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The New “Road to Prosperity” Explained

On October 7th, voters in West Virginia overwhelmingly approved a $1.6 billion general obligation bond to invest in the state’s road system. This is on top of the estimated $500 million in Turnpike Bonds and $500 million in federal GARVEE road bonds that were approved during the special legislative session earlier this year, along with about $130 million in increased State Road Fund revenues to pay for the $1.6 billion “Road to Prosperity” road bond.

The legislature is meeting in a Special Session this week to consider legislation that will address filling vacancies at the WV Department of Transportation and to make changes to the WV Jobs Act – which requires the state to hire at least 75 percent of its workers on state funded public improvements projects ($500,000 or above) from the local labor market.

According to Governor Jim Justice, this unprecedented investment will lead to the creation of an estimated 48,000 jobs in West Virginia. While this could be an enormous opportunity for the state’s short and long-term growth, it is important to put these numbers in context and for people to have a clear understanding of what the impact could be over the next several years. Below, I take a dive into answering some of the important questions surrounding the road bonds and there impact on West Virginia’s economy and fiscal health.

So, how big is $2.6 billion in road construction?

It’s pretty big. Altogether, the state spends about $700 million in state revenues on roads and about $400 million in federal revenues or $1.1 billion. The state revenues come from motor fuel taxes, DMV fees, and the sales tax on vehicles, while federal matching funds come mostly from the federal highway trust fund.So, $2.6 billion is more than double what the state spends each year on roads and four times more than what the state collects in taxes/fees each year in West Virginia. The voters approved $1.6 billion in general obligation bonds is approximately $500 million more than the state spends each year on roads or $900 million more than the state collects in West Virginia in taxes/fees for roads. In 2014, per capita spending on highways was $658 per person  compared to the national average of $508 per person – ranking 14th highest among the 50 states.

While $2.6 billion in additional road spending may be a lot of money, West Virginia’s spending on roads has stagnated over the last decade. West Virginia spends less today compared to the 1980s and 1990s on roads after you adjust for inflation and spending per mile. According to the 2015 report by the WV Blue Ribbon Commission on Highways, West Virginia would need approximately $750 million per year in additional funds to maintain its existing highways system and $1.130 billion annually to provide for expansion of the current highway system. The commission recommended an additional $419 million per year in additional revenues into the State Road Fund.

The $2.6 billion in bonds that have been approved by the legislature (Turnpike/GARVEE) and by the people (General Obligation Bond) this month are planned to be issued over the next four years. The voters approved bond of $1.6 billion will be issued in four increments, $800 million in 2017, $400 million in 2018, and $200 million in 2019 and 2020. The Turnpike and GARVEE bonds will also be issued in increments over the next few years.

Is West Virginia taking on too much debt?

The last general obligation bond constitutional amendment for roads was passed in 1996 at $550 million (Safe Road Amendment). This is about $879 million in today’s dollars. This debt is scheduled to be retired by June 1, 2025. As of June 30, 2017, the state’s total net tax supported debt is $1.521 billion, while the non-tax supported debt from the state’s 20 other bonding authorities (mostly colleges, but includes Turnpike Authority) is $6.249 billion.

According to the West Virginia’s Treasurer’s Office’s 2017 Debt Capacity Report, West Virginia’s net tax supported debt and debt service are currently below the recommended caps or debt ratios for each category that the “municipal bond industry and others use” to analyze a state’s fiscal position.

The debt ratios include net tax supported debt service (principle + interest payments) as a share of the state’s General Revenue Fund and Total Revenues (General Revenue Fund + Lottery Funds + State Road Funds), and net tax supported debt as a share of the Assessed Value of Real/Personal Property, State Personal Income, and net tax supported debt per capita in West Virginia.

The chart below shows the recommended caps (debt ratios) for each of the five categories included in the 2017 Debt Capacity Report along with their projected 2018 debt ratios without the $1.6 billion in tax supported  general obligation bonds that passed earlier this month. Included in the chart is also the estimated debt ratio if you include $1.2 billion of the $1.6 billion (75 percent) in new tax supported general obligation bonds that are scheduled to be issued by 2018 and 75 percent or $97.5 million of the projected $130 million in new dedicated debt service payments that are to be used to pay the new bond debt.

The WV Treasurer’s Office estimates that on June 30, 2018 the total estimated net tax supported debt will be $1.414 billion and the total debt service will be $182.9 million without any additional debt. As you can see from the chart, when you include the additional $1.2 billion in new tax supported debt and $97.5 million in additional debt service payments (based on the WV Treasurer’s Office own projections for each of the five categories) for 2018, the state goes above each of its own recommended debt caps. For example, the recommended per capita cap on net tax supported debt is $1,100. The Treasurer’s Office estimated earlier this year that this number will be $327 below this cap by 2018. However, if you include the more than  the additional $1.2 billion in voter approved general obligation bonds that are scheduled to be sold by 2018 this figures grows to $1,428 or $328 above the state’s own per capita recommended debt cap.

