Friday, July 10, 2015

Fiscal Condition Ranking

The Mercatus Center, a market-oriented think tank, has released a report ranking the fiscal condition of the 50 U.S. states. This is especially pertinent given the global state of public finances and the long-run viability of funding pensions and health care. Greece is dealing with the fallout of an overextended public sector and has been for the last five years. Meanwhile, the debt-to-GDP ratio of the U.S. has risen above 100% as of 2013. The solvency of the U.S. is not particularly worrisome given the low levels of interest at which the national government can borrow. However, individual states and municipalities have been running massive deficits within the U.S. This has led to some unprecedented bankruptcies and defaults. Although there have been numerous bankruptcy filings by counties, municipalities, and towns during U.S. history this collapse highlighted the magnitude of the problem in post-Great Recession America. The reasons many local governments are running deficits are very predictable: huge pension obligations; huge Medicaid costs; an assumed growth rate of state investments at unattainable levels (usually 8% or higher); high levels of state employment relative to private employment (less tax revenue to collect); an aging population that contributes less tax revenue. Many of these problems were caused and/or exacerbated by the 2008 financial crisis, but they all date back to governments over-promising benefits that they could not reasonably pay in the future based on current and future tax revenues.
West Virginia ranks in the bottom ten of the Mercatus ranking, 43rd to be exact. The state's "fiscal condition index," an aggregate of different statistics on solvency, is -1.2. For comparison Alaska, the best ranked state, has a rating of +8.26. Illinois is the worst ranked state at -1.86. Part of what is unsettling about West Virginia's public finance ranking is that many of the best ranked states have high amounts of natural resources. North Dakota, South Dakota, Alaska, Nebraska, and Florida all have either large amounts of energy resources (oil & gas), agricultural productivity, and/or natural beauty that attracts tourism. West Virginia has both high amounts of coal and natural gas activity and attractive tourism locales but still manages to be one the ten least solvent governments.

What details make the public finances of WV look bleak? The state actually did not run a deficit in the year this report was released, 2013. It had a per capita surplus of $116.65. The short term budget seems to be handled quite well. However, the state has about $6.1 billion in unfunded liabilities. WV has a ratio of Unfunded Liabilities per Personal Income of 9%. There are at least 17 states that have a liabilities per income ratio of 5% or less. Kentucky is in a much worse situation with 18% unfunded liabilities of their state's personal income, so WV is outperforming its neighbor there. WV's Current Account Ratio (Assets / Liabilities) is 2.05 whereas the national average is 3.37; the state is not too far behind average in that category. The total amount of WV pensions per state income is right on the national average at 0.29. Tax revenue taken in roughly matches the amount of state spending at a ratio of 0.18 of state income. Since WV is not a "bad" outlier in any one category it can safely be assumed that the state ranks in the bottom ten states in terms of solvency because it is consistently at or below average on the Mercatus statistics.
The relative position of WV in this list is more disheartening than the overall performance. South Dakota and Florida manage to have strong cash positions and high tax revenue despite having NO income taxes. They make up the revenue primarily through sales taxes. Similarly, North Dakota used its oil tax revenues to decrease its total debt position; West Virginia does not seem to have utilized its energy assets as well as North Dakota. West Virginia also has a high number of separate pension systems with eight. South Dakota has one - the South Dakota Retirement System. New York, one of the most populous states with a bad fiscal position, only has three separate pension obligations. If WV wants to manage its budget better it could start by consolidating the pension system and closing the unfunded liability gap. No immediate disaster appears in store for the state, but if public spending has to rise to meet the needs of the citizenry WV does not have a lot of cash to make that happen.
 Illinois we are not. But there is significant room for improvement.

