Saturday, December 22, 2012

EYES THAT DON'T LIE (Pub Date 12/29/2012)

Richard Pryor famously joked about a husband caught in bed with another woman by his wife. Rather than try to explain the inexplicable, the husband indignantly denies having an affair and even the existence of the woman beside him in bed.

“Who you gonna believe, me or your lying eyes?” he demands.

That is also the approximate reaction of West Virginia Commerce Secretary, Keith Burdette, to a recent New York Times story that shows West Virginia hands out $1.57 billion annually in tax exemptions, credits, and other subsidies to businesses with the ostensible goal of stimulating economic growth and jobs.

The result? West Virginia has had no net job growth in more than a decade.

The Times report, researched and written by Louise Story, is important because, if it’s accurate, West Virginia gives away more than a third of its annual tax revenue even as the state cuts services for a population that is among the poorest, least educated, and least healthy in the nation.

That’s probably why Secretary Burdette felt compelled to respond to the Times story. As reported by the Associated Press and Tom Miller in his “Under the Dome” column, Burdette told the Legislature's Joint Commission on Economic Development and the Joint Committee on Finance that the Times article was “poorly researched and reported” and presented a “woefully inadequate picture” of the state’s use of tax incentives.

Burdette went on to say that the state issued only $83 million in tax credits last year and that $1.12 billion in sales tax exemptions shouldn’t count as subsidies because the exemption is a standard piece of tax policy that exists in many states. The purpose is to avoid “double taxation” on intermediate goods and services that would otherwise be taxed again on sales to end-users. Moreover, Burdette argued, the $1.12 billion figure was exaggerated because the Times chose to report on a year, 2009, when power companies were making unusually large purchases of pollution control equipment. For these reasons, Burdette concluded, suggestions that West Virginia is second in the nation in the level of subsidies provided to business are misguided.

However, as impressive as Burdette’s argument sounds, it’s really nothing more than a complex if less funny variation on, “Who you gonna believe, me or your lying eyes?” Here’s why.

First, Burdette didn’t actually question the accuracy of the figures in the Times report. He was relegated to contextual objections because the Times supplemented its report with an online database that lists and quantifies each of the credits, grants, and other subsidies that comprise the $1.57 billion total.

To address the question of whether the $1.12 billion sales tax exemption counts as an incentive, I’ll turn to another Sean O’Leary.

Sean O’Leary, the smarter, is a policy analyst at the West Virginia Center on Budget and Policy. In a recent blog post, he makes three points. First, the sales tax exemption, or “direct use exemption”, applies only to specified businesses and industries, not all. Second, the state’s 2010 Tax Expenditure Study explicitly says that, in addition to avoiding double taxation, the direct use exemption exists to “encourage investment in equipment and facilities by qualified industries.” Finally, while most states have comparable policies, not all do.

In summary, O’Leary writes, “The direct use exemption meets all the definition(s) of a tax incentive: it is a tax preference for certain taxpayers engaged in certain activities, it is designed to encourage those activities, it saves businesses money compared to other states, and it deprives the state of a substantial amount of revenue.”

O’Leary also addresses the question of whether the $1.12 billion in sales tax exemptions in 2009 was an aberration as Keith Burdette claimed. He writes, “The sales tax exemption is examined every three years, and the 2007 Tax Expenditure Study valued the direct use sales tax exemption at $1.1185 billion, with only a 4.9% increase from 2007 to 2010, which suggests that the 2010 figure was not excessively inflated.”

In other words, The New York Times was right and, along with O’Leary, provides documentary evidence to prove it. West Virginia passes out $845 in business subsidies for every resident of the state and, if these incentives were listed as an expenditure in the state budget, they would constitute the single largest line item exceeding even education and healthcare.

Plus, there’s another aspect of the story that has gone largely unaddressed – the state’s unwillingness to share information about the business incentives it doles out and an associated absence of accountability.

In September the West Virginia Center on Budget and Policy prepared a presentation that concluded the state’s “Tax Credit Review and Accountability Report” fails to provide data or analysis to determine if tax credits lead to additional jobs or economic impact, is only published every three years, includes only four business tax credits out of dozens of programs, and does not disclose the recipients of the credits.

Meanwhile, the New York Times database lists nineteen incentive programs for which the Commerce department refuses to make spending information available. That means the $1.57 billion figure is a floor rather than a ceiling on how much West Virginia metes out to businesses.

When asked to provide information about the missing nineteen programs and any information refuting data presented by the Times, Keith Burdette and the state Development Office chose not to respond.

Maybe they’re afraid we’ll believe our lying eyes.

