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. The report states,

Drilling for oil and natural gas is a high-impact economic activity that presents opportunities and challenges for state and local governments seeking to reconcile the benefits of job and revenue growth with the impacts of rapid industrialization and population growth. The rush to develop unconventional oil and natural gas resources—underway in many parts of the nation and on the horizon in others—requires more wells compared to conventional oil and natural gas, meaning higher costs, more jobs, and greater impacts to extract an equivalent amount of oil or natural gas.

The report goes on to outline many of the challenges faced by states with rapid natural gas development, some of which we are experiencing here in West Virginia.

The report also addresses some fiscal policies that can help states like West Virginia address those challenges. Two of the policy suggestions stood out to me as particularly relevant to West Virginia.

The first is, “Maintain a High Effective Tax Rate.” The report states, 

“The effective tax rate is a measure of how much money is actually paid in taxes after accounting for various loopholes in each state’s tax code. States that maintain higher effective tax rates have more resources to mitigate the impacts of industrial development and population growth, and can invest revenue in permanent funds for long-term economic development. Experience suggests that the state competition for industry activity through low tax rates and tax incentives is largely ineffective, meaning states can set fiscal policy to meet community needs and state priorities without deterring industry investments.”

This is a relevant lesson for West Virginia, because, as we’ve shown here, here, and here, West Virginia’s effective production tax rate is below most other states with significant extraction industries. The Headwaters report contained this figure, showing effective state and local production tax rates for oil and gas producing states out West. Effective rates for these states ranged from 4.6% to 10.3%, while West Virginia’s effective production tax rate on natural gas is 4.4%, lower than all the states examined.

The second relevant lesson for West Virginia is, “Invest Revenue to Provide Stable Long-Term Income.” The report states,

It is impossible to avoid volatility in tax collections that are based directly on the production value of oil and natural gas. Instead, stabilizing revenue streams to fund state and local services can be accomplished by investing a portion of annual revenue into funds that can disburse consistent amounts of money over time.

Example: New Mexico has a large permanent fund that distributes an amount equal to five percent of
the principal balance annually. If deposits and interest earnings exceed five percent in a given year, the
principal balance will grow, but even when annual revenue and interest earnings decline, the fund will
still distribute a stable revenue stream.”

This suggests that West Virginia should join most other energy producing states, and create a severance tax trust fund.

Avoiding The Cliff Effect

West Virginia is nearly a month away from reductions in childcare assistance  eligibility requirements that will ipact 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 quite their jobs because child care would become cost prohibitive, but it could further exacerbate the benefit “cliff effect.”

Often times, the greatest barrier to self-sufficiency for low-income individuals and families occurs when an individual has been receiving financial benefits from support programs such as Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), or child care subsidies, and a small increase in income causes the termination of these benefits and puts that individual in deeper financial strife. 

This is a particular problem for workers in West Virginia, because of the state’s high share of low-wage jobs. A low wage worker in West Virginia may be hesitant to accept a raise or move to a better paying job because an increase in wages could result in the loss of benefits like SNAP, TANF, and child care subsidies. 

For example, for a single parent with two children, a wage increase from $12.00 an hour to $12.50 an hour would result in the loss of SNAP benefits, while a wage increase to $18.50 and hour would result in a loss of child care assistance, even though the family would still earn below 200% of the Federal Poverty level. To put it plainly, if a West Virginia household of three earns an annual income of $23,803, they will lose SNAP and Low Income Energy Assistance Program (LIEAP) benefits. A raise to $27,465 would mean a loss of CHIP and an annual salary of $33,874 will terminate the child care subsidies.

So, while the family would not have enough income to cover basic household and family expenses, the worker would be earning too much to qualify for basic assistance programs. By accepting a raise or a better paying job, the low wage workers can put their families in worse financial situations, due to the loss of benefits the cliff effect creates. A study in Indiana estimates workers in their state can lose over $11,000 in net resources due to the cliff effect.

The Women’s Foundation of Colorado offers this graph below, illustrating the cliff effect:

The “Breakeven Line” is the point in which income is equal to expenses related to the costs of basic necessities. As wages increase and the family begins to just get ahead and pay off bills, the support programs drop off. Low-wage workers continue to strive and earn more money, yet ironically, the result is less financially stable and secure. 