Tuesday, May 12, 2015

Taxpayer Return for 2015

Tax Day 2015 has come and gone. Last year I wrote a post about taxpayer return on investment by state. Wallethub has produced a 2015 return analysis, so a year-to-year comparison can be made for West Virginia. The (moderately) good news is that WV climbed one spot up the rankings, from 46th to 45th best return on investment for taxpayers. The still bad (overall) news is that WV has one of the ten worst returns in government services per amount of taxes paid.
The state's "tax rate rank" fell from 18th to 22nd best. Wallethub ranks states by looking at the average state and local taxes and comparing them to the national average. For WV, the average figure was $5,457.  That is lower than last year, but enough states cut their tax rates so that WV dropped four spots in relative terms. To provide context, Alaska had the lowest rate at $2,993/person and Illinois had the highest at $7,719/person. Despite having a perception as a state with high tax rates, WV is at least in the top half of states with the lowest tax burden. When a lower cost of living than the national average is taken into account, this tax burden is even lower. But taxes did get marginally higher from 2014 to 2015.
The overall government services rank improved from 47th to 46th best. Surprisingly, Wallethub ranks our water quality number one in the U.S.
It is hard to tell where their data is coming from for this ranking. They note The Environmental Working Group (EWG) as a source, but I could not find a recent report from that organization. Thus, last year's chemical spill in Charleston was probably not factored into their analysis. On the other end of the spectrum, WV ranked near the bottom in hospital systems. 
This is an improvement from worst (51st) last year, but is still not good. Wallethub based this rank on a number of factors. One of them was the concentration of hospitals per population, which makes WV look bad. The average life expectancy and infant mortality rates are two other "outcome" based factors that went into their calculation. Out-of-pocket medical expenses and the average health premium payment were the other factors, along with a generic "public hospital system rank". Ultimately, there is only so much hospitals can do to improve the general health of the population, so life expectancy is a bit of a poor measure of the state's health care. The amount paid out-of-pocket also does not seem very causally linked to the system's quality. Regardless, the perception is still that WV citizens are getting a low return on taxes paid when it comes to health care.
The big picture has changed very slightly from last year. We are in the top half of states for least oppressive tax rates, but we are near the bottom in terms of government services quality. Reason would dictate that either the state's services improve dramatically, or taxes decrease a little bit (marginally). For example, a state with the worst government services should have a very low (maybe the lowest) tax rate. Whereas a state that is getting very high quality services can expect a high (maybe the highest) tax rate. With the 46th best services, WV citizens could argue that they should pay the 5th lowest tax rates (51 - 46 = 5). That would mean the average West Virginian pays about $4,000 in state and local taxes instead of $5,457. That is a reduction of around 25%. 
Unfortunately, taxes appear to be moving a little higher instead of a little lower. Unless that state has solid plans on how those extra dollars in tax revenue will improve services and outcomes for citizens, it should consider reducing the average tax rate. This is easier said than done. Politics will ultimately rule the day and stamp out any well-formed public policy analysis. But at least there are organizations like Wallethub providing a clearer picture to taxpayers. 
And it could always be worse. West Virginians could move to Michigan which combines one of the highest tax rates with the 45th best government services. High taxes and poor government services, that is a recipe for disaster. 



Wednesday, February 11, 2015

Employment & Wages Update

This is an update concerning the WV wages and employment with the most recent data from the Bureau of Labor Statistics (BLS). Historical data is only available up to the second quarter of 2014, which ended in June 2014. While the average U.S. state posted a gain of 1.56% in employment from June 2013 to June 2014, WV had negative employment growth of -0.3%. It was one of three states/territories to lose jobs over that period. The other two areas to have negative job growth were the Virgin Islands and Puerto Rico. This is a continuation of the weak employment recovery from the financial crisis of 2008. But it is disappointing that WV could not post even moderate positive employment growth over that 12-month time span, especially given the ability of every contiguous state to do just that.
Looking at the breakdown of employment growth and decline among WV counties shows great inequality. Doddridge County had job growth of +19% from June 2013 to 2014 to lead the state, while Mingo County had negative employment growth of -14.9% at the bottom of the list. Thirty-six of the fifty-five counties had flat or negative employment growth for this period. Counties with stagnant or negative employment included some of the counties with relatively high average weekly wages. Mingo County had the 3rd highest average weekly wage at $936, but had the worst job losses; Putnam County had the 5th highest weekly wage ($907), however it gained 0% employment. Kanawha County had -0.1% job growth with the 12th highest weekly wages of $830.
Unsurprisingly, most of the employment decline and growth is tied to natural resources. Coal mine closures in Mingo County are probably responsible for the majority of job losses. Legislation proposed to give tax credits to employers who locate on reclaimed mine properties is unlikely to have much of an effect. Tax credits may sound appealing, but if employers have no other reason to locate in a particular area (access to markets, natural resources, skilled workforce) they will not obey some politician's whim. On the other side of the spectrum, natural gas projects in the northern counties are adding to employment growth. This is powered by Marcellus Shale drilling and its support services, pipeline transmission, and electricity generators that are flooding those counties. That growth is not without negative side-effects, as some residents cope with increased truck traffic on local roads, consumption of large volumes of water from local sources, and load noises from drilling activity. The potential for explosions from highly pressurized gas, due to inattentive operators, and the constant worry of water contamination from the public will also continue to hamper the natural gas industry.
The search for new industries and employment diversification continues in WV. Natural resource exploitation, education, health care, and government work have offered the extent of employment opportunities in recent state history. That has landed WV with the 41st highest average weekly wage ($792) of 50 states. And it failed to contribute net job growth in the most recent period. More than tax breaks will be required to alter the state's employment picture. It will take a wide-scale change in workforce skills that attract existing companies and a thriving small business sector. That may not be possible to achieve with any set of policy tools.

