Budget Beat – February 28, 2014

Legislation Still Alive Post- Crossover Day

Wednesday was Crossover Day, the day that legislation has to have passed one chamber to stay alive.

Here’s what we are watching:

The West Virginia Future Fund bill passed the Senate unanimously last week and is awaiting action by the House of Delegates. Want to know more about what this bill would do for West Virginia? Read Ted’s Future Fund 101 blog post for all the answers.

Legislation to raise the state’s minimum wage passed the House and is under consideration by the Senate. The proposed increase to $8.75 an hour would not only be the first increase to the state’s minimum wage since 2009 but would also largely be paid by big employers, not small businesses. Read more about which employers are the ones paying low wages in Sean’s blog post.

Raise the Wage
Two other bills that passed the House and are now in the Senate would create a voluntary Work Sharing program and a Voluntary Employment Retirement Accounts (VERA).

The likelihood of an increase to the tobacco tax seems slim again this year. This long-overdue measure would not just raise much-needed revenue and bring the state’s tobacco tax closer to the national average, it would also discourage young people to start smoking and decrease the smoking rate overall. Read more about this win-win in Brandon’s blog post.

Next Up: Budget Week

After the session wraps next Saturday, legislators turn their attention to the FY 2015 proposed budget. Again this year, Governor Tomblin has balanced his budget by cutting important programs like higher education and early childhood development. This week the WVCBP released its annual Budget Brief which contains many alternate ways to close this year’s budget gap like raising the tobacco tax, expanding the sales taxes to other goods and services (you don’t pay tax when you get your hair cut but you do if you get your lawn cut), eliminating the personal income tax exemption for high wager earners (like the IRS does) and more.

West Virginians Newly Covered Under Obamacare = Population of Charleston + Huntington

Thanks to the Affordable Care Act, about 100,000 people who didn’t have it before now have health care. Some West Virginia counties are doing better than others. Find out more about how the enrollment process is going across the state in Brandon’s blog post.

medicaid-enrollment-2014

Dedicate State’s First National Monument to Water

We all have a new awareness and appreciation of our water after last month’s chemical spill. West Virginia is lucky to be the birthplace of many rivers, and a movement to make them the state’s first national monument is underway. Check out this video to learn more about the environmental and economic opportunities of this idea.

What Are Our Priorities?

Here’s an interesting blog post that cites the WVCBP’s analysis of recent and not-so-recent tax cuts. In FY 2015 alone, the state is offering up tax cuts, mostly to businesses and corporations, that would be more than enough to provide free in-state tuition at all the state’s two- and four-year institutions.

Lucky Seven!

Do you follow @WVCBP on Twitter? We need just seven more followers to get to 700. Follow us!

The Minimum Wage and Big Business

West Virginia’s proposal to increase the state’s minimum wage to $8.75 continues to work its way through the legislative process. We’ve looked before at the workers who would benefit from the increase, and we’ve also looked at how much it would cost the affected businesses. But now, let’s take a closer look at businesses where are these low-paying jobs found.

In West Virginia, a little over 10 percent of all jobs pay less than $8.75 per hour. However, these jobs are concentrated in a small number of industries. Nearly 90% of the low-wage jobs ($8.75 per hour or lower) are found in four industries: retail trade, education and health services, food services, and administrative services.

workers by industry

What’s more, the low-wage jobs are for the most part, concentrated in industries where low-wage workers make up a substantial share of the industry’s workforce. For example, over 43% of the jobs in the food services industry pay below $8.75 per hour.

share of industry

And while most low-wage jobs in West Virginia are concentrated in a few industries, those workers are largely employed by big businesses, rather than small businesses. Nearly three-fourths (73%) of all workers earning less than $8.75 per hour are employed by firms with at least 100 employees.

firm sizeSo if West Virginia does raise its minimum wage to $8.75 per hour, the majority of the impact will be felt by large corporations, not small locally owned businesses.

And the businesses that are employing these low-wage workers aren’t teetering on the edge of collapse. Most are in a fairly strong position. For instance,  of the four industries where almost all of West Virginia’s low-wage workers are found, each one has had stronger employment growth over the past year than the state as a whole.

growth

This report shows that, nationwide, of the top 50 largest low-wage employers, 92%were profitable in 2012, 75 % are earning higher revenue than before the recession, 63% are earning higher profits than before the recession, and 63% have grown larger profit margins since before the recession. But all of this growth has not resulted in higher wages for the industries’ lowest-paid workers.