While it is hard to know for sure what impact the additional bond debt will have on the state’s fiscal health, Moody’s Investor Service warned earlier this year that a “significant increase in state’s Net Tax Supported Debt burden…could lead to a downgrade.” As Brad McElhinny pointed out recently at Metro News, the 2017 Debt Capacity Report from the WV Treasurer’s office also warned against the state increasing its debt in the midst of chronic budget gaps:

Although West Virginia is below all of the recommended caps on the ratios examined in this report, that does not provide a license to issue debt. Until West Virginia leaders come up with a comprehensive plan to fix the budget deficits and address declining revenues, debt should only be issued within the recommended ratios to move West Virginia forward and help address its financial issues.

The additional state debt could also hurt the state’s fiscal health if the state is unable to meet its debt service requirement in the future do to declining revenues or if the added cost of maintaining additional roads from new construction squeezes out other budget priorities. When it comes to GARVEEs, it is important to realize that they produce no new revenues and add to debt services costs since they borrow from future federal money – which could diminish the state’s ability to match federal funds in the future.

That said, the benefit of speeding up road projects could result in cost savings, as the rate of construction inflation is higher than the interest rate on most general obligation bonds. This is a way to short-cut inflation.  In addition, if the new roadway spending goes toward rehabilitation projects instead of waiting until the roads are in functional disrepair it can lower future costs.

Where is the $2.6 billion going? 

According to the West Virginia Department of Transportation’s “Road to Prosperity”project list, there are $337.1 million in GARVEE (1&2) bond projects, $370.5 million in Turnpike bond projects, and $2.03 billion in General Obligation Bond projects – a total of $2.736 billion. Of this amount, approximately $1.95 billion (71%) in listed bond projects go toward new construction (e.g. widening lanes, new roads, etc.) while $784 million go toward road repairs, resurfacing, and replacements.

Of the voter approved General Obligation Bonds listed projects (aka Road to Prosperity Amendment), approximately 84 percent or $1.7 billion is planned to go toward new construction while the remaining 16 percent ($328.5 million) is expected to go toward repairs, resurfacing, and replacements. While all of the new GARVEE bonds are expected to go toward existing roads, over two-thirds of Turnpike Bond projects are being used for new construction.

Will the road bonds create 48,000 jobs?

Governor Justice has repeatedly said that the $2.6 billion in new road spending will create “48,000 jobs” in West Virginia. Apparently this number was derived from a 2014 report from Duke University’s Center on Globalization, Governance & Competitiveness. In the report it states that “each $1 billion dollars invested in transportation infrastructure creates 21,671 jobs” or about one job per $41,145 in transportation spending. At $2.6 billion this would equate to over 56,000 jobs or 38,800 jobs at $1.6 billion. While the Governor has been clear that this is an imprecise figure, it is not typically a sound practice to simply apply multipliers that are based on national figures instead of at the state level or from studies that don’t take into consideration a state’s economy and demographics.

It is also important to keep in mind that the projected new jobs are temporary and that the money used to pay the debt service on the bonds will partly come from an increase from regressive fees/taxes that could lower consumer demand in other areas unlike federal spending that can come from deficit spending. The economic impact of the proposed road bonds also depends on several other factors, including the use of local labor and local inputs like raw materials, the portion of the economic benefits that may spill over into neighboring states, the rate of interest on the bond itself, the amount of slack in the local construction market, and whether the investment is targeted where the quality of the roads is bad. While all of these factors – and more – need to be considered before policymakers can make a sound judgment on the number of jobs that will be created, let’s roll with their figures for a minute.

According to the Duke study, over half (57 percent) of the projected jobs per $1 billion spent on transportation are in the construction sector.  If we conservatively say half of the projected 48,000 new jobs will be in the construction industry, than construction employment should conservatively hit 50,000 absent any major declines in sectors within the construction industry. This appears to be a very unlikely scenario, while an additional 5,000 construction jobs – as predicted by Steve White with the Affiliated Construction Trades Foundation – seems like a more probable outcome. As the chart below shows, construction employment is at a 25 year low, with the state down about 9,000 construction jobs since their annual peak in 2006 – so while it appears there could be a lot of slack within the construction industry it is doubtful that it could jump by more than 10,000 jobs within the next few years.

Is this a good investment for the state?

There is little doubt well-targeted investments in transportation infrastructure such as roads create good-paying jobs – especially in the short-run. The long-run impacts, however, are largely determined on whether this investment leads to additional investments from businesses or people and whether the additional new roads will require new revenues in the future to be maintained. Another important consideration is whether the WV Jobs Act  will be enforced, which could determine how much of the $2.6 billion stays in our local economy.