Addendum: To be fair, employment has mostly recovered in WV since the 2008 recession. Seasonally controlled net employment is down from a 10-year peak of 715,677 in 2008 to 711,266 in June of 2014. The recovery of jobs seems to have leveled off since 2012 with declining employment over the last few quarters. The picture is not too bleak if we consider that from 2004 to 2014 employment in WV has increased from 694,322 workers to 711,266 workers - a gain of 16,944 net jobs.


Tuesday, November 25, 2014

Employment in WV

Many high school and college students struggle to understand the needs of the labor market as they are finishing their school years. This leads to a disconnect between employers and the work force that can result in reduced business activity and higher unemployment. Most readers will recall the lack of vision they had as high school students trying to pick a career path (the author certainly struggled). This problem needs to be tackled jointly by parents, schools, and businesses. Schools can go a long way to communicating what jobs will be available when students graduate. Education for its own sake is admirable, but preparing students for a work life is equally important. Businesses can reach out to schools and tell them what skills and workers are currently needed. They can communicate this with data and stories.
Having identified the problem, let us see what the current facts and figures say about employment opportunities in West Virginia. Presented below is a snapshot in time of the March 2014 employment picture in the state (BLS.gov data). For all private sector employment categories, Trade, Transportation, and Utilities leads the way by employing 23% of the WV workforce. 

Regardless of what you may have heard during election season, Natural Resources, and Mining is not a huge share of the state's employment at 5.7% of total private employment. Similarly, the Construction category accounts for only 5.5% of private state jobs. Manufacturing is a low source of employment at 8.6% although it is slightly higher than the previous two categories. Those three categories account for the almost 20% of employment that is associated with Goods Producing. The rest of private state employment, 80%, is attributed to Service Providing jobs. Education & Health Services are close behind Trade, Transportation, and Utilities with nearly 22% of employment. Together those two categories account for about 45% of the state's jobs. If you add Professional & Business Services (11.7%) and Leisure & Hospitality (13.1%), that group of four service providing categories accounts for 70% of all private work in WV.
That is the broad picture. If you are a student or unemployed West Virginian, you should probably look for work in one of those four categories. Education & Health Services probably consists of: nurses, doctors, health care administrators, private teachers. But the BLS data can be very specific within these categories. For instance, it might be beneficial to know that there were 7,534 jobs in home health care services for March 2014. Getting more detailed with the job numbers enables job seekers to get a feel for specific opportunities. The higher the employment, the more likely someone would be to find work in that category. Once a category of work is defined, a job search engine is a good place to start for finding specific job openings. Even more effective than internet searching is networking among friends and family. A large portion of workers learn of opportunities through social networks instead of official job listings. For students, this simple exercise can guide them in choosing courses and learning about industries while they are still in school.
The graph above looks at private employment only. Between federal, state, and local governemnt employment there are another 47,935 workers. These workers are considered separately because their wages come from tax revenue on private businesses. However, it may be beneficial for job seekers to know that nearly 48,000 government jobs currently exist and that the average annual wage for a government employee is above that of a service provider (broadly speaking). As you can see below, federal government positions pay considerably more than state and local jobs.

One thing that is not being considered with this "snapshot" is the trend of employment among categories. Looking at whether employment has moved up or down in each category over the past 5-10 years would allow us to make more definitive statements about where work is likely to be found. 

Friday, May 9, 2014

Taxpayer Return on Investment

My attention was turned onto a report that ranks states according to the returns they provide to taxpayers. Economist Scott Sumner at The Money Illusion makes the observation that states with no, or low, income tax rates tend to rank better with regard to their public services. He checked for a political bias in the ranking organization, but found that Republican and Democrat leaning states were evenly mixed throughout the rankings. The organization providing the rankings is called Wallethub. Their mission statement says they provide financial information for consumers and small businesses. The report was produced by professors of political science, economics, and public policy at various universities across the country.
So what does the report say about West Virginia? The state ranked 46th of 51 (D.C. was included) in return on taxpayer money. The good news is that the tax rate rank is not oppressive. West Virginia was ranked 18th, top 35%, in terms of how much taxes its citizens pay annually. Wallethub estimated that the average West Virginian pays $6,598 annually in taxes, which is 5% below the national average. The bad news is that our overall government services rank 47th, according to this organization.
There are a few graphics that break down the metrics by government service. West Virginia is featured in two of them.