Simply put, the evidence is just not there to support the claim that employers can’t afford to pay a higher minimum wage. Not only is the actual cost of the increase less than what some would lead you to believe, but the vast majority of low-wage workers in West Virginia are employed by large corporations. Theses businesses that employ low wage-workers are in strong financial positions, with record-setting profits, and whose executives and shareholders are keeping an ever growing share of the pie and can readily afford to pay a higher minimum wage.

The Future Fund Can Build a Better West Virginia

The West Virginia Senate has unanimously passed SB 461 that creates the West Virginia Future Fund and an accompanying resolution (SJR 14) to make the natural gas and oil severance tax fund constitutionally protected (inviolate). As most readers know, the WVCBP has championed the idea for several years and we are excited the state is moving forward in ensuring that it will  always benefit from its rich nonrenewable resources.

What I would like to do below is answer some common questions about the West Virginia Future Fund and explain how it could potentially work and how the balance of the fund will grow over time. At the end, I will also put forth several ideas for future consideration that would make the fund stronger and provide more bang for the buck.

What is the West Virginia Future Fund?

It’s a permanent mineral trust fund that is funded by 25 percent of natural gas and oil severance tax revenue over $175 million. For example, if the state collected $200 million in natural gas and oil severance revenue next year, approximately $6.25 million (25% of $25 million) would be deposited into the fund.

What is the purpose of the fund?

The purpose of the fund is to take revenue from a nonrenewable natural resource that is depleted over time and replace it with a renewable source of permanent wealth for the state. Otherwise, severance tax revenue will decline along with the nonrenewable natural resource itself. The fund would also ensure that future generations benefit from the state’s rich natural resources.

What makes the fund permanent? 

It’s permanent in that the principal or corpus of the fund is inviolate and can never be spent. Only the interest income from the fund can be used.  The only way to make the fund permanent is to constitutionally protect it, otherwise legislators could raid the fund each year.

How will it be used?

The revenues deposited in the fund will be invested and grow larger over time. After fiscal year 2020, it could begin to pay out dividends or interest income to fund to a range of activities, including education, workforce development, economic development and diversification, infrastructure improvements, and tax relief. 

Who will manage the West Virginia Future Fund?

The revenues deposited in the fund will be managed much like a state pension fund or an endowment at a foundation or university. The account will be in the WV Treasurer’s Office and will be invested by the West Virginia Investment Management Board.

How is the Future Fund different from the Rainy Day Fund?

The Rainy Day Fund is usually only used by the governor in a time of emergency (he has to repay the fund within 90 days) or by the legislature whenever there is a a severe decline in revenue or a crisis that needs immediate funds. The Future Fund is better thought of as a sunny day fund that will grow each year and be used each year to make investments in the state. One similarity is that both funds help with the state’s bond rating or credit score by building assets.

How many state’s have future funds?

While many states have land mineral funds where they collect royalties from mineral extraction (e.g. Permanent University Fund in Texas), several states dedicate a portion of their severance tax revenue into a permanent trust fund that is used every year. These states include Alaska, Wyoming, North Dakota, New Mexico, and Montana. For a more detailed look at these states, see this handout.

How big will the Future Fund be in the coming decades?

As Yogi Berra once said, it is tough to make predictions, especially about the future. That being said, we can say with some certainty that we are only in the beginning stages of the shale revolution and that natural gas and oil severance taxes will continue to grow for some time. According to the West Virginia Department of Revenue, natural gas and oil taxes will grow from $83 million in FY 2013 to $270 million by FY 2019. Based on these figures, and a 7.5 percent annual investment rate of return, the Future Fund would have a balance of about $127 million by the end of FY 2019. I would also stress that these figures are most likely very conservative.

Balance of FF

How can we make the West Virginia Future Fund stronger?

To be clear, the first order of business should be to pass SB 461 and SJR 14 and then work over the next few years to make sure the fund builds enough wealth to begin investing in crucial areas that will help our state grow. To strengthen the fund, it would need to include a larger share of gas and oil severance tax revenue and it would need to include revenue from coal production. One option for accomplishing this would be to maintain the Workers’ Compensation Debt tax on coal (56 cents per ton) and natural gas (7.7 cents per MCF) that will expire in 2016. This could add at least $100 million per year to the fund. Another route would be to look at raising the severance tax by one percent, like we proposed in this report, or by levying a tax on midstream natural gas products like ethane.  