Since the state did not perform a life-cycle benefit-cost analysis (as far as I am aware of) for each of the larger proposed road projects, it is not clear whether the benefits will outweigh the costs over the long-run. A 2010 study by economist Michael Hicks that looked at the impact on small businesses of the Corridor G project that goes from Charleston to Pikeville (KY), found “startling” results that suggest an increase in firm productivity but Hicks warned that the results “should be interpreted with caution.”

Conclusion

The enormous investment provided by the road bonds offers a great opportunity to boost jobs and economic growth in the short-term, but it is unclear what the long-term impact will have on the state’s economic and fiscal health. It will be imperative for the Justice administration to hire as many local workers and utilize as much in-state businesses in the process as possible get the best bang for the buck. Additionally, it will be important for lawmakers to ensure that the additional debt does not lead to another credit downgrade or additional budget austerity that is already hurting our state’s economic position. Lawmakers should also take steps to increase transparency and accountability by ensuring the public knows how the$2.6 billion in road bonds are spent in West Virginia.

 

 

To Create Jobs, Invest At Home

A  new report from the Center on Budget and Policy Priorities analyzes data about which businesses actually create jobs and where they create them. The conclusions from the analysis contain useful information for states, like West Virginia, looking to create jobs and grow their economy. 

While West Virginia recently underwent a significant tax reform, and is looking to do the same again, this failed to significantly create any new jobs in the state. But, as this new report shows, that shouldn’t have been surprising. While tax cuts and other tax incentives like those enacted in West Virginia are used to lure businesses from other states, the report finds that the vast majority of jobs are created by businesses that start up or are already present in a state. From 1995 to 2013, about 87 percent of private-sector job creation in a typical state was “home grown,” coming from startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state. In contrast, jobs that move into one state from another typically represent only 1 to 4 percent of total job creation each year.

vastmajorityofjobgrowthcomesfrominstatebus-rc_450

The report also found that start-ups and young companies are responsible for most of the job creation when the economy is healthy. This means that economic development strategies that focus on tax cuts and tax incentives are likely to fail. Tax cuts are poorly suited to helping startups and other rapidly growing firms, in part because these businesses often have little income in their early years, after spending heavily on new equipment, product development, and marketing.

Instead of creating jobs, tax cuts end up hurting state investments in education and other services that entrepreneurs need. In a survey highlighted in the report, the most commonly cited reason among entrepreneurs for starting their companies where they did was that it was where they lived at the time, with 31% of entrepreneurs citing access to talent as a factor determining where they launch their business. In contrast, only 5% of entrepreneurs cited low tax rates as a factor in deciding where to launch their company.

All of this suggests that West Virginia should look beyond doubling down on the failed tax cuts of the past as an economic development strategy, and instead invest in schools and colleges, improving workers’ skills, and maintaining communities that are attractive to residents who want to start a business. Successful entrepreneurs report these factors were key to where they founded their companies. More tax cuts and subsidies will only waste state resources that would be better utilized building a skilled workforce and improving the quality of life for local residents, investments that support real economic progress.

5 Things You Need to Know about “Right to Work” in WV

The West Virginia Legislature is poised to enact a so-called right-to-work (RTW) law this week. The House of Delegates is taking up an amended version of the “WV Workplace Freedom Act” this afternoon. The law would prohibit unions and employers from negotiating a contract that requires employees who benefit from union representation to pay for their fair share toward those costs.

So far, 25 states have enacted RTW laws, predominantly in the South and Southwest. While right-to-work laws have nothing to do with guaranteeing jobs for workers, some in the business community view it as a strategy for attracting new businesses to locate in West Virginia, despite its downside risks of lowering wages and hurting unions that helped build the middle class in our country.

Here are five important things you need to know:

 1. It’s about lowering wages and eroding workplace protections. As an economic development tool, the professed aim of RTW is to reduce the power of unions by depriving them of resources (dues), which ultimately weakens the union and strengthens the employers’ hand in bargaining for lower pay and benefits. By decreasing the likelihood that businesses will have to negotiate with their workers, this will lower labor costs, reduce the cost of doing business, and will supposedly incentivize out-of-state manufacturers and other businesses to locate in West Virginia. If RTW didn’t lower wages and weaken workplace protections across the board, there would be no incentive for companies to move to West Virginia. This, in a nutshell, is the hope of RTW supporters such as the West Virginia Chamber of Commerce.

 2. Academic research is unanimous that RTW reduces unionization. While there is no strong evidence that RTW laws help or harm a state’s economy, there is a broad academic consensus that it weakens labor unions. If this happens, it could mean even worse economic and social outcomes in the state. This is because unionization is strongly associated with higher economic mobility, less income inequality, higher wages, safer workers conditions, better benefits and larger voter turnout.