That is interesting given the chemical spill that tainted Charleston's water supply in January 2014, but before that West Virginia had been nationally ranked with the best water quality. It is assumed they ignored the recent spill and looked at the larger picture of the state's past and future water quality when conducting the report. More troubling is that WV was ranked last in terms of quality hospital systems. The explanation for this is not readily available. One could reason that the lack of health care options in rural areas across the state lead researchers to rank the state last. Their sub-metrics in determining health care provision were: the number of state and local hospitals per 100,000 residents; a public hospital system rank; the average life expectancy; the infant mortality rate; out-of-pocket medical costs; and the average health insurance premium. The average life expectancy could be more due to lifestyle choices, but the other areas are somewhat within the state's purview. And it can be noted that the quantity of hospitals does not always mark their quality. Still, a low health rating certainly made WV look like a bad return on taxes invested.
However, there is a bigger point to be drawn from this report. Could West Virginia improve its quality of public services by increasing or reducing the tax rate? Given that the state already collects below the national average in taxes, one might say that raising the tax rate to the national average or beyond could give the government more resources with which to improve health services, reduce crime, or build infrastructure. This makes good sense, but the state by state picture muddies this clear reasoning a bit.

Look at how convoluted this graph appears. Putting the same data into Microsoft Excel shows that there is a small negative correlation (-0.22) between lower tax rates and higher government services. But it is far from clear that higher taxes necessarily provide a state with better government services.

West Virginia would hope to move downward on the above graph. That would indicate better public services. The trend line would indicate that increasing taxes marginally would help that. However, the chart shows plenty of states with low taxes and high government service rates. Look at the cluster of five states in the lower left hand corner that rank in the top ten in low tax rates and in the top twenty in government services. Those states are: Wyoming, South Dakota, North Dakota, Washington, and Colorado. Of those states, South Dakota, Washington, and Wyoming have no income taxes. On the other end of the spectrum, the state with the highest tax rate rank, New York, has the 25th best public services. So New York has high tax rates and is in the middle in terms of services. California has the second highest tax rate rank and is 38th in public provisions.
Complicating the relationship further are states with high tax rates and highly rated government services. Iowa, Nebraska, and Vermont all rank in the top ten highest tax rates and provide top ten quality public services. All three states have a progressive income tax that is steeper than West Virginia's.
So what is the lesson from all this data? Should West Virginia lower or increase tax rates? And if so, which ones should it lower or raise? The main moral seems to be that rates are not as important as quality decision making. The efficiency with which a state government spends money is more important than the amount collected. Finding cost effective ways to improve infrastructure, schools, air and water quality, and health services is the best route. That is easier said than done though. Building bridges or hospitals takes money. Increasing safety requires better training or more officers or both. And improving education starts with better teachers and teacher training. It requires as much dedication from the populace to provide these services as it does the state to facilitate them. Teachers and police officers taking pride in their work and looking for innovative ways to improve their community are just as important as the politicians hoping to effectively parse through the tax code.

Friday, April 18, 2014

More on Minimum Wage

Many states have taken time during their recent legislative sessions to pass higher minimum wage laws. Whether this is an attempt to keep pace with inflation (which is at historic lows), or battle income inequality is up for debate. I wrote two months ago about the state of inequality. Here are two graphs depicting: 1) the upward shift of the population among income brackets (less people in the lowest income bracket, more people in $50k-$200k range) and, 2) the higher concentration of wealth among higher income brackets (less wealth among lowest income bracket; $100k-$200k range grows; $1 million+ bracket grows).



As I mentioned at the time, these trends show a positive movement of the population up the income ladder with the consequence that more of the total state income is held by people making $75,000 or more. But are those making much less, like the minimum wage, cut out of this growth in prosperity?
The unemployment rate has dropped almost linearly from a peak of 17.4% in 1983, with reversals of trend coming after each recession. Widely held economic theory says that raising the minimum wage results in higher unemployment. But that can be difficult/impossible to tell when unemployment rates are much more heavily influenced by macroeconomic conditions (changes in preferences, globalization, technological innovation, etc.). Shifts in the nature of the labor force away from mining and manufacturing toward health care, retail, law, finance, and other technical jobs requiring computer skills ultimately produced new, different jobs that displaced some workers from the labor force while providing new sectors for other workers. Upticks in the unemployment rate seem to follow the path of recessions (crash of 1987, tech bubble, Great Recession of 2008).

