Corporate Tax Cuts Haven’t Brought Prosperity to West Virginia

Yesterday,  Governor Tomblin announced that the business franchise tax will be fully eliminated beginning tomorrow (Jan 1). While the governor says the elimination of the business franchise tax and the reduction in the corporate net income tax has helped to “secure additional investments” and that the state has benefited from these changes, there is no evidence that it has improved economic growth or the quality of life in West Virginia. However, there is strong evidence that it has led to significant cuts to important public programs and services like higher education over the years. 

In FY 2014, the state collected an estimated $204 million from the business franchise and corporate income tax. This was $18 million less than it collected 24 years ago in 1990. Meanwhile, these two taxes have gone from about 13 percent of the general revenue budget to just under 5 percent. According to the State Budget Office, this pattern will continue over the coming years with business tax revenue declining further to about 4 percent of the state budget.

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While it is difficult to say with certainty how much revenue the state has lost over the years from these two tax cuts, one way is to look at these taxes as share of private-sector state GDP (Gross Domestic Product). From 1997 to 2006 (before the tax cuts where put in place), West Virginia collected on average 0.62 percent of private-sector GDP in business franchise and corporate net income taxes. In 2013, this number was just 0.38 percent. If we applied the 0.62 percent between the years 2009 and 2013, the state would have collected an additional $542 million over the five-year period. The State Department of Revenue has estimated that total lost revenue from these two taxes and some smaller ones was $205 million in 2015.

While proponents of cutting these corporate taxes proclaimed that they would pay for themselves and not lead to any budget cuts, this hasn’t been the case. As we documented earlier this year, the state has made drastic cuts to higher education and other important programs over the years because of large budget gaps.

There is also little evidence that they have spurred additional economic growth or created jobs. As Sean pointed out a couple of weeks ago, West Virginia has had slower job growth than its neighboring states and has a higher unemployment rate. The impact of the tax cuts has also been masked by the recent boom in shale gas development that has little or nothing to do with lower business taxes. (For a solid analysis of the academic literature on state corporate tax cuts and jobs see here.)

Instead of inefficient corporate tax cuts that have largely flown out of state to wealth stockholders, West Virginia could have made smart investments in early childhood education, infrastructure, workforce training, higher education, and in other areas that would have improved the well-being and health of our children and provided a much better foundation for stronger economic growth.   

Savings From Reforming Prevailing Wage Laws Might Be A Tad Overstated

As Ted pointed out after the election, changes to West Virginia’s prevailing wage law are likely going to be one of the priorities of the legislature’s new Republican majority. New Senate President Bill Cole was a lead sponsor of a bill to repeal the state’s prevailing wage law, and the West Virginia Chamber of Commerce is pushing for changes as well. 

Prevailing wage laws require that public construction projects done by private contractors pay a standard pay rate to their workers. The pay rate is based on a survey of all employers in given geographic area for each trade. Prevailing wage laws keep government-funded construction projects from devolving into a race to the bottom, with contractors bringing in low-wage, low-skilled workers from outside the state to do public works projects, and leaving when they are finished. Prevailing wage laws ensure that experienced and skilled workers aren’t driven from the industry, and that the tax dollars that fund local projects stay in the community.

Opponents to prevailing wage laws claim that the laws inflate the cost of public construction projects, costing taxpayers. According to the West Virginia Chamber of Commerce, West Virginia’s prevailing wage laws, “costs the public a minimum of 25 percent more on public works paid for with public funds.” However, the Chamber’s math doesn’t add up.

According to the Chamber, West Virginia’s prevailing wage rates are too high, and the too-high wages increase the cost of public construction projects by at least 25%. But according to the 2007 Economic Census, labor costs account for only 27.7% of construction costs in WV.

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If labor only accounts for 27.7% of total costs, then it is virtually impossible to reduce total costs by 25% by reducing the state’s prevailing wage rates, like the Chamber claims.

