Just How Arbitrary is the Tax Foundation’s State Business Tax Climate Index?

The 2015 edition of the Tax Foundation’s State Business Tax Climate Index came out earlier this week. West Virginia ranked 21st this year, showing improvement improvement over the past several years. And while some in the state put a lot of stock in our rank, we should know by now that the index is nothing more than a transparent justification for lower taxes and smaller government, with no real policy value.

I’ve gone over the problems with these types of rankings before, but since they keep getting attention, it’s worth going over them again. With the Tax Foundation’s Index, the main problem is that it’s completely arbitrary and has virtually  no relationship to what businesses actually pay in one state versus another. States’ that lack a corporate or personal income tax are rated better than state’s with progressive marginal income taxes, even if those states’ overall business tax burden is lower. The index weighs property taxes the least even though they are the largest tax for most businesses. So for the Tax Foundation’s top 10 states (those with the most competitive tax systems on their measure), only Utah and Indiana are among the 10 states with the lowest taxes on business according to the Council on State Taxation, which actually measures the amount of taxes paid by businesses.

The index doesn’t measure tax levels, instead it measures “tax competitiveness” but there is no evidence that what they define as competitive makes a difference to businesses. But when stating the importance of a state’s competitiveness, they argue that, “a state with lower tax costs will be more attractive to business investment,” even though their index doesn’t actually measure tax costs. Instead, the index adds together different features of the tax code that may or may not influence businesses, and arbitrarily weights them. 

The index also completely fails to predict growth. I’ve done a number of blog post on the index from various years showing that there is no correlation between a state’s rank and it employment growth, gdp growth, wages and any number of economic indicators. And improving a state’s rank doesn’t lead to growth. I recently went back to the 2010 rankings, South Dakota ranked #1, but only 30th in job growth since 2010, while California ranked 48th in the index and 3rd in job growth.

Just how how bad is the index at predicting growth? I compared the correlation between last year’s ranking and job growth with another completely arbitrary ranking – the state’s ranking in alphabetical order. And guess what? A state’s ranking in alphabetical order had a stronger correlation with job growth than its rank in the Tax Foundation’s index.

stbtc vs alphabet

West Virginia has substantially improved our score in recent years by cutting the CNI and phasing out the BFT, but we have nothing to show for it. Business tax revenue is at record lows and we have had to tap the rainy day fund to balance the budget. Most if not all of our economic growth has been in the natural gas industry, which can’t be attributed to tax climate.

But the biggest problem with the whole idea of a tax climate ranking is that it perpetuates the belief that state and local business taxes are the driving force behind economic development, when the actual research shows taxes are a small share of business costs, and have little effect on investment decisions. It also neglects to evaluate the impact taxes have on public investments. West Virginia has one of the lowest percentage of college graduates in the country, which doesn’t make for a good business climate. But by pursuing business tax cuts, we have had to cut state funding for higher education, pushing up tuition costs and making college even more unaffordable.

Rankings like these are ideological, and encourage a single-minded pursuit of business tax cuts as key economic development policy, and undermine the public structures that can lead to real economic growth and prosperity.

Congress Should Treat America’s Kids to Good Health Care and Refund CHIP

Want a real scare this Halloween? Imagine having to pay up to ten times more on average for your children’s health care. This is the increased cost estimate if Congress does not reauthorize funding for the Children’s Health Insurance Program (CHIP), according to a study commissioned by the Robert Wood Johnson Foundation.

The CHIP program provides an affordable health care option for families and tailors benefits to the needs of kids. Defunding CHIP would require parents to enroll their children in Medicaid or purchase insurance on the marketplace for them. Private insurance plans do not offer the strong health benefits that CHIP offers to insure children are growing strong. 

Also, the CHIP program caps out-of-pocket costs at a much lower dollar amount than the marketplace coverage currently offered. Out-of-pocket costs are health care costs not reimbursed by insurance providers. The table below compares the out-of-pocket caps for West Virginian children enrolled in CHIP and the current caps for a qualified health plan (QHP) offered through the marketplace. 

Screen Shot 2014-10-30 at 1.26.46 PM

Source: Wakely Consulting Group, “Comparison of Benefits and Cost Sharing in Children’s Health Insurance Programs to Qualified Health Plans” (July 2014). 

