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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.

 

 

Who Are the West Virginians Who Would Lose Coverage Under ACA Repeal?

A recent WVCBP report looked at many of the people who could lose health coverage from the repeal of the Affordable Care Act – including small business workers and those working in various industries. Last week, the Urban Institute released state fact sheets with more demographic information on this population – with details on income, age, race, education, and employment status.

Of the estimated 184,000 West Virginians who would lose coverage from repealing the ACA, 84 percent have incomes below 200 percent of the federal poverty level – which is considered the amount of income a typical family needs to make ends meet. Approximately 44 percent of those that could lose coverage are below the federal poverty line, which was $24,300 in 2016. If the ACA is repealed, the share of those below the federal poverty line without health insurance would grow fourfold, from 7 percent to 28 percent, according to the Urban Institute.

blog post aca repeal working families

Repealing the ACA would especially impact those in West Virginia without a college degree. Of the 171,000 adults who would lose coverage, 90 percent do not have a college degree. Approximately 91 percent are white, while 5 percent are black and 2 percent are Hispanic.

Among West Virginians who are expected to lose coverage, 73 percent are in working families. This figure is even higher for some families: 79 percent of children and 80 percent of parents who would lose coverage are in families with at least one worker.

 

What Will it Take for Coal to Make a Comeback?

Back in early May, President-Elect Donald Trump pledged to revive West Virginia’s coal industry and some school officials in Boone County say they are counting on this to help them keep schools open and save jobs. While it doesn’t need to be repeated here that this is highly unlikely (see here, here, here, and here), it is important, at least for posterity’s sake, and for those who believe it’s possible to revive the state’s coal industry, to see what that would have to look like.

According to the most recent forecast from West Virginia University, which does not include the now-unlikely implementation of the Clean Power Plan, the state is expected to extract under 80 million tons per year for the foreseeable future. Between 2000 and 2015, West Virginia produced between 98 million and 165 million tons of coal. The average tons produced over this period was approximately 144 million. Therefore it would be reasonable to surmise that for the coal industry in West Virginia to be revived production would have get back to at least 144 million tons per year. Or we could set the bar even lower and say coal production would need to return to at least 2015 levels or about 100 million tons per year.

wv-coal-projections

Historically, coal mining has been a source of relatively high-paying jobs for those without college degrees in West Virginia. Its decline has been a major factor in the state’s budget woes and its weak economy. It remains to be seen how, and if, Donald Trump will keep the promise he made to West Virginia voters to bring back the coal mining jobs that have been lost over the past several years.

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. 

West Virginia’s Jobs Crisis Continues in July

On Friday, the Bureau of Labor Statistics (BLS) released its employment and unemployment survey for July 2015 and the news for West Virginia’s economy continues to be bad. West Virginia not only has the highest unemployment rate in the nation at 7.5 percent, it is also the only state to have lost a statistically significant number of jobs since July of last year.

West Virginia’s economy has performed particularly poorly over the last six months. Between January and July of 2015, West Virginia has lost 22,500 jobs or about 2.9 percent of its job base, after adjusting for seasonal patterns. 

A Blip on Measuring Local Government Jobs?

According to BLS, about half, or 9,900, of the job losses since January 2015 were in local government, however, almost all occurred between May and June when the school year ended. Since about two-thirds of local government employment in West Virginia  is comprised of people who work for the school system, there is a good chance that this may be a blip in the data. Even though these numbers are seasonally adjusted, meaning BLS takes into account things like school schedules when adjusting the job levels, there is always a lot of volatility in measuring local government employment. As the chart below highlights, even when local government employment is seasonally adjusted, there is always a month or two in which there are large spikes in the data.local gov blip

While there have been recent news stories about local government layoffs due to the decline in the local share of coal severance taxes, we need to wait a few months to see if the data jump back up now that school is back in session.