A share of the dividends or interest income payments from the fund could also go back to the communities of origin. One fantastic model for this would be creating a regional board similar to the Iron Range Resources and Rehabilitation Board in northeast Minnesota that invests in companies, non-profits, and workforce development in the area to help create economic opportunity.

Lastly, the state could take steps to ensure that the Future Fund is as transparent and accountable as possible. This would need to include building a website that would give citizens details on how the money is be investing and used each year.  One model for this would by the Alaska Permanent Fund Corporation.

Most importantly, however, we must create the West Virginia Future Fund this year and start building a better future.

Fast Facts on Future Fund PDF

How Your Tax Dollars Subsidize Cigarette Prices

Once again it looks like another year will go by without an increase in the state tobacco tax. This year it is quite surprising though as West Virginia is facing a severe budget crisis and raising tobacco taxes would essentially fix it all in one fell swoop. Nevertheless, our legislators seem intent on using our emergency savings fund rather than risk their political futures by raising taxes during an election year. Sigh.

What people may be surprised to hear is just how much our taxpayer dollars are subsidizing cigarette prices. Knowing this, perhaps even more people would support raising tobacco taxes, an item that already polls pretty well in West Virginia.

While we are not directly using tax dollars to lower cigarette prices, the simple fact is that smoking causes hundreds of millions of dollars in excess health care costs every year in West Virginia, and a significant portion of those costs are paid for by taxpayer-funded health insurance programs like Medicaid and Medicare and through direct hospital assistance payments.

Tobacco use causes $690 million in direct health expenditures every single year in West Virginia, $229 million of which is spent by the state Medicaid program, according to estimates from the Campaign for Tobacco-Free Kids.  Every pack of cigarettes sold in West Virginia, therefore, results in an additional $8.93 of health care costs. Yet, West Virginia only brought in $107 million in tobacco tax revenue in 2013. This means that West Virginia is spending over $120 million more on tobacco-related health care costs, in Medicaid alone, than the state receives in tobacco taxes! (Figure 1)  Coincidentally, that is pretty close to the amount of increased revenue that the state Budget Office projected would result by passing House Bill 4191 ($134.8 million to be exact). Meanwhile, the Senate version (SB534) would dedicate the entirety of the increase to the Medicaid Trust Fund for the next two years, which happens to be about $35 million more than is needed to close the Medicaid budget gap for FY15 without tapping the Rainy Day funds for $84 million as the governor has proposed.

Figure 1: Annual Medicaid costs from tobacco-related health care exceeds total tobacco tax revenue

Source: Campaign for Tobacco-Free Kids "New revenues, public health benefits, and cost savings from a $1 cigarette tax increase in West Virginia"

Source: Campaign for Tobacco-Free Kids “New revenues, public health benefits, and cost savings from a $1 cigarette tax increase in West Virginia”

To put it another way, a $5 pack of cigarettes actually costs nearly $14 at the end of the day, a hefty chunk paid with your state tax dollars. How many fewer smokers would there be, and therefore millions of dollars less that West Virginia would spend on preventable health care, if cigarettes cost $14 a pack?

So the next time someone in front of you at your local convenience store asks for a pack of Marlboro Reds, be sure to tell them, “You’re welcome.”  

What about declining revenue?

Tobacco taxes are designed to decline over time, but they still generate surprisingly stable revenue.  First, since the whole point of raising tobacco taxes is to reduce the number of people who use it, it is expected that tobacco sales will drop as more people quit and fewer youth start. Secondly, cigarette taxes are calculated on a per-pack basis meaning that the yield per pack will stay the same even as inflation drives overall prices of consumer goods up. The lesson is that states should not depend on tobacco taxes to fund programs over the long-term since revenues will not keep pace with growth, however, they can be successful policy tools to reduce smoking-related costs in the future while providing a stable source of additional revenue in the short-term (Figure 2). Case in point, the increased revenue created by passing either HB4191 or SB534 would be sufficient to bridge the Medicaid budget gap for at least the next three fiscal years, giving the state more time to recover economically or find alternative solutions rather than tapping our emergency savings fund.

Also, it’s worth noting that four of our five neighbors currently have higher tobacco taxes than we do, while Pennsylvania and Maryland still would even after a full dollar increase in our state’s cigarette tax.