 3. The WVU report on RTW is fundamentally flawed. While a recent study by John Deskins at West Virginia University concluded that RTW would boost jobs in West Virginia, the study is fraught with basic design problems. For example, the WVU study misidentifies that Texas and Utah adopted RTW in the 1990s, when both states adopted RTW before 1960. The WVU study also failed to adopt a standard academic practice that accounts for unobserved differences between states, such as the advent of air-conditioning in the South, access to oversees markets, and other important state characteristics. When researchers at the Economic Policy Institute accounted for these problems and replicated WVU’s findings, they found no relationship between RTW status and employment growth. Tim Bartik, an economist with the Upjohn Institute and one of the country’s leading economic development experts, recently reviewed the WVU study and concluded that it “does not provide any convincing evidence that a state that adopts RTW laws will, as a result, experience faster job growth.” The flaws with the WVU study highlight why state policymakers should not rely on its conclusions to adopt RTW.

 4. RTW is not about “workplace freedom.” While RTW proponents define ‘workplace freedom” as letting workers opt out of paying a representation fee to pay for the benefits they are receiving under any negotiated union contract, most would define workplace freedom as being treated with dignity and respect on the job. That means getting paid an honest wage for an honest day’s work, and having access to benefits such as paid sick days, paid family leave, health care, and a retirement plan. The only freedom workers would receive if RTW were enacted is the ability to get something for nothing.

 5. Low workforce skills are the central reason for West Virginia’s economic woes, not lack of RTW. A recent in-depth study by the Center for Business and Economic Research at the University of Kentucky that explored why the state is so poor found that the shortage of skilled workers – not RTW – was the central reason for the state’s relative poor economic performance. Since West Virginia faces many of the same social and economic problems as Kentucky, policymakers would be well advised to promote polices that improve the skills of the state’s workforce instead of RTW that could reduce workforce training.

While we are all worried about our economic future and want to build a strong economy in our state with good-paying jobs, enacting right to work is not going to get us there. Instead it may hurt working families by redistributing income from workers to employers and from middle-class taxpayers to the wealthy.  I hope the legislature in West Virginia will see that we can’t build West Virginia by tearing down working families and unions. Instead we need  to focus on the policies that we know work, such investing in early childhood education, research and development, higher education, workforce training, and effective ways to help more people get out of poverty. 

Income Tax Cuts for Wealthy Unlikely To Boost West Virginia Economy (Part III)

While the last post found that state income taxes have little or no impact on interstate migration, there is also little evidence that slashing or eliminating the personal income tax is a surefire way to boost economic growth in the Mountain State. Most of the states that have followed this path recently have not experienced stronger growth, but they have seen their budget deficits grow. And this means less investment in education, infrastructure, higher education, and other important public goods that provide a foundation for a strong economy. The theory that income tax cuts for the wealthy lead to stronger economic growth is also deeply flawed and contradicted by real world experience, as we shall see.

Here are five simple reasons why we should be very skeptical about cutting income taxes on high income businesses in West Virginia:  

States without income taxes not outperforming those that have income taxes

One simple. but somewhat crude. way to gauge whether the lack of an income tax is a good predictor of economic growth is to examine the performance of states with and without an income tax. While policymakers in West Virginia have not (yet) claimed that no-income tax states are doing better than states with income taxes, high ranking officials in other states, and groups like ALEC and Americans for Prosperity, have all used this as a talking point in advocating for eliminating the state personal income tax.

According to a recent report from the Institute on Taxation and Economic Policy, states that go without personal income taxes have failed to outperform others. As the chart below illustrates, between 2002 and 2011 states without income taxes experienced slightly lower economic growth (real GSP per capita), a larger decline in household median income, and similar unemployment rates. 

tax and grown ITEP

States that cut incomes taxes are doing worse

Not only is there little difference in economic performance between no-income and income tax states, but a number of states that have recently cut income taxes in the hope of boosting economic growth have not performed any better as well. From 2002 to 2007, six states – Arizona, Louisiana, New Mexico, Ohio, Oklahoma, and Rhode Island — enacted significant personal income tax cuts on the premise that it would boost economic growth. Three of these states – Arizona, Ohio, and Rhode Island – have seen their share of national employment decline, while New Mexico, Oklahoma and Louisiana have enjoyed above-average employment growth mostly due to the sharp rise in oil prices during this period. 

More recently, since 2012, five states have sharply cut their personal income taxes in the hope of boosting economic growth. Of the five, only North Carolina has outperformed the nation in job and personal income growth. Despite its recent economic performance, North Carolina has made substantial budget cuts and is drastically underfunding schools, colleges and other important public services businesses need to thrive.

Kansas, which enacted the largest personal income tax cuts in recent history, has performed especially poorly. Since Kansas enacted its tax cuts (January 2013), its jobs base has grown only by 2.9% compared to the national average of 4.6% over this period (ending in April 2015) and its personal income growth was 4.3% compared to the national average of 4.6% (2012Q4 to 2014Q4).