Construction and Mining Still Shedding Jobs

Outside of local government, the sectors that have suffered the worst job losses are construction and mining. Over the last six months, the state has lost 4,000 construction and 3,400 mining jobs, largely due to the sharp drop in energy prices, especially natural gas, and the continuing decline of West Virginia coal production. Other sectors that lost a lot of jobs over the last six months include finance and insurance (-1,200), professional business services (-900), and leisure  and hospitality (-800).

joblossdec07

Since the beginning of the Great Recession in December 2007, West Virginia has had the third-worst job growth in the nation at -2.6 percent, behind only New Mexico and Alabama. Outside of Ohio, each of our neighboring states has more jobs today than before the Great Recession. West Virginia had 19,700 fewer jobs in July 2015 than in December 2007.

Back to the Future?

Moving from the establishment survey, which counts the number of jobs by industry, to the household survey that looks at unemployment, West Virginia’s doesn’t look any healthier than it did in 1980. The number of West Virginians employed and the size of the labor force is roughly what it was nearly 35 years ago. Similar to 1980, there are about 785,000 people in the state’s labor force and between 720,000 and 725,000 people employed.

 backto future

The only good news from July’s jobs report was that the state’s labor force has grown by about 5,000 over the last year and 7,400 over the last six months. Without this growth, the unemployment rate would have been lower, 7.1 percent compared to 7.5 percent. So, a higher unemployment rate is not so bad as long as there is growth in the labor force. That said, even at 7.1 percent, West Virginia still has the highest unemployment rate in the nation.

Time to Power Up

While an aging population and lack of population growth appear to be large factors negatively affecting employment, the state’s energy sector is being hit hard by low prices, competition, and public demand for clean energy. One way West Virginia policymakers could boost the state’s economy would  be to push hard for the White House’s POWER Plus Plan that includes over $5 billion in funding to coal states to help them diversify their economies and help coal miners retrain and retool. Letting politics and ideology get in the way of this investment would not only be a disservice to working families, but will ensure that our coalfield communities continue to decline and deteriorate. 

Recovery in Reverse: The State of West Virginia’s Economy

Andrew Brown has a good piece in the Gazette-Mail highlighting that West Virginia now has the nation’s highest unemployment rate. West Virginia’s economic recovery since the Great Recession (December 2007) has been bumpy but it now appears that the state may be entering a new downturn. Overall, West Virginia has lost 1.1 percent of its jobs base (8,700 jobs) since December 2007,  while the nation as gained 2.5 percent or 3.5 million jobs. In fact, West Virginia has fewer jobs today than it did in 2006. While the decline in coal jobs is one reason for the state’s poor economic performance over the last several years, other sectors are also performing poorly.

The economic recovery for both manufacturing and construction is well below the national average. West Virginia has lost 16.1 percent of its manufacturing job base, compared to 10.2 percent nationally, and nearly 23 percent of its construction job base compared to about 15 percent for the nation as a whole. The closures of coal-fired power plants in the state have also dragged down employment in the utilities sector while other states continue to add jobs. Most surprisingly, the state has lost a large chunk of jobs in leisure and hospitality while nationally these jobs have grown. The one bright spot for West Virginia has been job growth in business and professional services, which typically pay above average wages, and growth in government employment. 

jobgrowth by sector

The mining and logging sector, after initially adding jobs during the recession, has declined over the last three years as demand for coal and lower prices for natural gas have reduced jobs in both industries. However, it is important note that mining jobs over the last 25 years (1990) have averaged about 3.9 percent of total non-farm employment and today it’s just below this number at 3.8 percent. This tells us that the relatively poor performance of other industry sectors is also a large reason for West Virginia’s poor job growth in the economic recovery.

mining and loggingWVmininshare of wv jobs

One other bright spot in June’s unemployment numbers was the  increase in the state’s labor force, which pushed up the state’s unemployment rate. While it is great to see the labor force growing, it has a long way to go before it’s back to historical levels. At 782,000, the state’s labor force is down by 35,000 from its peak of 817,00 in 2009 and it’s smaller than it was in 1980, 35 years ago.

labroforve historica

While the state’s economic recovery is in reverse, it is important that policymakers take the important steps needed to help get it back on course. This would start by efforts to push more people and places out of poverty by enacting a refundable state EITC, investing more in higher education (instead of cutting it) and infrastructure, and avoiding the tax cut mistakes of the past. While national trends (e.g. energy prices) and federal policies have a much larger impact on our state’s economy, well-targeted state policies that invest in communities and educate our children can help us in the long-run to get back to stronger economic growth, and more better-paying jobs.

