Overall, Natural Resource Extraction Jobs Are Growing in W.Va.

While there has been lots of shouting about the state losing coal jobs, as a whole, the state’s natural resource extraction employment picture looks very healthy. All together, employment in the natural gas and coal industry reached almost 37,000 in the third quarter of 2012 – its highest point over the last ten years. While coal mining employment has declined recently, there are still more than 8,000 jobs today than there were in 2003. The growth in the natural gas industry has also played a large role making up for the losses in coal mining jobs. Over the last ten years, total employment has nearly doubled from about 6,900 in 2003 to just over 13,000 in 2012.

Do Coal Companies Need Another Tax Subsidy?

This week the House passed the “West Virginia Coal Employment Enhancement Act,” which gives local coal producers a $3 per ton tax credit on coal sold to West Virginia power plants and other industries. According to the bill (HB 3072), the tax credit (upon the severance tax) is given only to West Virginia coal that is sold in excess of the coal consumed at a power plant or industrial facility during calendar year 2012. For example, if Acme Coal Company sold one million tons of coal to Acme Power Company in 2012, but in 2013 it sold two million tons to Acme Power Plant only a million of those tons would be eligible for the $3 credit upon the severance tax. So, how much is this credit going to cost the state’s budget? According to the fiscal note from the Department of Revenue, it could be significant but that are unable to make a guess. Sounds familiar, ah…remember the cracker plant fiscal note?

The intended purpose of the bill is to “increase coal production and employment in West Virginia,” but it is unclear how the bill would incentivize coal production. Coal production is based on demand, supply, and prices that are set in a regional or global market place. Therefore, it is hard to see how reducing a coal company’s severance tax payments will stimulate demand from power plants to purchase West Virginia coal unless they pass the savings onto the power plants in the form of lower coal prices. According to bill, there is no requirement to do so. Even if this happens, the credit would probably not be enough to incentivize a power company to purchase additional West Virginia coal.

As the chart below highlights, the amount of West Virginia coal used by West Virginia utilities and industrial facilities has declined dramatically over the last decade from a high of 37.6 million tons in 2003 to a low of 18 million tons in 2011 (the latest year we have data). In 2003, approximately 76 percent of the coal used in West Virginia for electric power and other industries was mined in West Virginia compared to about 55 percent in 2011.

 

It is hard to fathom that the share of West Virginia coal used in the state for electric power generation will be increasing any time soon given the stiffer competition with other coal regions and the massive shale gas play underway in our region and across the country. It is even harder to understand how this tax credit will boost local coal production and employment since it has the incentives pointed backwards at coal producers instead of forwards at power plants who purchase coal.  It also seems unclear how the power plants or industries will certify that the West Virginia coal they are purchasing is in “excess” of the amount they purchased in 2012. What if a coal company decided to rename its existing company, or gets purchased by another company and then sells their coal to a power plant? Would this coal qualify? What if a power plant purchased coal from five different West Virginia companies in 2013 and it was more than they purchased in 2012. Which company would get the $3 per ton tax credit on the excess coal purchased? The language in the bill does not clarify how this would work. One thing is for certain. If the above chart continues to show declines in WV coal being used at power plants and coal companies receive a subsidy from this bill during this period then it will be unmistakeably obvious that we are giving away free money. 

With this in mind, the Senate should proceed with extreme caution if they plan to consider this bill. It doesn’t seem to accomplish its stated purpose and there seems to be all kinds of wiggle room that would essentially being giving free money away at a time when we are cutting vital program like higher education and domestic violence prevention. Then again, perhaps I just don’t understand the bill.

More Budget Cuts Coming for West Virginia

With revenue collections running $49 million below estimates, the Senate Finance Committee has introduced a bill to enact immediate spending cuts, with the full Senate expected to vote on the bill today. Lower than expected personal income, sales and severance tax revenues have contributed to the revenue shortfall prompting the budget cuts.

SB 664 cuts $28 million from FY 2013 budget, affecting 42 areas of the budget. The table below shows these cuts.

Unlike the $75 million budget cut in the upcoming FY 2014 budget, in which each agency saw a 7.5% cut, this $28 million cut is distributed unequally throughout selected areas of the budget. More than 1/5 of the $28 million in cuts will come from the WV Development Office, which will see a $6.3 million cut, a 27% decrease from the original appropriation. $4.3 million of the Development Office’s cut will come from Local Economic Development Assistance.

While most of the listed cuts will come from the personal services and employee benefits area of the agency budgets, some programs which receive line item funding will also be affected. These include GO HELP in the Governor’s Office, Teacher Mentor in the Dept of Education, the Center for Professional Development in the Dept of Education and the Arts, Emergency Response Entities in the Division of Health, and Community College Workshop Development and WV Advance Workforce Development in Higher Education.

These budget cuts are occurring despite the fact that the state is currently sitting on nearly $1 billion in rainy day funds, after adding nearly $100 million to the funds in 2012. And while revenues are faltering across the board, revenue projections show the personal income tax as the only source of revenue growth. And even as a lack of revenue has forced multiple budget cuts, the corporate net income tax is on schedule to be cut once again in 2014, and the business franchise tax cut in 2014 and eliminated in 2015, which would put business tax collections at at 25 year low.