Figure 2: State tobacco revenue remains stable even after tax increases

Source: WV State Budget Office. Note: The red stars represent federal tobacco tax increases while the blue and gold star represents West Virginia's last increase from 17 cents to 55 cents per pack.

Source: WV State Budget Office. Note: The red stars represent federal tobacco tax increases while the blue and gold star represents West Virginia’s last increase from 17 cents to 55 cents per pack.

ACA Reducing Uninsured Throughout West Virginia

With just over a month left in the open enrollment period for the Affordable Care Act, the share of West Virginians without health insurance has already dropped significantly. As of this week, nearly 100,000 West Virginians have enrolled in health coverage through the ACA.  The overwhelming majority of these sign-ups have come through Medicaid expansion, which was always expected to be the case. While we can’t say with certainty that none of these folks previously had insurance, it’s a very safe bet that most of them did not.  That means that of the approximately 268,000 West Virginians who did not have health insurance last year, about 34 percent of them are covered today thanks to Medicaid.

medicaid-enrollment-2014

The map above shows the share of those enrolled in Medicaid who are estimated to be income eligible and were previously uninsured by county. Some counties like Clay and Webster have already enrolled over 90 percent of this population, while other counties still have have only enrolled about one-third. For example, the five counties that have signed-up the smallest proportions of their Medicaid eligible populations are all in North Central West Virginia – Monongalia, Doddridge, Harrison, Ritchie, and Marion (Table 1 below).

In addition to Medicaid expansion, there are almost 8,000 people who have enrolled in private health insurance plans through Healthcare.gov, as of February 1st.  Again, we don’t know (yet) how many of them were previously insured but the chances of this group having insurance before are much greater since they have significantly higher average incomes than the new Medicaid enrollees.  Even so, 84 percent of them qualified for tax subsidies to help lower the monthly premium.

While official estimates won’t be available for some time, thanks to the Affordable Care Act (and Governor Tomblin’s decision to expand Medicaid), the number of uninsured West Virginians under 65 may have already dropped from over 18 percent to 12 percent.

Table 1: Percent of Previously Uninsured, Newly Eligible Residents Enrolled in Medicaid, By County

Medicaid Enrollment by County table

Source: WVDHHR, data as of January 24, 2014

Property Tax Incentives Growing Costly

An article in Sunday’s in Wheeling’s Intelligencer/News Register highlighted the growing cost of the state’s business property tax incentives. The Marcellus Gas and Manufacturing Development Act of 2011 created a special tax preference for manufacturing facilities involved with natural gas liquids products (the famous “cracker bill” was an expansion of this legislation).

The tax incentive gives a property tax break to businesses that make a capital addition of at least $10 million to a manufacturing facility with an original cost of $20 million, if the facility processes natural gas. The incentive allows the capital addition to be appraised at its salvage value (5%) for 10 years for property tax purposes, rather than at the normal 100% of market value. This dramatically lowers the property tax bill of a qualifying business.

According to the fiscal note on the bill, the tax incentive “will have little or no direct effect on Property Tax revenue” and that any potential forgone revenue is “estimated to be less than $500,000.”

While the fiscal note projected minimal forgone revenue, Marshall County is missing out on millions already, with its booming natural gas industry. According to the Marshall County Assessor, $916 million worth of construction will qualify for the incentive in 2014. Normally, $549.6  million (60% of appraised value) would be taxable. Instead, the assessed value will only be $27.5 million, due to the salvage value treatment.

So, instead of paying $12.1 million in property taxes, the affected companies will only pay about $603,000. That means Marshall County will lose out on over $2 million in property tax revenue, while Marshall County Schools will miss out $4 million from their regular levy, and $4.7 million from their excess levy. And the forgone school revenue means the state is paying an extra $3.3 million through the school aid formula.

The development of the Marcellus Shale hasn’t been without its costs, and those costs can’t be addressed if those benefiting from the resource don’t help pay them. And what was once thought to be a minor tax break is now costing just one county millions of dollars in lost revenue. And this tax incentive is going to companies worth billions of dollars, who are coming to West Virginia because we have a resource that they want, not because of a tax break. A $12 million tax break isn’t going to be the deciding factor for businesses that have already made billions in investments in the state, and want to be located where the natural gas is located. However, it can be the difference in whether or not we balance the budget, or keep our libraries open, or hire new teachers.