Growth Rates bt tax cutting states US avg

When Kansas Governor Sam Brownback enacted these tax cuts he said this would provide a natural experiment in supply-side tax cuts and that the cuts “will be like a shot of adrenaline into the heart of the Kansas economy.” The opposite has happened, along with a $400 million budget hole. West Virginia has also undergone a natural experiment in supply-side economics, cutting business taxes significantly since 2007. The results have been similar: large budget cuts along with very poor job growth

Reality bites when theory rules the roost

As businesses have shifted from paying the corporate income tax to paying the individual income tax (because many companies are now pass-through businesses [S corps, limited liability companies, partnerships, sole proprietors]), policymakers have argued that cutting the personal income tax will lower business costs, thereby boosting investment and job growth in the states that do so.

While standard economic theory predicts that business tax rates can impact whether a business chooses to locate in a particular state because lower taxes mean lower costs, this is only true if all other things are equal (Ceteris paribus) and there’s perfect market competition. Of course, this is almost never the case because there is no such thing as a free market (it is a political construct) or perfect market competition, and states never hold “all other things equal” when they make tax changes that impact public investment.

The theory also hinges on the faulty assumption that the level of taxes are large enough to influence firm behavior or that business taxes are not passed on to customers via higher prices. In reality, business investment and location decisions revolve around a host of considerations, many of which can play a much larger role than state taxes. For example, the cost of electricity, occupancy (rent), raw materials (or inputs), transportation, and labor are usually much larger costs than state and local taxes and can have a greater impact on profit margins especially in different states. As Sean has pointed out, the variations in wages across states is much larger than the savings of any proposed tax reductions. 

The strategy of tax cuts to lower the cost of doing business is also focusing on a very small component of business costs. For example, according to COST, U.S. businesses paid a total of $648.8 billion in state and local taxes (including corporate and individual income taxes, sales and severance taxes, local property taxes, and other taxes) in 2012. According to the IRS, businesses in 2012 deducted $27.7 trillion in federal, state and local business taxes. This means, at the most, business taxes represented about 2.3% of the cost of doing business in the United States.*

cost of doing biz WV If we assume that West Virginia’s share of the $27.7 trillion is commensurate with the state’s share of national private GDP (0.42%), this pushes the share up to 3.3% based on the COST estimate that businesses paid $3.7 billion in state and local taxes in West Virginia in 2012.

One reason West Virginia might be higher is because of its large mining sector. This means for most businesses in West Virginia state and local taxes are probably much closer to 2.3% of total business costs (and even lower lower after their federal reduction of state and local taxes). 

Put another way, if West Virginia abolished its personal income tax it would only reduce average firm cost by about 0.2% at the most.

In sum, it is entirely reasonable to argue that state and local taxes have a relatively minor impact on corporate location decisions because they constitute a small share of business costs and their potential influence is overwhelmed by interstate differences in labor, energy, transportation, and other costs of production, which account for almost 97 percent of total corporate production expenses.

Rational profit-maximizing businesses would also consider the level of public provisions (e.g. good schools, roads, etc.), the quality of life, the supply of a qualified workers, and other state and local policies. Businesses might also look to national tax policies and national economic conditions when looking to expand and make a profit. All of these other considerations throw cold water on the theoretical argument that state taxation alone will have a large impact on economic growth.

This is why it’s very important to move from theoretical assumptions governing the behavior of state business growth and taxes and to focus on the empirical studies that have looked into the impact of state taxes on economic growth.

Tax cut theory at odds with academic research

A recent review of academic peer-reviewed studies by Michael Mazerov at the Center on Budget and Policy Priorities concluded that “of the 15 major studies published in academic journals since 2000 that examined the effect of state personal income tax levels on broad measures of state economic growth, 11 found no significant effects and one of the others produced internally inconsistent results.” This means for every one academic study that found personal income taxes boosted state economic growth, there were about four that found no significant effects. A new and very rigorous study conducted by the Tax Policy Institute further undermines the claim that states can improve their economies by cutting personal income taxes. The study found that personal income taxes have a statistically insignificant impact on growth.

So, if anyone ever tells you that there’s a consensus among economists or that “economic theory predicts” that lower state personal income taxes boost economic growth, all you have to do is look at the recent empirical academic evidence and the real-world examples that are unfolding badly across the country. 

Cuts in personal income tax usually result less public investment

While not all income tax cuts are created equal (more on that soon), states that have cut income taxes (mostly for the wealthy) across the country did not do so in a revenue neutral way. Instead, the tax cuts had the predictable consequence of creating large budget gaps that were met by smaller investments in education, higher education, and other important public goods that are vital to support private sector growth (sound familiar?).

In fiscal year 2016, West Virginia is expected to collect about $1.9 billion in personal income taxes. To put that in perspective, the personal income tax alone could nearly pay for our state’s public education costs and it brings in nearly twice what the state pays in Medicaid costs. Because West Virginia must balance its budget, personal income tax cuts that fail to produce the promised economic gains almost certainly will lead to deep funding cuts for schools and other public services. This would not only hold our economy back and exacerbate income inequality, but it would make West Virginia an unattractive place to live, work, and raise a family.

