What is Holding Back Personal Income Growth?
General revenue collections for December 2013 ended up $24.1 million below estimates, and are down $81.5 million for the year. The biggest underperformer so far has been the personal income tax, which is currently $63.9 million below estimate. So what is the cause of its poor performance?
To understand why personal income tax revenue isn’t living up to expectations, let’s take a look at its source: personal income. According to the Bureau of Economic Analysis, total personal income in West Virginia has grown 2.8% over the past year (from 2012Q3 to 2013Q3, the most recent quarter). That’s pretty slow growth compared to the rest of the country. Nationally, personal income grew 3.6% over that time period, while West Virginia’s rate of 2.8% ranks us 46th among the 50 states and D.C.
So the state’s personal income growth is low, holding down revenue growth. But we can dig a little deeper in the BEA data to get a better idea of what is happening. One obvious source of personal income is wages and salaries. Using the BEA data, we can break down wages and salaries by industry to see where growth, if there is any, is occurring, and where it is not. The table below shows the five biggest industry sources of wages and salaries in the state for the past five quarters.
The five industries listed in the table: government (including federal, state, and local), health care, mining, manufacturing, and retail trade, make up more than 60% of the total wages and salaries in West Virginia. And two of the industries, health care and mining, which make up nearly a quarter of the state’s wages and salaries, are doing quite well. Wage and salary growth in the mining sector have grown 5.4% over the past year, nearly twice that of the total, while wages and salaries in the health care sector have grown almost 10%.
On the other hand, growth in manufacturing and retail are slower, both below average, both below 2%. But the real interesting story is in the state’s biggest source of wages and salaries – government. Wages and salaries paid to public employees, from federal workers to school teachers, make up 21% of all wages and salaries in the state. And income from this source has shrunk over the past year, by 0.5%, a loss of $32 million.
The decline of public employee wages can be seen at all levels of government. State and local government wages and salaries are down 0.3%, while federal government is down 0.7%. Military wages and salaries are also down by 3.3%. And it shouldn’t be a surprise that the public sector is faltering. The sequester cut $85 billion from the federal budget on March 1, 2013, and government wages and salaries in West Virginia fell by nearly $80 million the next quarter. Add on to that the economic drag the sequester had on the economy, and you’ve removed a significant chunk of the state’s tax base. So remember, when the lack of revenue leads to more state budget cuts this year, it was federal budget cuts that helped get us here in the first place.