Budget Beat – February 21, 2014

Senate Passes WV Future Fund Bill

As the 2014 Legislative Session heads into its final two weeks, there is good news to report! Today the WV Senate unanimously passed the Future Fund bill (SB 461). The legislation, which now heads to the House of Delegates, would go into effect July 1, 2014 and sets aside 25% of severance tax revenue above $175 million into the Future Fund. No money from the fund would be spent before 2020, giving the fund time to grow. Here’s some early news coverage.

Future Fund vote 2.21.14

West Virginia State Senate passes unanimously passes Future Fund bill on February 21, 2014

Just minutes later, the WV House of Delegates passed HB 4409, the Valued Employee Retention Program, AKA Work Sharing, on a 85-11 vote. Many other states, including Ohio, already have work sharing programs in place and the program would be revenue neutral, with the federal government paying for start-up costs. 

Income Inequality – West Virginia Ranks Among the Worse

West Virginia is among 15 states where the majority of income growth has gone to the top 1%. This according to a report out this week from the Economic Policy Institute. Lopsided income growth hurts the middle class, and a stagnant minimum wage hurts low-income families. Read more from West Virginia Public News Service and the Charleston Gazette.

The report comes out just as the West Virginia legislature considers whether or not to increase the state’s minimum wage (legislation has passed the WV House of Delegates). Read more in Sean’s blog post on the EPI report and this one debunking claims in today’s Charleston Daily Mail that inaccurately cite a recent Congressional Budget Office report on the economic effects of raising the minimum wage.

toy_couple_savings.jpg
While it’s bad enough for workers and the economy that the minimum wage has not kept pace with inflation, the situation is even worse for tipped workers, who haven’t seen a wage increase since 1991. What is a tipped wage and how would the proposed increase in West Virginia’s minimum wage affect it? Read more in Ted’s blog post. And here’s an updated blog post from Sean on how much the new minimum wage would cost employers.

VERA Passes Out of House Finance Committee

In more legislative good news today, the House Finance Committee just voted to pass the Voluntary Employment Retirement Account bill (VERA – HB 4375) to the full House. The bill would provide a way for small businesses to provide retirement savings options to their employees, helping them retain workers.

Beyond Time to Raise the Tobacco Tax

Raising the West Virginia tobacco tax by $1 a pack, bringing it inline with the national average, would bring in $130 million a year to the state budget. This would provide a healthy boost to funding Medicaid and reducing the number of smokers in the state. Read more about this win-win in Brandon’s blog post.

Day Care Closings Not Fault of Affordable Care Act

This week three Charleston-based day care centers announced they would have to close, blaming this decision, in part, on having to provide health insurance to their employees. The rest of the story, however, is in Brandon’s blog post which points out that the centers have less than 50 employees and, therefore, are not required to provide health care.

What is Coal’s Future?

It’s a much-debated topic in West Virginia. To see interesting projections and policy recommendations, along with multiple citations of the WVCBP’s work, read Economic Impacts on West Virginia from Projected Future Coal Production and Implications for Policymakers from IOPscience. Policymakers took one step closer to one of the paper’s recommendations today with the Senate passage of the WV Future Fund bill.

“America does not have a money problem, it has a priorities problem. We give tax cuts to the wealthy and budget cuts to the poor.” Todd Huffman

Pass The Tobacco Tax, Fix the Medicaid Budget

Surprise! West Virginia has a budget problem — about a $200 million problem, in fact (you can read all about it here, here, and here!).  Oddly enough, Medicaid, which for years has taken the brunt of the blame for anything budget related, has hardly been mentioned in the fervor.  This is especially odd because the whole debate stems back to the governor’s original recommendation to use $84 million in Rainy Day funds to plug the projected hole in this coming year’s Medicaid budget. So, while in years past state legislators would make a big fuss about Medicaid before passing a balanced budget because there was sufficient revenue, the year in which there actually isn’t sufficient revenue for Medicaid is the year it somehow manages to escape everyone’s notice. Strange indeed. Regardless, there is one very easy out that these legislators would be wise to pass that would generate $130 million per year, all but solving the current budget crisis and completely closing the Medicaid budget gap for this year, and the next, and the next. What is this Holy Grail?  The tobacco tax, of course.