Annual costs estimates include the average cost to families for out-of-pocket costs, deductible, copays, and/or coinsurance.  These estimates illustrate the drastic cost increases West Virginian families could face.

Screen Shot 2014-10-30 at 1.28.32 PM 

Source: Wakely Consulting Group, “Comparison of Benefits and Cost Sharing in Children’s Health Insurance Programs to Qualified Health Plans” (July 2014). 

As you can see, the cost difference between CHIP and marketplace coverage is substantial. For many families, marketplace insurance would be unaffordable and as many as 25,000 West Virginian kids could be put be at risk of becoming uninsured. A spooky thought indeed! 

FamiliesUSA has created an easy way to send a letter to the editor of your local newspaper to address your concerns about the funding of the CHIP program. Click on the photo below to see draft letters and talking points. 

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I encourage everyone to “haunt” your local newspapers and lawmakers by writing to them in support of continued CHIP funding!

7 Things You Need to Know About Why Coal is Declining in West Virginia (2 of 7)

In the last post, I showed that the decline in coal production was heavily concentrated in the southern part of the state. While there are many factors at play, none is probably more important than this one.

#2 lower productivity is at heart of coal decline in W.Va.

If you want to understand why West Virginia and Central Appalachia coal production is struggling, the first place to look is productivity or the amount of coal being produced per hour of work. Productivity is the sine qua non of coal mining. It plays a large role in determining the price of coal, the costs of mining coal, and the profits being made from coal. It also helps explain why some mines are shutting down at the same time others want to open that are less than 100 miles apart.

As the table below highlights, West Virginia – especially southern West Virginia – ranks in the bottom of coal mine productivity. Wyoming can produce 13 times as much coal per hour of work than West Virginia, while Illinois is twice as productive. While Wyoming and Illinois coal has less heat content or BTUs than coal from West Virginia, it still comes out way ahead with Wyoming producing 244,000 BTUs per miner hour compared to just 26,000 in southern West Virginia.   

coal prod hist
Between 2000 and 2012, coal mining productivity has declined by over 50 percent in West Virginia, from about 5 tons per hour to 2.4 tons. As the table makes clear, this is largely being driven by the decline in productivity in southern West Virginia. Meanwhile, productivity in Wyoming – the country’s largest coal producer – has only declined by 27.6 percent and productivity in Illinois – the country’s 5th largest coal producer – has improved by 10.2 percent.  

In most industries, productivity rises each year as technology improves.But with coal mining, the gains since the mid-1980s have not been uniform. Since 1985, productivity has barely budged in Central Appalachia, with eastern Kentucky seeing a decline of almost 7 percent and southern West Virginia with an increase of only 13 percent. Meanwhile, productivity has grown by 122 percent in Illinois, 93 percent in Wyoming and about 50 percent in western Kentucky and northern West Virginia.

The drop in coal mining productivity, despite technological improvements, in West Virginia and the Appalachian region reflects the depletion of the area’s coal reserves. As coal seams get thinner, they becomes more expensive to mine. As Downstream Strategies highlighted in its excellent 2012 report, the central reason for the sharp declines in productivity  in Central Appalachia has been the “the exhaustion of the thickest, most accessible coal seams.” Other factors impacting productivity include demand for coal, mining costs, workforce demographics, mine permitting, and regulatory oversight.

The drop in productivity from the depletion of the area’s coal reserves can also help partly explain the growth in the value of the state’s reduced severance tax rate for thin-seam coal production.

thin seam

According to experts, there also do not seem to be any technological improvements that will increase productivity in the future. The latest projections from the U.S. Energy Information Association also confirm this finding showing that productivity will continue to decline in West Virginia.

coal prod proj

As I will show in the next post, the rapid decline in coal mining productivity in West Virginia has resulted in the state losing coal market share and could make it even harder to compete with other energy sources and coal basins as regulations move forward.

Budget Beat – October 24, 2014

Summit on Race Matters in Appalachia Almost Here

Time is running out to register for the Summit on Race Matters in Appalachia. Please take a minute to fill out the easy on-line registration form today to hold your reservation!

Register now!

Thanks to generous funding from foundations and organizations, there is limited scholarship money available. Please visit www.wvpolicy.org to find out more.