Let’s assume that the state has a $1 million construction project. If the prevailing wage adds 25% to the state’s total construction costs, like the Chamber claims, then the state should be spending $800,000, with the prevailing wage adding $200,000 in excess costs. But with labor costs at 27.7% of construction costs, that means the state is paying about $277,000 for labor under the prevailing wage law. Therefore, the state would have to reduce labor costs from $277,000, to just $77,000 in order to eliminate the 25% increase in total costs that the Chamber claims the prevailing wage adds, a decrease in labor costs of 72%. The extra 25% that the Chamber claims that the prevailing wage adds to public construction costs accounts for nearly three-fourths of the state’s construction labor costs.

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To make the Chamber’s numbers work, an cement mason working on a public project in Kanawha County would have to have their wages fall from $28.70/hour to just $7.98/hour, which is below the state’s minimum wage. 

Now let’s take things one step further, and give opponents of the prevailing wage the benefit of the doubt. According to the conservative Public Policy Foundation of West Virginia, West Virginia’s prevailing wage rates are 49.5% higher on average than the average construction wage rates (I’ll have another blog post coming up on why that’s not an accurate figure either), and that 22.5% of constructions projects are subject to the prevailing wage . If that’s the case, then labor’s share of total construction costs would be 41.2% for prevailing wage projects, higher than the industry average. But even with that higher labor cost, the Chamber’s claims still don’t add up.

On a $1 million project prevailing wage project, with labor cost at 41.2% of total costs, the state would be spending $412,000 on labor. If the prevailing wage adds 25% to the cost of the project, then labor costs would have to go down to just $212,000, almost in half, to eliminate the extra 25%. That would mean that the prevailing wage is nearly 100% higher than the market average, not 49%, like the PPF report claims to have found.

Even taking some rather questionable claims about prevailing wage rates at face value, the Chamber’s claim that the prevailing wage adds 25% to public construction costs just doesn’t add up.

In fact, a review of the academic research on prevailing wages found that when the researchers examine the data, and not hypothetical scenarios, they find that prevailing wage regulations do not increase government contracting costs. Instead, prevailing wage laws, “provide social benefits from higher wages and better workplace safety, increase government revenues, and elevate worker skills in the construction industry.”

Budget Beat – December 19, 2014

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With the last Budget Beat of 2014, we wanted to take a moment and wish everyone a wonderful holiday season and a happy, healthy and prosperous 2015.

We leave you with two of the major policy priorities we are ready to tackle in 2015:

First up, paid sick days for West Virginia workers. Over 250,000 of us do not have access to a single paid sick day. We hope to change that this year at the state legislature. Check out this op-ed by health policy analyst Erin Snyder on why workers, employers and the state’s economy would all benefit.

Wages for male workers have not kept pace with inflation, making it even harder for working families to keep up. With talk of repealing the state’s prevailing wage, the situation could grow worse, since this would impact construction workers at public projects. For more on the big-picture impact, here is Ted blog’s post “Is it a Good Time to Reduce Male Wages in West Virginia?” and his interview with WOWK-TV on the problem and possible solutions.

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Happy New Year! Boost in State’s Minimum Wage on 1/1/15 Will Also Provide Economic Growth

Thanks to the raise in the state’s minimum wage on January 1, 2015 from $7.25 to $8.00/hour, 88,000 West Virginia workers will see their wages increase. This means $50 million more in wages for the state’s lowest-paid workers. The Economic Policy Institute estimates this will also mean a bump up in the state GDP by $31 million in 2015.

Also helping keep working families out of poverty are two important tools: the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). According to the Brookings Institute, together they keep millions out of poverty. In West Virginia also, they lift 38,000 people out of poverty, including 18,000 children. A state EITC, successful in many other states, could do even more for West Virginia’s low-income families, were it to be approved by the state legislature in 2015.

Racial Equity Work Continues into 2015

The next Race Matters meeting will be January 8 at 11:30AM at the Fifth Quarter Restaurant in downtown Charleston. Please plan to join the group for continuing conversation on racial equity in West Virginia.

Plan are underway for mini-summits in other parts of the state including Clarksburg and Martinsburg. Details to follow.