West Virginia has struggled to fully fund Medicaid for a number of years, having to take one-time money to cover shortfalls in the Medicaid budget (figure below) using year-end supplemental reappropriations, mid-year budget reappropriations, one-time reductions, and trust fund draw downs. You’d think that legislators would get the hint that there is a structural problem in the way West Virginia funds Medicaid after having to go through this exercise again and again.  Unfortunately, the 2015 budget year is even uglier though as the one-time money is drying up since collections are down, meaning that West Virginia may have to dip into its Rainy Day fund for the first time in history.

Even more importantly though is what happens in the budget years beyond 2015. The $84 million in Rainy Day funds that would be used this year will become part of the Medicaid base budget forever, meaning that we will have to come up with that money in 2016 and beyond as well.  And that doesn’t even include the normal growth of the program, projected to be an additional $36 million in 2016 on top of the $84 million this year.  Tapping the Rainy Day fund to fill the 2015 budget gap doesn’t solve the budget crisis as much as kick it down the road to next year’s legislative session with an even bigger hole to fill.

West Virginia has grown increasingly dependent on one-time money to fund Medicaid

one-time Medicaid money

Source: Mike McKown, West Virginia Budget Office

So, how do we get out of this one-time funding cycle?  The answer is surprisingly simple —raise the tobacco tax. 

There are tons of reasons to raise the tobacco tax. Primary among them is the health of our state. West Virginia ranks last in the country in overall health yet we’re doing very little to address the underlying, fundamental problems that contribute to it.  We have the second-highest smoking rate yet one of the lowest tobacco taxes in the country. Meanwhile, studies have shown that substantial increases in tobacco taxes have measurable impacts on the proportion of smokers, especially younger smokers. There are many groups that are fighting for an increase in the tobacco tax for these health reasons alone. 

While the battle for higher tobacco taxes for health is a valiant effort, a completely different reason to do it is for the health of our state budget. With three consecutive years of budget and program cuts already, West Virginia legislators are staring down budget shortfalls for another three years to come.

Senate Bill 534, introduced by Senator Plymale, proposes a $1 per pack increase on cigarettes and brings the excise rate on other tobacco products up to 50% from 7%. While an additional $1 per pack is a substantial increase from the current rate of 55 cents, it would simply align West Virginia’s rate with the national average. SB 534 takes previous versions of the tobacco tax proposal further by directing the revenue from the increase into the Medicaid Trust Fund for the next two fiscal years, ensuring that Medicaid is fully funded and that the Rainy Day Fund is left untouched. 

Raising taxes takes political will. Unfortunately, state legislators have shown for many years on end that they lack the will to address two of our most pressing problems in West Virginia – high smoking rates and a structurally deficient Medicaid budget. They have an opportunity to address both at once, putting the Mountain State on more stable footing for years to come, but will they have what it takes to put West Virginia’s future before their own political futures and do what’s best for the state? 

I, for one, certainly hope so.

Yes, Raising the Minimum Wage Helps Inequality

Today’s Charleston Daily Mail includes an editorial in response to the EARN report on income inequality and our recommendation to raise the minimum wage as a tool to combat inequality. The Daily Mail contends that raising the minimum wage is a bad idea for two reasons: one, income inequality isn’t all that bad because rich people create jobs and pay taxes; and two, raising the minimum wage hurts more people than it helps. Both of these reasons are wrong.

The editorial cites the figure that the top 1% paid 22.9% of federal income taxes in 2009, and those taxes pay for anti-poverty programs. Now it really shouldn’t come as a surprise that the top 1% pay a little over 20% of all federal income taxes, because that’s about how much of the total amount of income they earn. In 2011, 19.8% of all the income earned nationwide went to the top 1%. So their share of taxes is roughly equivalent to their share of income. And of course, the Daily Mail‘s little factoid ignores that payroll taxes, which are paid by virtually everyone who receives a paycheck, make up a third of federal revenue, and pay for the country’s major entitlement programs: Social Security, Medicare, and Medicaid.

The Daily Mail also defends the top 1% as “job creators,” which is a fundamental misunderstanding of economics. Rich people just don’t create jobs because they have money, and giving them more money won’t lead to more jobs. Jobs are created when there is an increase in demand for goods and services, and that demand comes from consumers. Businesses will only create jobs when their customers demand it, not when rich people have more money. 

But the demand that creates jobs is fueled by the 99% and the middle class, and when they have more money, they do create jobs. And this is where growing inequality hurts. Consider this, the average income of the 99% would be 12.3% higher if they still earned the same share of income they earned in 1979. That is equal to about $5,239 for each person. How much more demand, and therefore jobs, would an extra $5,000 in the pockets of 99% of the workforce create? The rich just can’t generate that much demand for goods and services by themselves, but they are the ones getting that additional income. 