If your organization is interested in sponsoring, please contact lframe@wvpolicy.org. There are a variety of sponsorship levels available! Act now so we can be sure to include you in the event program.

The event costs just $25 which covers registration for both days.

To learn more about the event and register, visit www.wvpolicy.org

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First SCORE Meeting – Wednesday, October 29

The first meeting of the Southern Coalfield Organizing and Revitalizing the Economy (SCORE) task force will take place next week in Beckley.

Senators Mike Green and Art Kirkendoll will host the meeting at the Raleigh County Commission on Aging, 1614 Kanawha Street, starting at 6PM. The event is free and open to the public.

Please plan to attend to learn more about how this task force, announced last week by Senate President Jeff Kessler, will work towards diversifying the economy of southern West Virginia and strengthening the community’s families.

Time for Voluntary Employee Retirement Accounts (VERA)

Only 30 percent of West Virginia employees working for small businesses are offered a retirement plan at work. With so few workers saving for retirement, West Virginia, and its aging population, is facing a retirement crisis.

This week WVCBP Fiscal Policy Analyst Sean O’Leary presented to the interim Joint Committee on Pensions and Retirement on the retirement gap facing West Virginia. In addition, the WVCBP released the new report “Solving the Retirement Crisis,” to explain how VERA would help workers save for the future and give employers a tool to assist employees to set aside money for retirement.

The main opponent of this voluntary program is the insurance industry which wrote an op-ed appearing in last week’s Sunday Gazette-Mail. Check out Ted’s blog post this week which counters industry claims that VERA is costly and unnecessary.

Wonk on Coal

If you are anywhere near a TV or radio these days, chances are you are hearing a lot about who’s going to fight hardest in the War on Coal. But what is causing the decline of coal production in West Virginia? For the facts, check out part one of Ted’s blog series, 7 Things You Need to Know About Why Coal is Declining in West Virginia.

central app coal

7 Things You Need to Know About Why Coal is Declining in West Virginia (1 of 7)

West Virginia’s coal economy is not what it used to be. In 2013, coal production hit a 30-year low and employment in the industry fell to a nine-year low. While the coal industry and other like-minded people have put most, if not all, of the blame on President Obama and the Environmental Protection Agency’s “war on coal”, the evidence paints a much more complicated picture of a coal region that is in the wake of a structural decline due to market forces and regulations.

Meanwhile, other commentators have written that there is “no war on coal” and that the recent development of shale natural gas is the driving force behind coal’s woes. The problem with this argument is that the growing competitiveness of natural gas for electric power generation is being partly driven by concern over current and future regulations of greenhouse gases. In other words, it is a much safer move for utilities – given the uncertainty of future carbon pollution regulations – to make the switch to natural gas given the growing concerns about climate change.

This series of posts is aimed at providing a more complete picture of why coal is declining in West Virginia. In doing so, policymakers and others will have a better understanding of the root causes of the problem and will be better positioned to guide policy action to meet these challenges.

#1 Coal is declining in southern not northern West Virginia (so far)

 The first thing you need to know about the decline of coal in West Virginia is that it is primarily happening in southern West Virginia. As this chart shows, the recent decline in production is mostly from the southern part of the state, where production has dropped from 130 million tons in 1997 to just over 70 million tons in 2013. Meanwhile, production in the northern part of the state has remained relatively flat since the mid-1990s. In 2013, the counties in the northern part of the state produced over one-third (37%) of the coal in the state, compared to just 21 percent in 2002.

so wv coal production

Perhaps nothing highlights this transition more than the fact that that Marshall County, which is located in the state’s northern panhandle, is now the state’s largest coal producer (2012 and 2013), pushing past Boone County, which as led the state for over three decades in coal production. Between 2008 and 2013, coal production in Boone County dropped by more than half, from 30.3 million tons to just 14.2 million tons. Meanwhile, Marshall County coal production rose over this period from 10.8 million tons to 15 million tons.  