Rather than bet our future on a strategy that has failed to deliver in other states, we need to be making smarter public investments that support the private sector and create an environmental for all to succeed.

____

 *Using the IRS 2012 figure of business taxes deducted of $569 billion drops this share to 2 percent.It is also important to recognize that the IRS figure includes federal taxes, not just state and local taxes.  This number also does not consider that state and local taxes can also be deducted from federal income taxes paid, which would lower the effective state tax rate. For more on this methodology, please see footnote 5 ( http://www.cbpp.org/research/vast-majority-of-large-new-mexico-corporations-are-already-subject-to-combined-reporting-in) 

Time to Modernize West Virginia’s Excess Acreage Tax

With tax reform looming on the state’s public policy agenda, now would be a opportune time to revisit the state’s Excess Acreage Tax. Since 1905, a corporation purchasing 10,000 acres or more of property in the state is subject to a one-time five cents per acre tax on owning the property. In 1999, Governor Underwood’s Commission on Fair Taxation (3-694) recommended increasing this tax to 50 cents per acre, making it an annual tax, lowering the threshold to 1,000 acres and allowing a credit against the state’s severance tax. This is a step in the right direction and it is long overdue.

As many West Virginians know, one of the state’s historic economic problems has been large absentee land and mineral ownership.  As we discussed in our 2013 report Who Owns West Virginia in the 21st Century?, this problem has not gone away. In 2012, the top 25 land owners in the state owned about 18 percent of the state’s private land and none of the top 10 largest land owners were headquartered in West Virginia. In Wyoming County, two out-of-state companies – Heartwood Forestland Fund and Norfolk Southern – owned over half of the county’s private land in 2012.

Adequate taxation of large landowners could not only spur development of more land in the state (especially in southern WV) but could also provide needed revenue to fund economic development and lower the tax responsibilities of landowners with improvements. According to data from the West Virginia Property Tax Department,  approximately 352 corporate entities (excluding non-profits) owned at least 1,000 acres of land in the state for a total of 3,380,000 acres. At 50 cents an acre, this would amount to an estimated $1.7 million in annual tax revenue – not including the tax credit against the state’s severance tax which would lower this amount. The state’s largest private land-owner – Heartwood Forestland Fund, which owns about 500,000 acres in the state – would have an annual tax bill of about $250,000.

While the proposal of increasing the tax from 5 to 50 cents is a step in the right direction, it might not be high enough to incentivize the development of more land or provide adequate revenue to fund economic development and other priorities. Adjusted for inflation, the five cents per acre tax that was established in 1905 would be the equivalent of about $1.25 today.

One idea would be to create a graduated Excess Acreage Tax rate that increased with the amount of property owned over 1,000 acres. This could help provide a much greater incentive to the largest land owners to develop or sell their land and it would help ensure that those at the bottom end don’t buy more land.

EXCESS ACREAGE TAX

If we started with a tax rate of 50 cents per acre between 1,000 and 2,499 acres and ended with a top rate of $5 per acre over 250,000, it could yield an estimated $10.6 million in revenue (not including the severance tax credit). If the lowest rate was set at a $1 per acre and increased by a $1 per acre until it hit $10 for landowners over 250,000 acres, it could yield $21.2 million annually. It would also be wise policy to exclude any producing farms, which is something we do not want to discourage with the Excess Acreage Tax.

Along with reforming the Excess Acreage Tax, lawmakers could also consider revamping the state’s preferential tax treatment of unimproved land. As the Lincoln Institute of Land Policy has pointed out, using the use-value assessment (UVA) approach instead of the market-based approach that is used on other types of property can dramatically lower property value and taxes.  For example, in Wyoming County, Heartwood Forestland Fund owns a parcel containing 12,463 acres that has an appraised value of $2,358,450 (assessed value is $1.4 million) and their total property tax bill in 2014 was $31,490. This means Heartwood is paying about $2.53 per acre, with an appraised value of just $189 per acre. Using a market-value approach would mean that this land would be valued closer to $500 an acre.

Governor Underwood’s Commission on Fair Taxation was correct in recommending much-needed changes to the state’s Excess Acreage Tax.  As the legislature moves ahead with reforming our state’s tax code this year, they should consider reforming the state’s Excess Acreage Tax. This could not only incentivize economic development in West Virginia, but also provide a much-needed source of revenue as coal continues to decline in southern West Virginia. 

UPDATED

7 Things You Need to Know About Why Coal is Declining in West Virginia (3 of 7)

In the last post, I looked at the rapid decline in coal mining productivity in West Virginia. This post will show how the decline in productivity has played out over the last few years and how it is has resulted in West Virginia losing coal market share with other coal producing regions. 