By adjusting the state minimum wage by the inflation rate (taken from the Bureau of Labor Statistics CPI rate - table 24), we can see a fairly flat rate.

The current minimum wage of $7.25 is keeping pace with inflation though it is down slightly from a record peak of almost $8.00. Thus, increases to the nominal minimum wage have kept the real minimum wage steady, and increased it somewhat, since 1980. During this time, the unemployment rate of WV has dropped, subject to macroeconomic conditions in the broader U.S. economy. At the same time, the share of taxable income in WV has experienced a shift from earners making less than $50,000 to workers making $75,000 or more. The lowest taxable income bracket of below $30,000 in 1997 and below $25,000 in 2011 (the IRS changed the brackets for some reason) shows a movement of workers out of that bracket. A total of 46% of returns were filed for those making under $30,000 in 1997, while 25% of returns were filed for those making under $25,000 in 2011.
From this information it can be reasoned that workers making under $25,000, around the minimum wage, are not making less in inflation adjusted terms. Not only that, but more and more workers are not in this category. And lastly, that is why the share of total income of the bottom income brackets has dropped; not because they are earning less, but because of the upward mobility of higher earners.
In conclusion, there is an indeterminable relationship between unemployment and minimum wage. It may increase unemployment at the bottom of the income spectrum, but there is not clear data showing this and no way of inferring causality. The minimum wage has stayed constant, in real terms, as unemployment has dropped in WV over the years. It is currently above the 1980-2013 average of $6.55 in 2013 dollars. Increasing it now may slightly increase the share of income going to the bottom tax bracket, but it won't be considerable due to the broader shift of workers up the income brackets and their increasing wages.
This is an issue of importance being hotly debated at the global level. The release of Thomas Piketty's book: Capital in the Twenty-First Century has created a flurry of discussion over inequality and whether it is due to grow indefinitely in the future. Piketty's main thesis is that the growth rate on capital has been higher than the growth rate of labor over the broad course of human history. This makes the people owning capital assets (stocks, buildings, land, machines) wealthier than the people providing goods and services. He uses this point to advocate for a global redistribution of income. While the jury is out on his claim about growth rates, the story for a large amount of people over their lifetimes has been a rising standard of living as they jump up the income scale. The Great Recession may have called this mobility into question, but the numbers have yet to show that it has stopped. There is still wealth to be made for those that can and will work for it.

Friday, February 28, 2014

Race Track Subsidies

The WV House recently passed a bill to reduce subsidies to thoroughbred and dog race tracks. It estimates this would save the state $35 million and help reduce a budget deficit. Some delegates objected because they represent districts with dog breeders or race tracks. Do they have a point, or are subsidies to private enterprises like these an unnecessary expense to the state?
Tyler Cowen of George Mason University calls state "racino" legislation that allocates a percentage of gaming revenue to racing and breeding businesses a "triply stupid policy". Why such a harsh endorsement? The first trip up, in his opinion, is that there should not be a separate legal entity for a casino with racetracks, such as Mardi Gras Resort and Casino in Cross Lanes, WV. Secondly, he objects to the nature of such legislation as a response to competition between state lotteries and racinos. State lotteries like to bill themselves as great benefactors to local education. But the effects of all their spending on education is ambiguous while the revenue they generate is often extracted from the lower income residents of a state. And lastly, Cowen finds it bizarre that a private, for-profit enterprise should need state funding to survive. In his words, "how about spending the money on poor people, rather than on sectors which extract money from a disproportionately lower income clientele?"
Delegates arguing against this legislation are doing so to represent their breeders and race track workers. That is all well and good. But what is the cost-benefit of defending these subsidies? It seems fairly intuitive that if a company cannot operate without government subsidies perhaps it should not be in business. And if race tracks are losing out to competition from state lotteries, why not abolish the state lottery? Again, state lotteries extract revenue from lower income residents, on average, and frame their operations as benevolent by funding things like education. These lotteries could be replaced by so called "no-lose" lotteries run by local credit unions. Some states, like Michigan, already allow these "no-lose" lotteries where savings accounts are opened by players and the winners receive extra cash in lieu of each depositor gaining interest in their account. Britain already runs a form of this that they call "premium bonds". That program has been around since 1956.

So while we are reviewing race track subsidies, maybe it's time to throw in some lottery reform as well. It's food for thought.