Coal mining employment in West Virginia has also shifted north. In fact, as of the 2nd quarter of 2014, the number of coal miners in the northern part of the state was at a 15-year high of 7,162 according to data from the Mine Health & Safety Administration. Meanwhile, the number of coal miners working in southern West Virginia declined from a high of over 18,500 in late 2011 to just 13,300 by early 2014, a drop of nearly 5,000 jobs. The northern region now makes up about 35 percent of coal mining jobs, its highest share since 2000.

coal jobs north

The decline of coal production  in the south and the relatively stable production in the northern part of the state has to do with many factors (see more in future posts). The northern part of the state, similar to other western coal basins, contains mostly medium and high sulfur coal, while the southern coalfields have mostly low and medium sulfur coal. For years, many coal power plants were able to use low-sulfur coal to meet pollution requirements contained in the 1991 Clean Air Act instead of installing expensive anti-pollution scrubbers at their plants. Eventually through, all of the plants were required to install this equipment and this meant that the low-sulfur coal in the southern part of the state became less competitive as other power plants became outfitted to burn medium and high sulfur coal.

The transition or shift in coal mining from the south to the north is part of a larger structural decline that is taking place in the entire Central Appalachian region. This area, which includes southern West Virginia, eastern Kentucky, western Virginia, and eastern Tennessee, has been declining for well over a decade. From its peak in 1997 of 291 million tons, it has fallen by over half (56%) to just 127 million tons in 2013.  While Central Appalachian coal production began its decent in the late 1990s, it has dropped much faster over the last several years.

 central app coal

From 2008 to 2013, it fell by nearly 46 percent, or from 226 million tons to just 127. As the graph above shows, northern Appalachia produced nearly as many tons of coal as the Central Appalachian Region did in 2013. Corresponding with this decline is the falling share of coal production in Central Appalachia compared to other regions. In 1990, Central Appalachia made up nearly 29 percent of coal production in the United States. In 2013, this dropped by more than half to about 13 percent in 2013. Meanwhile, Northern Appalachian production has remained relatively steady declining from 16 percent to 12.5 percent. Today, both regions account for nearly the same share of U.S. coal production.

 In the next few posts, I’ll explain the factors driving the decline of coal in southern West Virginia and what the prospects look like for the future.

Insurance Industry Doesn’t Understand Retirement Access

In Sunday’s Gazette-Mail, John E. Pauley, the executive director of the West Virginia Chapter of the National Association of Insurance and Financial Advisors, wrote an op-ed making several dubious claims about the state of retirement security in West Virginia and about the proposed Voluntary Employee Retirement Accounts (VERA) program that is being supported by AARP. 

For example, Pauley says:

The AARP claims that 250,000 West Virginia workers lack access to an employer-based retirement savings option. This is simply not true. The real question is whether workers who currently choose not to explore private market retirement options would suddenly consider retirement advice from a state-managed plan?

To use Pauley’s own words, this is simply not true. According to the Current Population Survey from 2011-2013, approximately 287,645 private-sector workers in West Virginia work for an employer that does not provide any type of retirement plan. This is about 47 percent of the state’s private-sector workforce. Pauley offers no evidence to the contrary. Instead, he just changes the subject by asking whether these workers would enroll in a private market retirement plan if they were offered one from the state. While this a good question, it has virtually nothing to do with how many workers lack access to retirement plans at work.

The good news is that research shows that when workers do have access to retirement plans at work they usually take advantage of them.  According to a recent study by the Boston College Center for the Study of Retirement Security, 86 percent of older low-income workers and 95 percent of higher-income workers participate in retirement savings plans when they are offered one at work.

Pauley also says that the $3 million in start-up costs for VERA would be better used for financial educational campaigns and tax incentives. The problem here is that the $3 million in start-up costs is a loan from the state’s unclaimed property fund that will be paid back by account fees over time. Therefore, this is not $3 million that is available for program services or tax incentives unless Pauley wants to add a new line-item in the budget.

Pauley also errs when he tells readers that the state will incur a financial liability in implementing VERA similar to state public pensions. Unlike the defined benefit plans Pauley mentions, VERA would be a defined contribution plan similar to the state’s 457 Retirement Plus and  SMART 529 College Savings plan that is administered by a private-sector financial company. Therefore, it would not be a liability on the state’s books. Pauley also asserts that VERA “presents significant risks, costs and liabilities… for West Virginia’s small employers.” This claim is also unsupported by the evidence. There would be no more risks for small employees than if they started a SIMPLE IRA or 401k with a private company.