Sean O’Leary can be contacted at seanoleary@citlink.net. A version of this column containing links to references and statistical sources may be found at www.the-state-of-my-state.com.

Thursday, December 13, 2012

THE EMPEROR HAS NO NATURAL GAS BOOM (Pub Date TBD)

On December 10th Governor Earl Ray Tomblin convened his annual Governor’s Energy Summit at which leaders from industry, academe, and government gathered to studiously avoid addressing the only question that should have been on the agenda. Why has West Virginia’s natural gas boom so far proven to be an economic non-event?

You remember the hype. The process known as fracking would enable drillers to tap West Virginia’s vast Marcellus shale natural gas reserves generating tens of thousands of new jobs and hundreds of millions of dollars in new tax revenue that would put the state on the road to sustained economic prosperity. “Game-changing” was a favorite descriptor among politicians and pundits.

But an accidentally more accurate description was uttered when a state official called the prospects, “mind boggling”. That’s because a comparison of the boom’s actual economic effects to those that were predicted suggests that minds were indeed “boggled”.

The problem isn’t that that natural gas production hasn’t grown as predicted. It has. Since 2008 volume has risen by 87%. But, the jobs, tax revenues, and economic prosperity that were supposed to grow as well are an altogether different story.

In November Workforce West Virginia reported that since 2008 oil and gas employment has risen not by tens of thousands or even by 1,000. Just 916 jobs have been added – less than 10% growth in four years. And the severance tax that was expected to produce tens of millions of dollars in new revenue has grown not at all. Despite the huge rise in production, severance taxes in 2012 are no greater than they were in 2008.

But, if the effects on the state’s economy aren’t great, surely the counties where drilling is concentrated must be prospering. The State Journal recently reported that four counties – Marshall, Wetzel, Doddridge, and Harrison – account for 87% of Marcellus shale gas production in West Virginia. Are they booming?

Since 2005, just before the dawn of the Marcellus shale era, the combined populations of these four counties have grown by 1,001 people – less than 1%. The size of their workforces has actually declined by almost a thousand. And the number of jobs has dropped by more than 2,000, causing the combined unemployment rate to rise from 4.4% to 6.9%.

Yes, but we’re just coming out of recession, so aren’t the Marcellus counties at least doing better than the rest of West Virginia where there is little drilling activity?

No.

The rest of the state has actually experienced slightly more population growth and less job loss. And, while the unemployment rate in these four counties is half a point below the state rate, it was half a point lower before Marcellus drilling began.

In short, by every important metric, West Virginia’s Marcellus shale natural gas boom has failed to produce any measurable benefit for the people of West Virginia.

Why?

It’s hard to quantify the dynamics underlying a phenomenon the existence of which few are aware or willing to admit -- least of all the captains of industry, government, and academe who sold us on “the Marcellus Miracle” and, in most cases, continue to believe in it. But, four factors almost certainly play roles.

First, amid the glut of inventory brought about by fracking, the price of natural gas dropped even more than the volume increased, which explains why severance taxes failed to grow. It also means that property owners’ royalty checks are much smaller than they had hoped.

Second, many landowners who receive royalties don’t live in West Virginia. The last study I could find on absentee land ownership was done in 1981 and, at that time, a majority of the state was owned by out-of-state individuals and corporations while 15% was owned by the government, which means that residents of West Virginia owned only about a quarter. There’s little reason to think the situation has improved and much reason to suspect it has worsened.

Third, companies doing the drilling and their investors are almost entirely out-of-state entities, so any profits go out-of-state as well.

Finally, many and probably most of the drilling jobs that have been created are held by out-of-state workers.

If some of this sounds vaguely familiar, it’s because West Virginia has seen this picture before. In our southern coalfields, as much as 80% of the land is owned by out-of-state interests and the historical result has been a massive repatriation of wealth that has left those counties among the poorest in the nation despite their mineral treasure.

Still, there are some flickers of hope that West Virginia’s natural gas boom will not be a replay of the state’s dismal experience with coal. Gas prices may rebound a little, although not to the degree that many expected even a year ago. And, as the Clarksburg Exponent Telegram recently reported, some companies are beginning to locate headquarters and natural gas processing centers in West Virginia, which may finally produce some job growth.

But, the problem of out-of-state ownership of land and production is immense and structural, meaning wealth will continue to drain from the state. For this, there is no market solution and government’s ability to address the problem is limited. Yet, if the problem isn’t addressed, future phases of West Virginia’s gas boom may be as barren as the current phase has been.

That’s why it’s time for the exaggerations about the economic impact of natural gas in West Virginia to end and the hard work of finding solutions to begin.