It is no surprise that a low-wage worker would consider refusing a raise in order to keep the benefits he or she needs to provide for the family. This “cliff” phenomenon can be a real deterrent for employment and a barrier to economic security. It would be less detrimental to families if programs like SNAP raised their income limits to 200% of the Federal Poverty Level. This would reduce the initial “cliff.” An individual could be phased out of these programs gradually, rather than immediately terminated due to a tiny wage increase.

It is important that work must pay. Otherwise, individuals are trapped in a cycle of financial insecurity. It is a situation that we simply cannot afford.

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.

But the focus on the debate over spending cuts and tax increases may be obscuring a far bigger problem than the federal deficit, which raises the question, is the federal deficit the real problem?

Over the past few years, the source of the most recent federal deficits has been clear. As the charts show, the biggest contributors to today’s deficits have been the recession, tax cuts and wars. Get the economy growing, repeal the tax cuts, and end the wars, and you’ve solved a big chunk of today’s deficit problem.

In fact, before the recession struck, we really didn’t have much of a deficit problem at all. The deficit was just over 1 percent of GDP before the financial crisis took hold, and were projected to stay low for the near future. It was only when the housing bubble popped and the financial markets collapsed, sinking the economy, that the deficit took off.

Source: Congressional Budget Office

But today’s deficits aren’t the only problem. As we’ve heard countless times, future deficits will put the nation on an unsustainable path, and if we don’t stop spending, we will go broke. 

But it’s not , “more government hiring, more student loans, mortgage relief, jobs programs (we now have 47), free health care, green energy subsidies, stimulus spending,” that is causing our future problems, as Hoppy Kerchaval would like to believe in his commentary. These three charts show all of the government’s spending, projected out to 2035, from the Congressional Budget Office. And as they show, the real source of our deficit problem is plain as day.

The top chart is health care, including Medicare and Medicaid, as well as the Affordable Care Act. The middle chart is Social Security, and the bottom chart is everything else: defense, education, and everything that Hoppy lists as are deficit problems in his commentary.

What do these charts tell us? Pundits like Hoppy have it wrong. We don’t have a deficit problem, or a spending problem, we have a health care problem. Spending on social security grows, but not by much. And while the trust fund may not be solvent now, the solution is pretty easy. And spending on EVERYTHING ELSE is actually falling. Healthcare costs are the cause of our deficits; healthcare costs are the real problem.

But simply cutting public spending on healthcare isn’t the solution. Private healthcare spending is growing even faster. The healthcare problem in our federal budget is also a problem in every household and every business in the country.

Without addressing the rising costs of healthcare in this country, all of our deficit reduction efforts will be wasted. But this challenge isn’t impossible. All we have to do is get our per person health care costs down to the same level as any number of countries, all of which have longer life expectancies than in the U.S., and we can watch our budget deficits disappear.

The Future of Coal and Insightful Industry Leaders

As readers may know, we’ve talked a lot recently about the future of coal in West Virginia. Specifically, we’ve aimed at taking a data-driven and evidence-based approach to the issue instead of one focused primarily on unsubstantiated political posturing. The issue is just too important not to be taken seriously. Now, with the election over,  this column in Forbes by energy columnist Ken Silverstein offers a prudent strategy on moving forward:

“Increased government oversight may be coal’s most conspicuous villain. But its real culprit right now is a lot tougher: free market forces. Here, coal’s true competition is natural gas, which is now just as cheap and potentially more abundant. It’s also cleaner and easier to permit, enabling it to capture some of coal’s market share.

Shale gas, or unconventional natural gas, is thus the path of least resistance. It’s a potential gold mine in multiple parts of the country that include Ohio’s Utica basin and throughout in the East Coast in the Marcellus Region. President Obama has said that those plush areas would get developed but with stricter oversight than if his challenger would have been elected.

All this is to say that if Tuesday’s election results don’t push coal into greater compliance then free market forces will. Insightful industry leaders should then be less intent on turning back the regulatory clock and instead, more focused on ushering in relevant technologies.”

 

Budget Beat

Welcome to this week’s Budget Beat, a recap of blog posts, publications, reports and other information from the West Virginia Center on Budget and Policy.