Now onto the minimum wage. The Daily Mail cites the recent CBO report on the effects of raising the minimum wage as evidence that raising it does more harm than good. But the editorial gets several basic facts about the CBO report wrong. First the CBO report does say that raising the minimum wage to $10.10 will reduce employment by 500,000 (a reduction of only 0.3%), but that does not mean that it will cost 500,000 people their jobs, as the Daily Mail contends. There is an important distinction between costing jobs and lowering employment. As Dean Baker explains, the CBO projections imply that, instead of losing their jobs entirely, the negatively affected workers will instead work 2% less each year, because of the high levels of turnover among them. But when they do work, those at the bottom will earn 39% more, a beneficial trade-off. 

It’s also worth noting that the CBO’s projections are outside the growing consensus of economists that there is no considerable employment effect from increasing the minimum wage. But ignoring that and taking the CBO report at face value, it shows that the benefits of raising the minimum wage far outweigh the negative. First, the report shows that raising the minimum wage gives a raise to over 16 million people. So, even if you assume that 500,000 people might lose their jobs, there are 33 people helped by every one person harmed.

The Daily Mail also misrepresents the CBO’s findings about how raising the minimum wage affects poverty. The editorial states, “raising the minimum wage will cost more people jobs than it will move people out of poverty,” and that raising the minimum wage to $10.10 an hour would only “boost the average family income of the officially poor by 1 percent.”  Both of these points are directly contradicted by the CBO report, with the relevant passage below:

cbo quote

Not only is the effect on poor families’ incomes three times as high as what the Daily Mail claims it is, but the number of people lifted out of poverty is nearly twice the level of employment loss. There’s really no question about it.

To sum up, income inequality is real, and is holding down middle-class incomes. And you can’t create jobs without a strong middle class, no matter how much money the 1% has. Raising the minimum wage is one way to address income inequality and help reverse declining wages. And no matter which way you slice it, the positive impacts of raising the minimum wage far outweigh the costs.

Income Inequality Continues to Grow in West Virginia

A new report from the Economic Analysis and Research Network takes a deep look at income inequality, by focusing on how the top 1 percent in each state have fared over 1917–2011. The report finds that not only is income inequality on the rise nationally, but each of the 50 states has experienced growing income inequality over the past few decades. Some of the overall findings include:

  • Between 1979 and 2007, the top 1 percent took over half of the total increase in U.S. income.
  • All 50 states experienced an increase in their top 1%’s share of total income since 1979.
  • The growth in income inequality started in the latter half of the 20th century, the share of income held by the top 1 percent declined in every state but one between 1928 and 1979.

Data on all income groups in each state can be downloaded here, and the report also included an interactive feature for each state.

While income inequality is often associated with Wall Street, bankers, and the financial sector, the report shows that is not the case. Income inequality is growing in every state, including West Virginia, making it a Main Street problem, not just a Wall Street problem.

So what does income inequality look like in West Virginia? Between 1979 and 2011 the average real income in the state grew just 3.9%, which is pretty bad compared to the national average of 14.8%. But over that time period, all of the income growth was gained by the top 1% of richest West Virginians. The average real income for the top 1% grew by nearly 71%, while the average real income for the bottom 99% fell by almost 3%.

growth

Because of that lopsided income growth, the share of income held by the top 1% in West Virginia has steadily grown since 1979, and is reaching historically high levels.

top 1 1917-2011 no caption

Now, West Virginia’s economy has grown more top-heavy than ever. As the figure below shows, the share of income held by the top 1% grew from 9.2% in 1979 to 15.2% in 2011. It also shows the income gap widening. In 1979 the average income of the top 1% was 10.1 times higher than the average income of the bottom 99%. By 2011, that ratio had grown to 17.7 times higher.

output_Pb86Iz

Source: Estelle Sommeiller and Mark Price, The Increasingly Unequal States of America: Income Inequality by State, 1917 to 2011, an Economic Analysis and Research Network (EARN) report

As the report shows, the economy isn’t growing for the vast majority of the country. The prosperity that has been produced over the past decades hasn’t been shared with all of those who have helped create it. And without policies to help create a more shared prosperity, there is no sign that trend will stop.