Check out this interesting article, “3 Elements of a Successful Diversity Initiative in Appalachia: Community, Perspective and Story,” on why the folks behind making the film “Cracking the Codes“, by film maker Shakti Butler, are giving November’s Summit on Race Matters in Appalachia high marks, in large thanks to Reverend Ron English, lead of the event’s planning committee.


Budget Breakfast: Early Bird Discount Expires 12/31/14!

Join us for the next Budget Breakfast on Wednesday, January 21 at the Four Points Sheraton, downtown Charleston. Please register by 12/31/14 to get the Early Bird discount! Panelists include Senators Jeff Kessler and Mike Hall who will take questions on the state’s fiscal future under new legislative leadership.

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Is it a Good Time to Reduce Male Wages in West Virginia?

As the legislature considers repealing the state’s prevailing wage for public construction projects, it is important to recognize that it could further depress wages. This is especially true for male workers, who typically hold over 90 percent of construction jobs.

Since the late 1970s, male hourly wages have declined by more than $3 in West Virginia after adjusting for inflation. In many ways, the collapse in male wages over the last several decades is at the heart of many of our state’s social and economic problems. When families’ wages stagnate or decline, those families struggle to make ends meet, save for retirement and college, spend time with their kids, and help make their communities a better place to live. This also means less tax revenue to invest in the important public structures like education and infrastructure that provide a backbone for strong economic growth and poorer health.

Males Wages

The decline in male wages over this period has to do with a several factors including the decline in unionization, the collapse in blue-collar jobs such as manufacturing and coal mining in the state, the wage gap between educational attainment, and federal and state policies that have put downward pressure on wages.

Unions play a vital and substantial role in pulling up wages not only for their members but also other workers. As we noted in a previous report, union members in West Virginia earn $5 more per hour than non-union workers and are more likely to have benefits like health and pension coverage. Historically, males made up a much larger share of the union workforce (65% in 1983) but today women now account for about half of all union members (48% in 2013). 

As the chart below highlights, union membership in West Virginia and the United States has declined dramatically over the last 50 years. At its peak in 1981, nearly 40 percent of all workers in West Virginia were members of a union compared to just under 13 percent today.

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A recent study by scholars at Harvard University and the University of Washington found that declining unionization was responsible for about a third of the wage inequality for men between 1973 and 2007. The same study found that the educational pay gap accounted for another third of the increase in wage inequality for men. While workers in West Virginia have made substantial progress in acquiring post-secondary degrees since the late 1970s, West Virginia continues to lag behind most states in having a smaller knowledge-based economy. With a lower share of workers with college degrees, the result is lower wages

Another reason for the decline in male wages is the collapse of goods-producing jobs like manufacturing and coal mining and the transition to lower-paying service jobs. As we documented in the 2013 State of Working West Virginia, in 1979 Weirton Steel was the largest employer in the state with 14,000 employees. Today, it’s Wal-Mart where average wages are fraction of what they were at Weirton Steel.

Since 1979, West Virginia has lost over 77,000 manufacturing jobs and 42,000 coal mining jobs. These jobs are still primarily held by males, according to the Bureau of Labor Statistics.

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 Federal and state policies have also resulted in the decline of male wages. As economist Heidi Shierholz noted last year:

Unlike the postwar period, when economic policy supported the expansion of good jobs, for the last 35 years, the focus has been on policies that were advertised as making everyone better off as consumers through lower prices: deregulation of industries, the Federal Reserve Board’s prioritizing low inflation over full employment, weakening of labor standards including the minimum wage, a “stronger” dollar — which costs manufacturing jobs by making our goods relatively more expensive around the world and imports relatively cheaper to US consumers — and the move toward fewer and weaker unions.

Males wages in the state could decline further in the upcoming years as the legislature considers repealing the state’s prevailing wage law for public construction projects and by making it much harder for workers to join unions by becoming a “right-to-work” state. Instead of pursing policies that will further depress wages, the state should be investing more in education, early childhood development, and projects that diversify our economy and lead to higher wages for all.