New Report Offers Solutions to Child Care Cuts

Every day in West Virginia, thousands of low-income families rely on public child care assistance. Today the WVCBP released a report Reducing Child Care Assistance – The Impact on West Virginia’s Low-Income Families. “Child care assistance is crucial to keeping low-income parents in the workforce and their children safe,” said Ted Boettner, author of the report and WVCBP Executive Director. “Instead of cutting child care assistance, we should follow the lead of other states that have invested additional resources into the program.” Read the report.

With the Election Over, It’s Time to Expand Health Care

With the 2012 election firmly behind us, now is the time to fully implement the Affordable Care Act and ensure that no one in West Virginia is without health care coverage. In 2011, approximately 272,000 West Virginians between the ages of 18 and 64 lacked health coverage. About half of the state’s uninsured could gain health care coverage if the Mountain State expands Medicaid to cover low-income adults earning up to 138 percent of the federal poverty level. This would be a great investment for the state, with the federal government picking up nearly 96 percent of the tab in the first six years (2014-2019). 

Read blog post.

Coal Industry CEO Projects Decline in West Virginia Coal: Will Policymakers Take Note?

While policymakers have been somewhat slow to confront the historical and future decline of coal in the state, coal mining executives seem to understand quite well the economic realities facing their industry. As Ken Ward reported in the Charleston Gazette last Friday, the CEO of Alpha Natural Resources, Kevin Crutchfield, noted he “expects the region’s production of steam coal for electrical power plants to drop from previous levels of 120 million tons a year to a range of 50 to 70 million tons annually.” Read blog post.

WVCBP In the News

Federal funds benefit many West Virginians. This week the State Journal mentioned how the WVCBP found that more than 20 percent of state residents depend on federal benefits for personal income.

Both Ted Boettner and Sean O’Leary were quoted in an editorial in this week’s Charleston Gazette on how, even if there were no new regulations, coal production is going to decline for other reasons including competition from natural gas.

The WVCBP was also cited in a pre-election Charleston Gazette article on the decline of coal.

Former WVCBP Economist Jill Kriesky is published in a new book “Transforming Places: Lessons from Appalachia” which is edited by Stephen L. Fisher and Barbara Ellen Smith. Jill and co-author Daniel Swan contributed an essay called “Faith-Based Coalitions and Organized Labor: New Forms of Collaboration in the Twenty-First Century?” The book is available from the University of Illinois Press.

With Election Over, It’s Time to Expand Health Coverage

With the 2012 election firmly behind us, now is the time to fully implement the Affordable Care Act and ensure that no one in West Virginia is without health care coverage.

In 2011, approximately 272,000 West Virginians between the ages of 18 and 64 lacked health coverage. As we highlighted in this recent report, about half of the state’s uninsured could gain health care coverage if the Mountain State expands Medicaid to cover low-income adults earning up to 138 percent of the federal poverty level. This would be a great investment for the state, with the federal government picking up nearly 96 percent of the tab in the first six years (2014-2019).

 

Status of Health Reform Medicaid Expansion

 As you can see in the chart above, West Virginia is among the states that have not made a clear decision on the Medicaid expansion. 

Failing to expand Medicaid would squander the opportunity to boost our state economy. Medicaid expansion in West Virginia will amount to at least $3.7 billion in additional federal dollars invested in the state between 2014 and 2019. As health policy expert Judy Soloman notes, “Congressional Budget Office estimates that if all states adopt the expansion, they will spend only 2.8 percent more on Medicaid from 2014 to 2022 than they would have spent without health reform. And that estimate doesn’t account for the ways in which expanding Medicaid will save states money, such as by cutting the cost of treating uninsured residents in emergency rooms and health clinics.”

It is also important to point out that if West Virginia fails to expand Medicaid under the ACA, approximately 30,000 low-income West Virginians with incomes between 100 and 138 percent of the federal poverty level will have to seek coverage in the health care exchanges if they do not have access to affordable employer-sponsored insurance. Because of the greater cost-sharing arrangements for exchange coverage than in Medicaid, this means many of these low-income adults will experience greater financial hardships to meet their health care needs.

Governor Tomblin and the Legislature should take steps to expand Medicaid when the Legislature convenes in February of 2013.  It will help thousands of working parents and other adults in West Virginia get the quality health care they need and give the state’s economy a real boost.

