Immigration Reform Could Help Bolster State’s Finances

West Virginia could gain $1.2 million in state and local tax revenue each year if Congress passes immigration reform, allowing undocumented immigrants now living in the United States to live here legally, according to a new report from the Institute on Taxation and Economic Policy. While the likelihood of immigration reform is currently up in the air in Congress, passing a comprehensive reform bill would provide a much needed boost to the state’s revenues.

West Virginia is home to an estimated 2,180 undocumented families. These families earn an estimated average of $28,800 per year, and pay an estimated total of $3.8 million in state and local taxes, giving them an effective tax rate of 6.3%. In comparison, the typical West Virginia household pays an effective state and local tax rate of 8.6% at that income level. Legalizing these families will increase their tax contribution to $5.0 million, as both wages and tax compliance increase bringing their effective tax rates closer in line with the rest of the state.

Most of the increase in tax revenue gained through legalizing undocumented families would be through the income tax. Most undocumented workers pay sales and excise taxes on the goods they purchase, and they often pay property taxes, either directly on their homes or indirectly as renters. But only half of undocumented workers pay income taxes, because of their lack of legal status. Legalizing these workers who already are living and working in the state would increase the number of families paying income taxes, increasing that revenue source from an estimated $715,000 to $1.7 million.

At a time when the state is facing harmful budget cuts, such as those to higher education, the annual boost in revenue that could come from immigration reform would be a welcome development for the state.

Obamacare Rhetoric Off The Mark

There’s an interesting spin on Obamacare that has been going on in recent days as a result of several announcements out of Washington.  First, the Treasury Department announced last week that it will delay enforcing the large-employer mandate for one year.  Later, the Department of Health and Human Services announced that it will simplify the income reporting requirement for individuals purchasing insurance from the Marketplace in 2014. 

Both announcements allow for easier implementation of what is an admittedly complex law while reducing the burden to adhere to the law for both businesses and individuals for 2014.  However, rather than applauding these decisions as you might expect, opponents of the law are deriding them as evidence that the ACA should be repealed. 

Ironically, part of the reason that these delays have occurred is that opponents have tried to stymie implementation of the law at nearly every corner.  The House of Representatives has voted to deny funding to HHS to roll out parts of the law while some state legislatures and governors have refused to create state-managed exchanges in their own states.  In the ultimate contradiction, by railing against health reform and refusing to create state-run exchanges, these efforts have actually given more power to the federal government.  Essentially, these state leaders who had the opportunity to tailor health reform in their home state have given up their say in how it should be implemented.  While logic says that these should have been the states that would have jumped at the opportunity to push the federal government out and do it their own way, political posturing has resulted in the exact opposite.  They consciously chose to hand over their power to the federal government while simultaneously complaining about federal overreach.

Fortunately, West Virginia leadership has generally avoided this sort of politicking in favor of attempting to do what’s best for state residents and state finances.  Governor Tomblin chose to expand Medicaid which should provide insurance to nearly 100,000 additional West Virginians while shoring up the state budget.  Meanwhile, the Office of the Insurance Commissioner has worked very hard and transparently in trying to get our state-partnership exchange going. 

Last week’s ACA announcements ultimately have little overall impact on the law other than smoothing implementation at the state and federal level.  Large employers will have an extra year to understand the mandate and get their house in order to prepare for 2015 while more individuals will be able to access insurance through the Marketplace.  Claiming that it is proof that the ACA is broken and using it to call for repeal, however, is further evidence that opponents are more intent on pushing for the ACA to fail than they are improving it to help the American people.  

Leadership to Study North Dakota’s Future Fund

Budget Beat – July 5, 2013

Evidence Counts – ObamaRomneyCare, Student Debt, and Inefficient Tax Cuts

The Obama Administration this week decided to delay the mandate in the Affordable Care Act which would require employers to provide health care for their employees or face penalties. Since this affects only those companies with 50 or more employees, few will be impacted in West Virginia. Read more in Brandon’s blog post on how this decision is expected to affect West Virginia (spoiler: not much).

This week, the interest rates on student loans doubled, making college even more expensive for many West Virginia students. West Virginia already ranks near the bottom in the percentage of workers who have college degrees. This ranking, however, belies the fact that, from 1979 to 2012, West Virginia increased the number of college-educated workers by about 200 percent, more than any other state. Read more in Ted’s blog post.

Business taxes in West Virginia are such a small cost of doing business, and have already been cut to such a low level, that cutting them further will unlikely have much affect on creating jobs and attracting new business to the state. In fact, the business franchise tax and the corporate income tax make up just 0.2% of business costs in West Virginia. Read more in Ted’s blog post.

 cost of doing business

Making the News – Future Fund and Employer Mandates

To learn more about how a Future Fund could work in West Virginia, Senate President Jeff Kessler and other legislators will travel to North Dakota later this summer. As the most recent state to adopt a Future Fund, North Dakota has seen its fund grow at a rapid pace since it was started three years ago, as reported in the Charleston Daily Mail and the State Journal. The WVCBP has issued multiple reports on how a Future Fund could provide a source of long-term sustainability to the state, especially after nonrenewable energy sources are depleted. Here’s our report that talks about other states’ funds, including North Dakota. And here is a short video on why we need a Future Fund in West Virginia.