#3 West Virginia coal is losing national coal market share

While coal’s share of electric power generation has declined nationally, West Virginia’s share of steam coal that is being used for electric power generation has also declined. In 2008, West Virginia shipped 97.7 million tons of coal to the electric power sector compared to just 51.8 million in 2013. Between 2008 and 2013, West Virginia’s share of U.S. coal being shipped to the electric power sector dropped from 9.6 percent to 6.6 percent. In contrast, Wyoming’s share of coal being used for electric power in the U.S. rose from 44.3 percent to 47.4 percent over this period and Illinois’s share grew from 2.3 percent to 4.4 percent. West Virginia’s shrinking share is even more dramatic when you look at the southern part of the state. In 2008, southern West Virginia accounted for 6.3 percent of the nation’s coal used for electric power generation. By 2013, southern West Virginia’s share had dropped to just 2.5 percent. This means that West Virginia is being out competed by other states for providing steam coal that is used for electric power generations in the United States.

 domestic coal by state

What about international coal markets?

West Virginia is doing much better here. Between 2008 and 2012, the state has increased the number of tons of coal it is exporting from 26.4 million to 47.5 million. As the table below highlights, this growth is driven primarily by the increase in southern West Virginia foreign exports, which has nearly doubled over this period. While West Virginia has seen growth in its coal exports, so have other states, most notably Illinois, Alabama, and Montana. As a share of total U.S. coal exports, West Virginia has seen a slight reduction between 2008 and 2012 of two percentage points. It is also important to recognize that most of West Virginia’s exports are dependent on the internal market for metallurgical coal which is highly volatile and is heavily dependent on growth rates of countries like India and China. 

 foreign coal by state 

Looking at the big picture, the share of U.S. coal being produced in West Virginia has shrunk considerably over the last 14 years. In 2002, nearly 15 percent of the coal produced in the U.S. came from West Virginia. Today, only 11.5 percent. As the graph below shows, this is driven by the relative decline in southern West Virginia coal production. The share of U.S. coal produced from northern West Virginia has risen over the last decade and a half, from 3.1 percent in 2002 to 4.3 percent in 2013.

coal market share

What this all makes clear is that the decline of coal production in southern West Virginia is happening as other coal basins and states have increased their market shares. There is a national ‘war on coal’ when other regions are out competing West Virginia and our production losses are being replaced by other states.

In the next post, I will look at one of the other central reasons why coal is declining in West Virginia –  the growth of natural gas. 

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.

Raising the Minimum Wage Deserves Attention

Yesterday, I had the privilege to discuss efforts to raise the minimum wage with Hoppy Kercheval on his Talkline show. Today, Hoppy followed up with this commentary, arguing that raising the minimum wage is bad economics because it wouldn’t actually help the working poor. But, the facts that Hoppy cites in his commentary don’t really support that argument.

Hoppy points to research from economist David Neumark, who says that 29% of the benefits of raising the minimum wage to $10.10 would go to families with incomes at least three times the poverty level (if David Neumark sounds familiar, he’s the economist whose work on the employment effects of the minimum wage isn’t terribly objective).

Neumark’s work largely agrees with the findings of the Congressional Budget Office, who said that raising the minimum wage would increase income by $5 billion for families below poverty, $12 billion for families between one and three times the poverty level, and $2 billion for families between three and six times the poverty level. So some of the benefits would go to families who aren’t desperately poor. But rephrase Neumark’s and the CBO’s findings, and they don’t sound all that bad: over 70% of the benefits would go to families below three times the poverty threshold. Not to mention that the CBO also found that raising the minimum wage to $10.10/hour would lift 900,000 people out of poverty, reducing poverty by 2 percent. 

It’s also worth mentioning that three times the poverty level still isn’t exactly living the high life. In 2012, three times the poverty threshold for a family of four was $70,476. That’s lower than the median four-person family income of $76,049. So, one could say that in addition to 70% of the benefits of raising the minimum wage flowing to poor families, most of the remainder is helping out the middle class, which I’m sure we all agree could use it. Doesn’t sound like “bad economics” to me.

We already know the demographics of who benefits from the increase in West Virginia’s minimum wage, and by-and-large it’s low-income workers supporting their families. An increase to $10.10 doesn’t change much. The average family income of a worker who earns less than $10.10/hour in West Virginia is less than $35,000. When you talk about raising the minimum wage, you’re talking about helping low-income families.

Finally, Hoppy is right that the Earned Income Tax Credit (EITC) is a very effective tool for fighting poverty and helping low-income families. But for a commentary all about how the EITC is preferable to minimum wage because it targets low-income families better, he’s been strangely silent on recent changes to the Child Tax Credit (CTC), which is closely related to the EITC. A bill passed by the U.S. House of Representatives and supported by Rep’s Capito and McKinley increased the maximum earnings level of the credit, while letting the reduced earnings minimum expire. In effect, the House voted to reduce the CTC for low-wage workers and increase it for high-wage workers.