Budget Beat – December 12, 2014

Budget Breakfast: Register Today to Take Advantage of Discount!

Join us for the next Budget Breakfast on Wednesday, January 21 at the Four Points Sheraton, downtown Charleston. Please register by 12/31/14 to get the Early Bird discount! 

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Join Us to Announce the 2015 Our Children Our Future Platform

Monday’s forecast is beautiful! Join us during your lunch hour as the Our Children Our Future Campaign to End Child Poverty in West Virginia releases its top priorities for the coming legislative session.

Monday, December 15 at 12:30PM, Governor’s Conference Room, Secretary of State’s Office, State Capitol.

The press conference will include statements by families directly impacted by state policies.

Safe Water System Leadership Training

It is a year after the water crisis, and little progress has been made towards an improved water system. WV American Water has not taken any steps to fix its infrastructure, and the Public Service Commission’s investigation has been delayed.

Advocates for a Safe Water System (ASWS) is building an organized base of citizen leaders to push for the changes needed in our water system.

More than 120 people attended the ASWS safe water system panel discussion and community conversation in November. Join them for a January leadership training to turn what was learned at that forum into action. (You are welcome to join even if you were not about to attend the November meeting.)

Saturday, Jan 17th, 9am-1pm (lunch provided)
St. Marks United Methodist Church (900 Washington St E., Charleston)

Please register to reserve your lunch!

Budget Beat – December 5, 2014

Shout-Out to Evidence Counts, the WVCBP Blog

As a Budget Beat reader, you are familiar with the WVCBP blog, Evidence Counts. We are proud to be one of the top blogs followed by West Virginia Focus as mentioned in its Sept/Oct issue! Our work on broadband access is also cited on page 24.

Read the latest West Virginia Focus at www.wvfocus.com.


Summit on Race Matters – Stay in Touch

The Summit on Race Matters in Appalachia brought together over 200 people from across the state last month. Let’s keep the conversation going! The next meeting will be January 8, 2015 at 11:30 am at the Fifth Quarters Restaurant, 201 Clendenin Street, downtown Charleston.

Please like the new Race Matters in WV Facebook group to learn more!

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Budget Breakfast, January 21, 2015

The WVCBP will hold its second annual Budget Breakfast on Wednesday, January 21 at the Four Points Sheraton in downtown Charleston. Please consider a sponsorship to our once-a-year fundraiser. More information in next week’s Budget Beat!

Our Children Our Future Platform Decided

The ballots are in and here are the unofficial Top 10:

#1: Protect and Provide a Secure Funding Stream for Family Support Programs
#2: Expanding Quality Early Childhood Programs
#3: Juvenile Justice Reform
#4: Drinking Water Protections
#5: Defend Medicaid and CHIP, While Expanding Medicaid Access to Mental Health Therapy
#6: Past Due! It’s time for Tobacco to pay its fair share
#7: Retiring Old Laws so Nurses (APRN’S) can meet health needs for WV families
#8: Stopping Meth Labs in WV
#9: Erin’s Law: Preventing Childhood Sexual Assault
#10: Providing Earned, Paid Sick Days for Workers and Schedules that Work

Learn more at www.wvhealthykids.org and plan to attend Kids and Families Day on Wednesday, January 14, 2015 at the state Capitol. Register here.

Safe Water System Leadership Training

It is a year after the water crisis, and little progress has been made towards an improved water system. WV American Water has not taken any steps to fix its infrastructure, and the Public Service Commission’s investigation has been delayed.

Advocates for a Safe Water System (ASWS) is building an organized base of citizen leaders to push for the changes needed in our water system.

More than 120 people attended the ASWS safe water system panel discussion and community conversation in November. Join them for a January leadership training to turn what was learned at that forum into action. (You are welcome to join even if you were not about to attend the November meeting.)

Saturday, Jan 17th, 9am-1pm (lunch provided)
St. Marks United Methodist Church (900 Washington St E., Charleston

Please register to reserve your lunch!

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