Some members of West Virginia’s congressional delegation seized on the opportunity to slam the Affordable Care Act this week after President Obama decided to delay the employer mandate by a year. Giving the other side of the story in the State Journal was Brandon Merritt, the WVCBP’s health policy analyst.

Military Families Rely on Earned Income Tax Credit (EITC)

About 11,000 West Virginia military families rely on either the Earned Income Tax Credit or the low-income component of the Child Tax Credit to help them make ends meet as reported this week by the Center on Budget and Policy Priorities. Nationwide, over 1.5 million military families rely on the federal safety net to stay out of poverty. Read the full report.

Mining Jobs At Highest Point in Over Two Decades

According to the U.S. Bureau of Labor Statistics establishment survey, mining jobs are at a two-decade high in in the Mountain State.  The chart below finds that the number of jobs in “Mining & Logging” in West Virginia was 36,200 in May 2013. This was higher than at any time over the last 23 years. The mining and logging sector consists of jobs in coal, natural gas and oil, and, to a very limited extent, the timber industry. While jobs in the coal industry have declined somewhat lately, it appears that strong growth in natural gas jobs has been enough to make up the difference.

minign jobs

Why Don’t Business Tax Cuts Pay Off?

Over the last several years, West Virginia has reduced its two main business taxes on the promise that it will boost revenue and jobs. As recent budget cuts show, there is little evidence that cuts to the corporate net income and business franchise tax have “broadened the [tax] base” or led to significant job gains.

In fact, as the chart below highlights, business tax revenue was lower in FY 2013 (July 2012-June 2013) than it was fourteen years earlier in FY 1999.  While these two business taxes made up 12.7 percent of the general revenue fund in 1990, today they only account for 5.7 percent. Furthermore, this trend is expected to continue in the years ahead as the business franchise tax is eliminated and the corporate net income tax rate drops to 6.5 percent by 2016.

bustaxshrinking

The larger reason for why these business tax cuts will do little to boost investment or jobs is that they are a small cost of doing business compared to other interstate differences, such as labor, energy, transportation, occupancy, and other costs of production.

For example, according to the IRS Corporate Source Book, total business expenses in the U.S were about $25 trillion in 2010. Of this amount, businesses deducted about $493 billion in federal, state, and local taxes. This amounts to just two percent of total business expenses in 2010. Using a slightly higher figure of $619 billion provided by the Council on State Taxation (COST), state and local taxes paid by businesses equated to about 2.5 percent of business expenses in 2010.

According to COST, West Virginia businesses paid $3.5 billion in state and local taxes in 2010. According to the WV Budget Office, the state collected $239.9 million from the corporate net income and business franchise tax in 2010. This amounts to just 6.7 percent of total West Virginia business taxes paid in 2010. 

Based on the above estimates, the corporate net income and business franchise tax made up just 0.2 percent of the cost of doing business in West Virginia.* You would be hard pressed to make the case that reducing this amount from 0.2 to 0.1 percent would significantly impact economic growth. A much better case can be made that the real goal of reducing these two business taxes has to do with good ole fashion rent-seeking (aka lobbying) not economic evidence or theory.

cost of doing business

To help further illustrate this point,  let’s look at the effective tax rate of these two business taxes on the coal industry. According to the WV Department of Revenue, the total production value of coal sold in West Virginia was $9.5 billion in 2010 and the total corporate net income and business franchise taxes paid by the coal industry was $32.9 million. This is an effective tax rate of just 0.35 percent. To put this in perspective, the coal industry paid $1.6 billion in wages in 2010 or 17.2 percent of its production value.

Since cutting these two corporate taxes only reduces business costs by a very tiny amount, it is clear that business location and investment decisions hinge on factors other than taxes and that cutting business taxes are an inefficient way to boost economic growth and job creation. This is especially true when you look at who likely benefits from corporate tax cuts and what sacrifices have to be made in order to balance the budget with less revenue.

For example, most scholars maintain that corporate taxes largely fall on capital or shareholders and that the benefits of corporate tax reductions mostly go to high-income taxpayers and those living out of the state. Since most large businesses in the state that pay the lion’s share of corporate net income and business franchise taxes are headquartered out-of-state and whose shareholders live mostly out-of-state, this means most of the tax savings – $82.3 million in 2013 – flows outside of the state’s borders. Meanwhile, when the state has to cut higher education funding and raise tuition for in-state students because of these tax cuts the result is a tax increase on the state’s college students and parents.