Solutions to Address Economic Opportunity and Income Inequality

One of my favorite social scientists, Lane Kenworthy, has a remarkable essay in the latest Foreign Affairs on America’s growing opportunity and income inequality gap. Most notably, Kenworthy finds that addressing these twin problems requires different strategies. For example, while investing in early childhood development may help create more economic opportunity over the long-run it would do little to address income inequality (see economist Tim Bartik’s response) in the short-run.

As I noted last week, there are several actions we could take at the federal and state level to address the Mountain State’s growing income inequality. There are also several things we could be doing to create more economic mobility and opportunity, including investing in early childhood development, higher education, asset building, working on a just transition in coal mining communities, and creating a state Earned Income tax Credit.

Of these different policy choices, investments in early childhood education may be at the top of my list.  Over the years, there have been multiple studies documenting the benefits of investments in early childhood education programs (such as Head Start, Child Care Assistance Birth to 3, In-Home Family Education, Pre-K ) and the across the board support in West Virginia makes it very doable. As Tim Bartik highlights in this recent TEDx speech, early childhood programs can help us not only build stronger local economies but can create greater economic opportunity for all over the long-term.

As Kenworthy correctly concludes, there is no silver bullet, but government action must be part of the solution:

In the last half century, the United States has taken long strides toward equalizing economic opportunity. That progress did not happen on its own; it took place with a push from the government. In recent decades, however, the opportunity gap for Americans from different family backgrounds has started to grow. Fortunately, the United States’ experience and that of other affluent nations suggest that the country is not helpless in the face of economic and social changes. There is no silver bullet; a genuine solution is likely to include an array of shifts in policy and society. Even so, a fix is not beyond the United States’ reach.

 

Coal Industry CEO Projects Decline in West Virginia Coal: Will Policymakers Take Note?

While policymakers have been somewhat slow to confront the historical and future decline of coal in the state, coal mining executives seem to understand quite well the economic realities facing their industry. As Ken Ward reported last Friday,  the CEO of Alpha Natural Resources, Kevin Crutchfield,  noted he “expects the region’s production of steam coal for electrical power plants to drop from previous levels of 120 million tons a year to a range of 50 to 70 million tons annually.”

As we’ve noted here and here, Mr. Crutchfield is absolutely right about the decline in steam coal production in Central Appalachia. According to the latest projections for the Energy Information Administration, steam coal production (bituminous coal) will decline sharply over the next two decades (see below)

While Mr. Crutchfield gives a range of 50 to 75 million tons over the coming years, EIA estimates are more pessimistic showing that steam coal production will be below 30 million tons by 2020.  It is important to remember that EIA projections also tend to be optimistic. Let’s hope policymakers finally take note and begin to plan for the coming decline of coal in southern West Virginia.

Surplus Corporate Tax Collections Reflect Lowered Expectations

Friday’s Daily Mail reported on the state’s latest monthly revenue report. The report shows that the state ended October with a $3.8 million surplus over what the budget office had estimated. The surplus was credited to higher than expected corporate income and business franchise tax revenue, which are currently running 21 percent ahead of expectations.

However, beating the projected estimates for corporate taxes is now a fairly meek accomplishment. The FY 2013 estimate for corporate income/business franchise tax revenue is $248 million, barely any higher than it was in 1990.

Last year, corporate net income/business franchise tax revenue collections totaled $188 million, one of the lowest totals in the past two decades. Overall, the corporate net income/business franchise tax has been the slowest growing source of tax revenue for the state, and its importance to the state’s finances has dramatically shrunk.

When we don’t expect any significant growth from business tax contributions year after year, its easy to exceed expectations. And the reasons for those lowered expectations and generally poor performance of corporate tax revenue? Unpaid tax cuts and unaccounted for tax credits and incentives.

Budget Beat for November 2, 2012

Welcome to Budget Beat, a recap of this week’s blog posts, publications, reports and other information from the West Virginia Center on Budget and Policy.

Romney/Ryan Budget and What It Would Mean to 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. Read blog post.

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. 

Read blog post.

WVCBP In the News

This week the WVCBP’s recommendation of a Future Fund for West Virginia was in a Charleston Gazette article. Please visit www.wvfuturefund.org to learn more about this idea and what it could mean for West Virginia.

Executive Director Ted Boettner was quoted in USA Today on energy policy in the presidential campaign in terms of West Virginia coal. “The regulations may have long-term impact on the coal industry, but recent mine closures are due more to the plunge in prices for natural gas that make coal less cost-competitive.”