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.

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 *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) 

Will Tax Reform Work This Time?

Yesterday, the Joint Select Committee on Tax Reform met for the first time to start laying out the plan for comprehensive tax reform in West Virginia. Citing ALEC’s dubious Rich States/Poor States report, Senate President Bill Cole and House Speaker Tim Armstead said that West Virginia’s tax structure is broken and burdensome, and is holding back economic growth, and tax reform is just what the doctor ordered.

Now if all that sounds familiar, it should, because it all was said about less than ten years ago during West Virginia’s last tax reform effort. Under then-Governor Joe Manchin, West Virginia underwent tax reform. And then, as it is now, the complaint was that West Virginia’s tax system was too anti-growth, and put us at a competitive disadvantage. In particular, the Chamber of Commerce complained in 2006 that the tax responsibilities of business were too high, blaming our Corporate Net Income Tax rate and the Business Franchise Tax as the source of the state’s uncompetitiveness.

Over the next two years, the Chamber got exactly what it asked for as the Corporate Net Income Tax rate was reduced from 9.0% to 6.5% while the Business Franchise Tax was phased out and eliminated entirely.

rates

At the time, the tax cuts were widely praised by conservative anti-tax groups, who predicted great things for West Virginia. The Cato Institute called West Virginia’s tax reform the “most pro-growth tax reform” in the country, giving Governor Manchin an “A” grade for fiscal policy, while the Tax Foundation said that the state’s tax cuts would put West Virginia, “in a better position to compete regionally with Pennsylvania and Virginia and place itself in a better position nationally.

Not everybody was enamored, as Ted warned in 2008 that the tax cuts could prove costly, while doing little to grow the economy. The Center’s warnings went unheeded, as Chamber of Commerce President Steve Roberts quipped that Ted’s warning was his “opinion” and it, “doesn’t mean the opinion has any resemblance to reality.”

And as it turns out, Ted ended up being a whole lot closer to reality. The business tax cuts blew a huge hole in the budget, to the tune of $236 million this year alone. Business tax revenue will be lower in 2016 than it was in 1990, and the state has faced year after year of budget problems, problems that would have been worse if it weren’t for the fortunate timing of the Marcellus Shale boom.

revenue

 The 2006/2008 tax reform worked in one sense, in that it dramatically reduced the state’s business tax burden while improving our state’s “business tax climate.” But it failed to actually improve the state where it matters most: jobs. The chart below tells the story. While West Virginia’s business tax rate fell from 7.6% of gross state product in 2007 to 5.8% in 2014, and while the state’s business tax climate rank improved from 37th to 21st, annual employment fell by 39,000.

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Instead of competing better nationally, West Virginia has fallen further behind. While the rest of the country is setting records for job growth, there are not only 39,000 fewer West Virginians working than before the tax cuts began but also 11,000 fewer manufacturing jobs. To see the real impact of the tax cuts, just take a look at tuition at colleges and universities in West Virginia, which are on the rise as budget cuts to higher education, brought on by tax cuts, have taken hold.

Unfortunately, West Virginia’s policymakers seem intent on doubling down on this failed policy that hasn’t created jobs or made the economy stronger. The strategy couldn’t be clearer than when Senate President Cole talked about improving West Virginia’s ranking in ALEC’s “Rich States, Poor States” report. The blueprint for reform from the ALEC report, which has consistently failed to predict any sort of economic growth, is simple: take from the poor and middle class and give to the rich. It’s a recipe for economic inequality and declining middle-class incomes, all while depriving the state of the ability to invest in the future. Those policies have failed West Virginia already, and are failing elsewhere. We don’t need to give them a second chance. What we need to do, is move from austerity to prosperity by strengthening the middle class. 

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.