect. While the state could certainly use the revenue gained fom the expiration of tax cuts, these gains would be dwarfed by the cuts in federal spending that flow into the state. Read blog post.

Not All Parts of Fiscal Cliff Are the Created Equal

In more fiscal cliff discussion, both in Jobs Count (see above) and a blog post, the WVCBP looked at how many jobs might be lost if the fiscal cliff is not averted. Read blog post.

WVCBP In the News

Ted Boettner was quoted in Sunday’s Gazette Mail on how Patriot Coal’s decision to move away from mountaintop removal mining is a reminder that preparing the state for economic transition is important and a tool to use is the Future Fund. “The decision highlights the fragility of our state’s economy and the urgent need to take steps to ensure that we will always benefit from our rich natural resources,” he said.

Ted was also quoted in USA Today in its article on the fracking boom. “Fracking is happening and it’s not going to stop, so we have to take the high road of good regulation and taxes so communities are better off, not worse off, after it’s done.” He was quoted in another USA piece which looked at the states that are considering creating permanent mineral tax funds (AKA Future Fund) which include West Virginia, Ohio, Pennsylvania, Kentucky and South Dakota.

Not All Parts of Fiscal Cliff Are Created Equal

In this month’s edition of Jobs Count, I looked at the Congressional Budget Office’s report on the employment and GDP effects of the fiscal cliff. The CBO report spells out how many jobs lost and how much GDP would be reduced for each deficit reducing policy that is a part of the fiscal cliff. Overall, if the fiscal cliff is not averted, and its major deficit reduction policies take place, the nation could lose 3.4 million jobs and GDP could decline  by 2.9 percent.

With the economy still fragile, it would be ideal to defer any deficit reduction until later, which would allow for more deficit reduction at a smaller cost to the economy. But, while ideal, it is also not likely, so some deal on the fiscal cliff will probably be made, with some aspects of deficit reduction policies kept, despite the potential negative economic impact. 

If a deal is made that keeps some aspect of the fiscal cliff, policymakers ought to look at how they can get the most deficit reduction for the least harm to the economy. As the analysis in this months Jobs Count showed, some parts of the fiscal cliff have a greater impact on the economy than others. However, the size of their impact on the economy does not perfectly correspond to the amount of deficit reduction they achieve, as this chart shows.

Source: Congressional Budget Office

For example, look at the payroll tax cut/unemployment insurance extension. Its impact on the deficit is roughly equivalent to its impact on the economy. Allowing its expiration to take effect accounts for roughly 22% of the fiscal cliff’s total deficit reduction, 24% of its impact on GDP, and 24 percent of the job loss.

Compare that to the defense and nondefense spending cuts. Together they account for about 13% of the fiscal cliff’s deficit reduction, but they account for nearly twice as much of the economic impact: 27% of the GDP decline, and 24% of the job loss.

In the other direction is the expiration of the Bush tax cuts on high income earners. The expiration accounts for over 8% of the total deficit reduction, but only 3 percent of the GDP decline and less than 6% of the job loss.

As policymakers debate how to address the fiscal cliff, they should keep in mind that some aspects of the fiscal cliff matter much more to the budget than they do to the economy.

Pew Report: “Fiscal Cliff” Could Damage West Virginia Economy

Last week, the Pew Center on the States released a report that looks at the impact of the “fiscal cliff” on state tax revenues and spending programs. The report also includes a nice fact sheet on the impact to West Virginia.

On the revenue side, West Virginia, like several other states, is linked to the federal income tax code so expiring provisions within the “fiscal cliff” (e.g.expiration of 2001,2003, and 2009 tax cuts ) could increase state tax revenues in the state, including federal personal deductions in income taxes, business reductions in the corporate income tax, and the estate tax. 

On the spending side, 18 percent of federal grants would be subject to the across-the-board cuts. This includes education programs, nutrition for low-income women and children, public housing, and other programs. In all, total federal grants subject to sequester made up 6.7 percent of West Virginia’s revenue in FY 201o. Spending cuts in federal spending on procurement, salaries and wages, will also impact West Virginia’s economy. In 2010, these items made up 5.2 percent of West Virginia’s GDP. West Virginia is particularly vulnerable to cuts in non-defense spending, as these two charts reveal.