While Pauley is correct in saying that “there also is no guarantee” that VERAwould earn tax-preferred status from the IRS” so far there is little to no evidence to suggest that the IRS wold not allow VERA IRA plans to be tax-deferred accounts. If enacted, the State Treasurer’s Office will have to submit the plan to the IRS in order for it to be tax-deferred plan.

While there is some uncertainty in how the proposed VERA program would roll out and work, it is pretty safe to say that if West Virginia does nothing it will continue to have almost half of its workforce without a retirement plan at work. This means that the state will have to spend much more money down the road on senior services and other programs as the population ages.

As one newspaper editorial concluded in early May, “Pension promises are easy to make and difficult to keep. Legislators should stay clear of them.” – See more at: http://www.wvgazette.com/article/20141019/ARTICLE/141019104/1103#sthash.EmXHfQeI.dpuf

 

250,000 West Virginia workers lack access to an employer-based retirement savings option. This is simply not true. The real question is whether workers who currently choose not to explore private market retirement options would suddenly consider retirement advice from a state-managed plan? – See more at: http://www.wvgazette.com/article/20141019/ARTICLE/141019104/1103#sthash.EmXHfQeI.dpuf

Budget Beat – October 17, 2014

SCORE Initiative Announced

Yesterday at the state Capitol, Senate President Jeff Kessler announced the kick-off of his SCORE initiative, Southern Coalfields Organizing and Revitalizing the Economy.

In a statement released yesterday, Senator Kessler cited these goals for SCORE:

  • Increase funding for tourism advertising and development
  • Education and workforce development and retraining initiatives
  • Dedicating monies for viable redevelopment projects
  • Agribusiness and rural development opportunities
  • Increase Broadband access
  • Expanding and supporting intermodal transportation
  • Explore development of coalbed methane reserves
  • Support clean coal research and development

In last month’s State of Working West Virginia, the WVCBP outlined the challenges facing southern West Virginia as coal-mining jobs continue to decline and market pressures slow coal production. Transition assistance is needed for the region and the SCORE initiative is a step in the right direction by policymakers.

Read more in the Charleston Gazette’s Coal Tattoo blog.

VERA Presentation at Next Week’s Interims

Next Tuesday, October 21 at 4:00PM, WVCBP’s Fiscal Policy Analyst Sean O’Leary will present to state legislators on the need for Voluntary Retirement Accounts (VERA).

The WVCBP, along with the West Virginia Chapter of the AARP, has long supported VERA as a way for West Virginia’s aging population to prepare financially for retirement. Many West Virginians have no access to a retirement plan at work, and VERA would provide a voluntary mechanism for small businesses to help their employees while retaining workers. Stop by the House Judiciary Committee next week to learn more when Sean makes his presentation.

VERA infographic
Reminder: Registration Now Open for Summit on Race Matters in Appalachia

The Summit on Race Matters in Appalachia is less than a month away – please hold your seat by registering today!

We’ve added another nationally known speaker, Dustin Washington, Director of the Community Justice Program with the American Friends Service Committee.

The event costs just $25 which covers registration for both days.

To learn more about the event and register, visit www.wvpolicy.org

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What is a Safe Water System? Let’s Make it Happen!

A panel discussion & community conversation on our water

Thursday, November 6th
7-9pm (doors open at 6:45)
University of Charleston, Erma Byrd Gallery (in Riggleman Hall)
Event is free. Register here

Speakers include: Dr. Rahul Gupta (Kanawha-Charleston Health Department), Fred Stottlemyer (former director of Putnam PSD), and other safe water experts.

Despite legislation and promises from our politicians, our drinking water system is still at risk. The Public Service Commission’s investigation of WV American Water has been pushed back until next year, and the legislation we have won is at risk. Hear experts explain what a safe water system might look like, and discuss among our community how we can achieve that goal.

Sponsored by: Advocates for a Safe Water System, WV Center on Budget & Policy, WV Council of Churches, National Association of Social Workers, and WV Healthy Kids & Families Coalition.

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Budget Beat – October 10, 2014

Registration Now Open: Summit on Race Matters in Appalachia

The WVCBP is a proud sponsor of the Summit on Race Matters in Appalachia, taking place November 10 & 11 in Charleston.