Fixing Job Applications Could Help Ex-Felons Gain Employment

While the governor’s prison reform bill (SB 371) is being debated in the House, they might want to think about removing barriers that make it very difficult for ex-felons gain employment. If one of our goals is help reduce recidivism and help ex-felons enter the workforce, the state will need to end counter-productive practices that make it difficult for ex-felons to get a job. One way that this could be accomplished is if the state prohibited some employers from asking about convictions on job applications. So far, seven states and more than 40 cities nationwide have passed this reform which is often referred to as “ban the box.”

The “box” refers to the place on many employment applications that asks whether the applicant has been convicted of a crime or sometimes it may even inquire about arrests. By removing the box from applications, it would give the employer the opportunity to learn about the candidate’s experience and skills as they relate to the position instead of automatically tossing out the application. However, this does not mean that the employer cannot run a criminal background check. The aim is to help remove this initial barrier and allow the applicant to explain his or her record and how successful their rehabilitation efforts have been since being convicted.

If we want to reduce our growing prison population, reduce prison costs, and help families of formerly incarcerated heal, prosper and contribute to our community, then ex-felons must have a better shot at getting a job.  While the legislature may not look at “banning the box” this year, cities in the state could lead the way and put pressure on the state to do the same.

Should West Virginia Adopt a Mileage Tax?

As the Gazette reported on Wednesday, the WV Department of Highways is pushing a bill to study the feasibility of replacing or supplementing the motor fuel tax with a vehicle miles traveled (VMT)  tax to help address the declining State Road Fund revenue which is partly due to more fuel efficient vehicles. The VMT tax would place a small fee on cars and trucks for each mile they drove – often referred to as “pay-as-you-drive” tax –  instead of (or to complement) the state gasoline tax, which is 34.7 cents per gallon of gasoline. Before we look at the mechanics and the advantages and drawbacks of the VMT tax, it is important to first delve into the fiscal problems facing our state road fund.

West Virginia State Road Financing

Currently, the State Road Fund is made up of four central revenue sources, including federal matching funds, motor fuel taxes, registration fees, and a 5 percent sales (privilege) tax. All together, the state is planning to appropriate $1.2 billion for the Department of Highways in FY 2014. While federal funds are the largest single revenue source ($470.4 million), the state gas tax ($430 million), sales tax ($175.5 million), and registration fees ($92.7 million) are the the the central state sources of revenue of the State Road Fund. These funds are used to match federal funds for interstate construction and maintenance and for other state road and bridge construction. The state also pays for roads through general obligation debt such as road bonds. In FY 2013, the total outstanding debt on road bonds was $245 million in 2013.  (The state also collects toll fees on the WV Turnpike ($82.1 million in FY 2012) operated by the WV Parkways Authority, but this money is solely used for the I-64 Turnpike and it does not receive federal matching funds or go toward other roads.)  

Over the last several decades, the sources of tax revenue to the State Road Fund has shifted away from registration fees and more toward the motor fuel taxes. From 1980 to 2014, fuels taxes have grown 417 percent, sales taxes by 332 percent, and registration fees by only 194 percent. In 1970, registration fees made up 30 percent of revenue and today it only comprises 13 percent.

Unlike most states, West Virginia is responsible for financing both state and county roads. According to 2010 study by WVU economist Tom Witt, the state is “responsible for over 92 percent of public highways while municipalities are responsible for about 5.5 percent and federal agencies for the balance.” According to Witt, the only other states that have jurisdiction over both state and county roads are Delaware, North Carolina, and Virginia. 

A look at the local spending on highways from the Census Bureau bears this point out. As the chart below highlights, local governments in West Virginia spent less than any other state on highways expenditures in 2010. Of the estimated $1.2 billion spent on West Virginia highways in 2010, local governments in the Mountain State spent only 7.5 percent or $92 million. The U.S. average was 40 percent. The other states that have jurisdiction over all state and county roads also saw their local governments spending less, with North Carolina local governments spending 17 percent, Delaware at 19 percent, and Virginia at 27 percent.

State Road Fund Revenues Lagging Behind Road Use

Over the last several decades, the state has found that its central revenue source, the motor fuel tax (which contains a flat rate of 20.5 cents per gallon and a variable rate of 5 percent based on the wholesale price of gasoline), cannot catch up to the increasing fuel efficiency of cars and trucks in the state. But as fuel efficiency has increased, so has the number of miles driven in the state, putting more stress on maintaining roads and bridges. According to the Federal Highway Administration (FHA), from 1980 to 2010, the number of miles driven per vehicle in West Virginia has grown from  8,141 to 13, 377 and the average miles per gallon has grown from 11.3 to 16.8. So, people are driving father on less gas, which means less revenue for the state. 