7-22-14ctc-f3

While a single parent earning the minimum wage, working full time would no longer be eligible for the credit, couples making between $150,000 and $205,000 with two children would become newly eligible. The disproportionate changes to the CTC are far more egregious than the fraction of low-wage workers working in high-income families who benefit from a minimum wage increase. But it didn’t create much outcry from the likes of David Neumark and Hoppy Kercheval. Maybe because tax forms are dull and complicated and the minimum wage debate has a sexier ring to it.

Could Surging Steel Imports Lead to the Further Decline of West Virginia Manufacturing?

A new report from the Economic Policy Institute outlines the recent risk to the U.S. steel industry from a rapid increase in steel imports. According to the report, in facing the lack of demand in the aftermath of the Great Recession, steelmakers in other countries continued to add production capacity with government support. As the U.S. recovered from the recession, those countries have leveraged their excess capacity, exporting the surplus at below-market rates, with the U.S. as the major target for exports.

U.S. steel imports increased from 28.5 million net tons in 2011 to 32.0 million net tons in 2013, and have grown even more this year. Imports have also grown relative to domestic production and consumption. The jump in imports has led to a decline in the domestic steel industry, with falling production and income, along with layoffs or reduced wages for thousands of workers.

The steel industry supports over half a million jobs in the U.S., including 6,200 in West Virginia. And as we showed in our 2013 State of Working West Virginia report, the fates of the steel industry and the rest of manufacturing, as well as the coal industry, are closely tied. The steep drop in coal mining and manufacturing employment in West Virginia during the 1980s was directly tied to the collapse of the region’s steel industry.

Untitled

In the past, trade remedies have provided relief to the U.S. steel industry from the stress of overcapacity, excess supply, and subsidized steel exports, and their effective use can make a difference again. Other efforts, like West Virginia’s Buy-American proposal, would require the use of U.S.-manufactured products in taxpayer-funded projects in the state, encouraging domestic production over foreign imports.

Giant Step for Future Fund, but More Work Ahead

Late Saturday night, the Legislature passed SB 461 that created the West Virginia Future Fund. While this is an important step forward, the bill included the adopted house changes that I focused on last week. The most significant changes included a new funding mechanism and several conditions that have to be met in order to deposit money into the Future Fund. Unfortunately, these changes will very likely preclude any deposits made into the Future Fund for several years.

Instead of adopting the Senate version which deposited 25 percent of all natural gas and oil revenue above $175 million, the Future Fund will now receive three percent of general revenue severance tax collections on coal, oil, natural gas, limestone and sandstone. The three percent will not include local severance tax distributions or the $23 million that goes into the infrastructure fund in calculating the share that would be deposited into the Future Fund. In addition, the three percent does not include “natural gas liquids” which are expected to grow from $10 million to at least $35 million over the next few years. 

As discussed earlier, deposits into the Future Fund can only happen if Rainy Day Fund A (Revenue Shortfall Reserve Fund) is above 13 percent of the General Revenue Fund budget. As Senator McCabe said on Saturday night, this condition will not likely be met for many years because of the state’s revenue problems – which are mostly due to self-inflicted tax cuts. To give you an idea of why it will be so hard to meet this trigger, the chart below looks at a couple of scenarios.

RDF Projections

Currently, Rainy Day Fund A is 13.3 percent of the General Revenue Fund Budget for FY 2014. This will most likely drop significantly after the end of the week when the Legislature passes its final budget for FY 2015. The House plans to use at least $84 million from the Rainy Day Fund A for its FY 2015 budget (per the Governor’s request) to pay for Medicaid, while the Senate version of the budget would use $125 million from the Rainy Day Fund. This would put Rainy Day Fund A at 11.1 percent or 10.2 percent, respectively. So this means no deposits in the Future Fund in FY 2015.

What about in later years?  In order for Rainy Day Fund A to be at 13 percent in FY 2016 it will need an additional $140 to $181 million. Usually the only way money grows in the Rainy Day Fund is through deposits made from budget surpluses (80% of surpluses will now go into the RDF A) or interest accrued in the fund. The interest income from the fund would likely be no higher than eight percent, so it will take at least a surplus of $110 million next year (unless there are deep cuts to the budget) for a deposit to be made in the Future Fund. The same goes for the outer years. The only foreseeable way this could change is a boom in shale development beyond beyond what is baked into future budgets or some other type of economic miracle.

How can we fix this problem? Two actions: 1) the state desperately needs to increase its revenue base (e.g. increase tobacco products’ taxes) so it can fill in current and future budget gaps in order to stop depleting the Rainy Day Fund. Without this action, it doesn’t look likely anything will ever flow into the Future Fund; 2) combine both Rainy Day Funds (A & B) or alter the language in the code to include both funds in the trigger. That way, it meets the 13 percent threshold trigger. To strengthen the Future Fund, it also needs to include “natural gas liquids” or it could just say “all severance taxes” collected.

This all being said, the Legislature should be commended for taking a great step toward creating the Future Fund. Now we just need to be sure that it gets the funding it deserves and that it’s constitutionally protected.