You won’t want to miss the Summit’s two amazing keynote speakers: Dr. Gail Christopher with the Kellogg Foundation, and Michael Wenger, author of My Black Family, My White Privilege. They will join other speakers to lead us through discussion of the powerful film “Cracking the Codes: Social Determinants of Racial Inequality.”

The event costs just $25 which covers registration for both days.

Register today to hold your seat! 

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Economic Recovery Not Reaching Southern Coalfields

Last week we released State of Working West Virginia 2014: Economic Recovery and Transition in the Mountain State. As cited in the report, recovery from the Great Recession isn’t bringing much relief to the state’s southern coalfields, as noted in the Logan Banner, one of that region’s newspapers. The Beckley Register-Herald also quoted the report in this article, where the headline says it all – Pay Attention: Policy Changes Can Have Major Impacts on People.

SWWV 2014 cover

Development Plan for Early Childhood in West Virginia

Last week we posted here about how the West Virginia Early Childhood Planning Task Force has released a draft of its Development Plan for Early Childhood in West Virginia. The public comment period closes this Sunday, October 12 on the report. Comments can be sent to jenny@terzettocreative.org.

For more on this important project, check out Pay for Success Financing and Early Intervention Programs: Recommendations from the Pay for Success Working Group to the West Virginia Early Childhood Planning Task Force. WVCBP Executive Director Ted Boettner is one of this report’s coauthors.

Budget Beat – October 3, 2014

West Virginians Working Harder, Pay Not Keeping Up

West Virginia’s economy is recovering from the Great Recession but low- and middle-income workers not are seeing similar growth in their paychecks, according to the annual State of Working West Virginia, released this week, by the American Friends Service Committee and the WVCBP.

Incomes remain stagnant for many West Virginia workers unless they are high-wage earners. Additionally, the report describes how the state’s energy economy is shifting northward, toward the booming natural gas industry, while in the south coal production continues its decline.

Read more in the Charleston Gazette, Beckley Register-Herald, Associated Press or listen to American Friends Service Committee Director Rick Wilson on West Virginia Public Broadcasting.

SWWV 2014 cover

Save the Date! Summit on Race Matters in Appalachia Coming to Charleston

Mark your calendars today for the Summit on Race Matters in Appalachia, taking place November 10 & 11 in Charleston. The event will include a screening of Cracking the Codes: The System of Racial Inequity and two nationally reknowned keynote speakers.

Look for registration information in next week’s Budget Beat!

Long-Time Health Care Advocate Set to Retire

At the end of the year, Perry Bryant, Executive Director of West Virginians for Affordable Health Care plans to retire. The WVCBP has worked closely with Perry over the years on many health-related policy issues and West Virginia has been lucky to have Perry here working on behalf of all of us who have the right to affordable, accessible health care. Happy Retirement to Perry! Read more about his career and accomplishment in this week’s Daily Mail.

More on Health Care…

Speaking of health care, WVCBP Health Policy Analyst Erin Snyder talks about the state’s health exchange in this week’s Charleston Gazette. The possibility of private independent exchanges coming to West Virginia could mean more choices for consumers and savings for employers.

ICYMI – check out this op-ed by WVCBP president Renate Pore on an interesting initiative coming to Kanawha County, Choosing Wisely, which promises to contain health care costs while improving care.

 Stock Photography: Nurse Checking Listening to Boy's Chest with

Share Your Comments on Building a System for Early Success

The West Virginia Early Childhood Planning Task Force has released a draft of its Development Plan for Early Childhood in West Virginia. The public is encouraged to submit comments on the report by October 12 to jenny@terzettocreative.org or Terzetto Creative, PO Box 188, Barboursville, WV 25504.

Here is some background on the Task Force from the report’s introduction:

Recognizing the importance of the earliest years of life, Governor Earl Ray Tomblin created the Early Childhood Planning Task Force in May 2013. The Task Force was charged with creating a development plan for West Virginia’s early childhood system. A 10-year plan for improving early childhood programs, financing and governance was completed in September 2014.

The Task Force partnered with the state’s Early Childhood Advisory Council on the creation of the plan. More than 1,200 West Virginians provided input through community forums, stakeholder discussions, study groups, an online survey and key informant interviews. The ultimate goal is for more pregnant women, young children and their families to receive the services they need and want. Our litmus test for the recommendations included in the plan was, “Will this work for the children we love and for the children in our state who are the most vulnerable?”