While it is very important for our state to be a place where businesses can thrive and prosper, slightly reducing business costs is not going to make this happen. By investing in the important public structures that provide a foundation for economic growth and a better quality of life, we are much more likely to get a better bang for our buck and make the state a better place to live, work, and raise a family.

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*These figures assume that the total cost of corporate business expenses in West Virginia was $140 billion based on dividing this amount by 2.5% using the COST estimates of $3.5 billion in total state and local taxes paid in 2010 ($3.6 billion/2.5% = $140 billion). The $140 billion estimate equates to being 0.56% of the total ($25 trillion) U.S. business expenses in 2010. This estimate is reasonable given that in 2010 West Virginia’s private sector GDP ($51.5 billion) comprised 0.41% of U.S. GDP ($12.5 trillion).  For a more in-depth understanding of using the above IRS & COST data see footnote #4 of this paper. Also for a more exhaustive understanding of the relationship of state and local business taxes on econmic growth, see Dr. Peter Fisher’s paper “Corporate Tax and State Economic Growth.”

Employer Mandate Delayed – What Does it Mean for WV?

Yesterday evening, the Obama administration made a surprise announcement that it would be delaying the employer mandate, a key provision of the Affordable Care Act, for one year.  The rule, originally slated to take effect January 1st of 2014, requires employers with 50 or more employees to provide health insurance coverage to their workers or face a penalty. 

Many conservative pundits and politicians have jumped on this claiming that it is proof that the ACA isn’t working while the official response from Washington is that the administration is responding to the business industry’s request for additional time to understand and implement the complex requirements effectively.

Putting politics aside, the most important question for us is how this impacts West Virginia.

First, it must be noted that delaying the large employer mandate does not delay or eliminate the individual mandate that all people have health insurance.  There is also no indication that the health insurance exchanges will be delayed either, meaning they are still expected to roll out on October 1st of this year when enrollment begins.

Therefore, this announcement only impacts employers with more than 50 employees.  According to the North American Industry Classification System (NAICS), only about 5 percent of the employers in the state have 50 or more employees in 2011. (Figure 1)

WV Employers by Size

Most employers of this size already offer health coverage to their employees.  According to the Kaiser Family Foundation, 94.8% of private employers in West Virginia with over 50 employees offered health insurance to their workers in 2011. Based on the above figures, this means there are around 100 employers of this size across the state directly impacted by this delay.

Employers that currently offer health insurance could potentially withdraw coverage in 2014 and push their employees to the individual insurance exchanges without facing a penalty.  However, it’s hard to imagine that happening with the mandate and penalties picking back up in 2015, not to mention the myriad of negative consequences a large employer could expect by reducing employee benefits.  

Essentially what this all means is that the impact of this delay in West Virginia will likely be minimal.  The 100 or so businesses that would have been directly impacted by the mandate will have an additional year to strategize without worrying about penalties, while their workers will now be able to seek coverage on the individual exchange in 2014, possibly benefiting from tax credits to do so.  

Actually, West Virginia Has Made Significant Progress with College Attainment

As we’ve said before, one of West Virginia’s biggest challenges to creating stronger economic growth and better paying jobs is increasing the number of workers with a college degree. Unfortunately, as Chris pointed out here and here, the state and the federal government are making it increasingly more difficult  to attend college by raising the cost of tuition and subsidized loans.

As the chart below highlights, only one in four workers (25.6%) in the Mountain State had a bachelor’s degree or higher in 2012. Just five other states – Wyoming, Arkansas, Nevada, Mississippi, and Louisiana – had a smaller share of their workforce with a college degree.  As we’ve shown previously, this is important because states with a high share of their workers with a college degree tend to have higher median wages or better paying jobs. As we know, better paying jobs are the key to better health, a better tax base, better economic mobility, and less crime.

laborforce with college 

While our state has struggled to transition to the “new economy”  – which tends to be geared toward only rewarding those with a college degree –  the state has made significant progress in educating its workforce over the past several decades.

In fact – and this may surprise many of you –  our state has made more progress in educating its workforce than any other state over the past several decades.

Between 1979 and 2012 the share of West Virginia’s workforce with a college degree increased by nearly 200 percent or from 8.7 percent to 25.6 percent. This was the highest increase in college workforce attainment in the country (see chart below). The next closest was Alabama at less than 150 percent.

college growth labor force

 In 1979, West Virginia ranked dead last in the country with only 8.7 percent of its workforce with a college degree or higher (Arkansas was 49th with 11.1%). What this also shows us is how overly reliant our labor force and state was on jobs that did not require a college degree. While moving from 50th in labor force college attainment to 45th in the nation doesn’t seem like substantial progress, it actually is. And we should be proud.

That said, if we want to continue making progress and build a more sustainable and vibrant economy, we will need to make investments in our kids and make it easier for them to attend and pay for college. This starts by ensuring that we have the resources to make it happen and the political will to get it done.