Sean O’Leary can be contacted at seanoleary@citlink.net. A version of this column containing links to references and statistical sources may be found at www.the-state-of-my-state.com.

Wednesday, December 5, 2012

THE DEFINITION OF A SCHMUCK (Pub date 12/15/12)

An old joke tells us, “Only schmucks pay retail”, a humiliation you know if you’ve had a vacation ruined by some twerp sitting next to you at a cruise ship bar delightedly boasting that he paid only half of what you did for the cruise. Sometimes schmuck abuse is elevated to a moral principle. I used to have a boss who would raise prices on foolish clients – charging “stupid fees” he called it – on the grounds that doing so reallocates money to those who use it wisely – meaning himself – thereby increasing economic efficiency.

But, to be a really big schmuck, that is, someone who squanders huge sums of money unnecessarily and without benefit, you have to be either really rich (however briefly) or a state – West Virginia for instance.

The New York Times recently published, "United States of Subsidies: a series examining business incentives and their impact on jobs and local economies”, by Louise Story, Tiff Fehr, and Derek Watkins. The centerpiece of the series is a study that quantifies the amounts that states lavish on businesses in the form of incentives, subsidies, loans, grants, and other inducements ostensibly to generate commerce and create jobs.

Not surprisingly, the results of these inducements are frequently less than those predicted by the politicians and bureaucrats who promote them and the businesses that receive them. That may explain why West Virginia, a state with zero net job growth since the year 2000, is second among all states in per capita subsidies.

According to the Times study, West Virginia provides $1.57 billion – yes, that’s “billion”, not “million” – in subsidies and tax abatements to businesses every year. That’s $845 for every man, woman, and child in the state. It’s equivalent to 37% of the state’s base budget and more than we allocate for education, or Medicaid, or roads, or prisons. In short, if business tax incentives were listed as an expenditure, it would be the state’s single largest item in the budget.

By way of comparison, none of the states that border West Virginia spends even half as much. Pennsylvania is the next highest at $381 per person. As for the others, you have to add together Maryland ($96), Virginia ($161), Ohio ($281), and Kentucky ($324) in order to match West Virginia’s generosity.

And West Virginia’s use of tax incentives isn’t necessitated because we start with unusually high tax rates. The Tax Foundation’s 2013 ranking of state business tax climates rates West Virginia 23rd in the nation, ahead of all those neighboring states except for Pennsylvania, which comes in 19th.

So, what has our munificence won us, what has it cost us, and what does it mean?

As mentioned earlier, West Virginia has had no increase in the number of jobs in the state in the last 12 years. That’s the period during which the state became most aggressive in cutting business taxes and extending incentives. While one can argue that conditions might have been worse in the absence of these measures, there’s a stronger argument that the measures made little difference.

Peter Fisher, Research Director at the Iowa Policy Project, recently published an analysis showing state and local tax rates are not significant determinants of business growth. The reason is that these taxes make up a tiny fraction of business’ operating costs. Business decisions about where to locate and whether or not to expand are far more influenced by factors such as demand for products and services, the availability of a qualified labor force, access to raw materials and suppliers, and infrastructure.

In fact, unless those needs are met first, the question of taxes doesn’t even come into play. And, when it does, it’s in the context of operating costs. In that area, West Virginia already offers wage and utility rates that are 20% below the national average – a market-based financial incentive that far outweighs any advantage to be offered through tax incentives.

Meanwhile, the loss of $1.57 billion a year in prospective business tax revenues has dire consequences for the rest of us. First, it’s forcing West Virginia to make significant cuts to education and infrastructure at a time when, if we hope to attract and grow businesses, we must figure out ways to meet companies’ needs for a skilled workforce, infrastructure, and an improved quality of life.

Second, West Virginia’s tax burden is being shifted from businesses, many of which are out-of-state interests, to individual taxpayers. Since 2005, while the portion of state revenue collected from business income and franchise taxes has dropped from 13% to 4%, the portion collected from West Virginia families has risen from 30% to 42%.

And for what? Economic development? Or is it just corporate welfare? The problem is we can’t tell the difference.

That’s because, while handing out corporate goodies, West Virginia does almost nothing to track the results, either to hold companies accountable on those rare occasions when they actually make commitments to get the incentives, or merely to determine the state’s return on investment.

In a way that’s the worst aspect of the fiasco because, by itself, trying and failing to nurture business growth through tax incentives doesn’t make our political leaders schmucks. It just means they’ve made mistakes. They become schmucks when, because they require no accountability, they don’t know they’ve failed and, consequently, go on repeating the same mistake indefinitely or, in West Virginia’s case, about 1.57 billion times per year.