One way to look at the declining power of State Road Fund revenue to meet the increased use of roads is by looking at vehicle miles traveled (VMT) in the state. According to FHA, in 1980 the total VMT was 10.7 billion miles. By 2010, this number almost doubled reaching 19.2 billion.  The chart below looks at State Road Fund Revenue per VMT in West Virginia (FHA data) from 1980 to 2010. The blue line looks at inflation adjusted State Road Fund revenue using the CPI-U-RS (the standard inflation measure for urban consumers) and the red line uses the Producer Price Index (PPI) for highway and street construction  that was discontinued in 2010.

As you can see, the state is receiving less revenue per mile driven using either inflation measure. Using the CPI-U-RS (blue line), the state received about 5 cents per VMT in 1980 compared to about 3 cents per VMT in 2010. And the red line (using the more accurate measure of price changes in highway & street construction), shows that the state received about 4.6 cents per VMT in 1987 (the first year this inflation measure was available) compared to 3.2 cents in 2009 (the last year the PPI for highways was available). Either way you cut it, people are traveling more and the state is receiving less in revenue. Over this same time, the state has also seen a large growth in the number of trucks, growing from 387,000 in 1980 to 730,000 in 2010. Meanwhile, the total number of automobiles in the state has shrunk from 929,000 n 1980 to 703,00 in 2010. With more trucks on our state roads creating more stress, it is no wonder that the state is having trouble financing road construction.

So, with all of this in mind, should WV adopt a vehicle miles traveled (VMT) tax?

While the VMT tax is gaining momentum around the country, so far no state is using it to fund its transportation system. In 2006, the state of Oregon began studying the idea  and recently it tested the concept in a pilot program in the city of Portland, but it has not made plans to implement it statewide. Several other states are also studying the idea, including our neighboring states Pennsylvania and Maryland.  (This may partly explains why the WV DOH wants to study the concept as well. As we’ve talked about before, action at the state level usually encourages action at the federal level).  The federal government also been studying the idea for a number of years. Recently, the Congressional Budget Office (pdf) and the Government Accountability Office (pdf) examined the advantages and disadvantages of a VMT tax at the federal level and found that for the most part it was a good idea. The GAO concluded: “Mileage-­based user fee initiatives in the United States and abroad show that such fees can lead to more equitable and efficient use of roadways by charging drivers based on their actual road use and by providing pricing incentives to reduce road use.”

While there are distinct advantages to adopting a VMT tax in West Virginia, there are also several drawbacks.These include privacy issues, costs of implementation, how to charge out-of-state drivers, and how the VMT tax could discourage the use of more fuel efficient vehicles. A lot would also depend on how the state imposes the fees per mile on each vehicle. Would heavy trucks that cause more damage to the roads be charged more? Would we charge more during peak hours of traffic? Would we charge rural drivers the same as those that live in the cities? Lots of details to unpack. The table from the CBO report provides good comparison between the federal gas tax and a VMT tax.

Currently, most states looking at the VMT tax want to attach a GPS device to your vehicle in order collect mileage and charge you a fee. There have been numerous complaints about this from civil liberty groups and the general public. Nobody likes big brother in their car and I imagine this would not go over well in the Mountain State. The good news is that the WV DOH has talked about using state inspection stations (your local gas station, usually) to collect your odometer reading each year when you get your car inspected. While this would be a much less intrusive way to collect mileage, it remains to be seen if it could be done efficiently and what the costs will be. 

Perhaps the biggest hurdle would be how to collect mileage fees from out-of-state drivers who benefit from our state’s road system but would not have to pay. According to the WV Parkways Authority, only 24 percent of toll revenues from the WV Turnpike come from WV passenger cars (16%) and commercial vehicles (8%). Based on the 2010 annual mileage figures in West Virginia, a flat 3.3 cents-per-mile fee on vehicles traveled would have produce about $634 million in revenue in 2010 or about $441 annually per vehicle. However, if a large share of those vehicles are out-of-state drivers for whom we cannot collect fees from, than the mileage fee would have to be much higher to reach the same amount of revenue.

Another hurdle is fuel efficiency. As the CBO table highlights, VMT taxes would provide little incentive to purchase fuel efficiency vehicles. This could be partly overcome by implementing a “green fee” on vehicle registration and title fees as the Massachusetts Department of Highways has suggested in its 21st Century Transportation Plan. According the plan, “Under a ‘green fee,’ existing vehicle registration and title fees would be assessed additional fees based on a vehicle’s level of carbon emissions. Under a green fee scenario, owners of motorcycles and hybrid cars could pay an extra $15 every two years for registrations, car and hybrid SUV owners could pay an additional $30 every two years, SUV and light truck owners could pay an additional $60, and heavy truck owners could pay an additional $85. The fee would be adjusted to reflect the age of the vehicle and the anticipated emissions produced – higher polluting vehicles would pay more, while cleaner vehicles would pay less.”

Conclusion

West Virginia is not unique in that it is having problems shoring up its State Road Fund to pay for road construction and maintenance. All across the country, states are finding it increasingly difficult to fund their transportation systems with fuel taxes. While it is important that the state is looking at alternatives like the VMT tax, it could be decades until it is up and running unless the federal government adopts such a system. In the short-run, the state will need to find additional revenue if it wants to maintain its current infrastructure needs and they may want to look at other alternatives. In my next post, I will look what some of those alternatives could be.