 

 

While West Virginia could certainly use the revenue, its benefits would be dwarfed by cuts in federal spending that flows into the state.

In other news, Craig Griffith is stepping down as State Tax Commissioner. Griffith has been a real asset to the state on tax policy over the last couple of years. Let’s hope they find someone as competent and hardworking to fill the position. 

 

Bargaining for Higher Wages Can Curb Income Inequality in Mountain State

On Friday, we co-released a report with the Center on Budget and Policy Priorities and the Economic Policy Institute on the rise of income inequality in West Virginia. Most striking in the report was the average drop in incomes among the bottom 20 percent of West Virginia households since the late 1970s.  While the wealthiest 20 percent of households in the state have seen their incomes rise by over 60 percent – or from $83,936 to $134,464 in 2009 dollars – from the late 1970s to the mid-2000s, lower income households in the bottom 20 percent have witnessed a decline in real income growth of over 7 percent – from $17,163 to $15,917.

Looking at more recent trends reveals a lost decade for West Virginia’s low income households. From the late 1990s to the mid-2000s, the top 20 percent and middle 20 percent of households witnessed modest real income growth of 9.2 percent and 8.8 percent, respectively, while low-income households saw a decline of nearly 12 percent.

As noted in the report, one of the causes of rising inequality has been the growth in wage inequality. As we noted in this year’s State of Working West Virginia,  over the last 30 years real wages at the top have grown substantially while those in the middle and bottom have seen no net wage growth. One reason for the lack of wage growth has been the declining share of workers in unions. For example, in 1977 nearly a third of all salary and wage workers in West Virginia were covered by a union contract compared to just 15 percent in 2011. The drop in union coverage is due to several factors, including the decline in manufacturing and coal mining, the shift toward a service-based economy, advances in technology, capital flight, the share of the workforce made up of women, and most importantly policies that have made it harder to unionize.

As we noted in a previous blog post, there are many tools at our disposal to help mitigate the growth in income inequality in the U.S. and in West Virginia. One of the most important steps we can take, however, would be to ensure that low-income workers can join unions and bargain collectively with employers to raise their wages. This is especially important in a state like West Virginia that has a disproportionally high share of low-wage jobs than traps many of our residents in poverty.

 

Budget Beat – November 16, 2012

Does the U.S. Have a Long-Term Deficit Problem?

With the election over and the “fiscal cliff” drawing near, the nation’s attention has once again turned to the federal government’s budget deficit and the problems we face addressing it. Most agree that some combination of spending cuts and tax increases will be necessary in order to put the federal budget on a sustainable path, and a large part of the debate over the deficit is over how much spending should be cut versus how much tax revenue should be raised. 

Read blog post.

Avoiding the Cliff Effect

West Virginia is nearly a month away from reductions in childcare assistance eligibility requirements that will affect over 800 parents and 1,400 children. Families that make between 150-185 percent of the Federal Poverty Level will be dropped from the program on January 1, 2013. The changes in eligibility could not only force parents to quit their jobs because child care would become cost prohibitive, but it would further exacerbate the benefit “cliff effect.” Read blog post.

Best Practices for Oil and Natural Gas Extraction Tax Policy

The independent think tank Headwaters Economics has released a report on the best fiscal practices for states and local governments with oil and natural gas extraction. Part of its conclusion is that West Virginia join other energy-producing states in creating a severance tax trust fund.

WVCBP In the News

Last Friday’s report on the impact of cutting child care funding at the state level was discussed in both the Charleston Gazette and Huntington Herald-Dispatch which had an editorial stating “the bottom line, according to a new report by the West Virginia Center on Budget and Policy, is that the reductions will jeopardize those residents’ ability to keep their jobs or continue their schooling.”

On Thursday, the Center on Budget and Policy Priorities and the Economic Policy Institute coreleased a report on how the income gap between the poor and well-off continues to widen nationwide and in West Virginia in particular. Both the State Journal and West Virginia Public News Service covered the report. Additionally, Bloomberg Businessweek cited West Virginia’s numbers.

Health Policy Director Renate Pore was quoted in the Charleston Gazette’s story about the state awaiting Governor Tomblin’s decision to establish a health-care exchange or leave the job to the federal government.