Corporate Tax Cuts to Stimulate Job Creation: They Never Work

We should be open to any legislation or tax policy that stimulates job creation. But we should also be on guard against legislation or policy that merely sounds good, without subjecting it to a rigorous evaluation of its costs and benefits. Among the West Virginia Legislature’s new Republican majority, it is fashionable to call for corporate tax cuts as a way to unleash job creation. Unfortunately, this thinking is more the product of ideology than of solid analysis. The idea of corporate tax cuts to stimulate job growth has one main problem – it never works.

New Senate President Mitch Carmichael (R-Jackson, 04) recently formed a Select Tax Reform Committee in the Senate, saying

We must examine every method to improve the West Virginia economy, and that certainly will include         comprehensive tax reform. Our focus is to create private sector jobs and opportunities for our citizens… Other states have achieved significant growth as a result of fundamentally overhauling their tax code. Why wouldn’t the West Virginia Senate pursue tax strategies that have a proven record of success in other states?

West Virginia is now facing a $400 million budget deficit. If the tax reform Sen. Carmichael describes will raise revenue now, he and his colleagues can be political heroes. On the other hand, if he intends to cut taxes – losing present revenue – in exchange for uncertain future job growth, he is on a fool’s errand.

West Virginia has relentlessly cut corporate taxes in the past decade. In the period 2007 to 2014, the Legislature reduced the business franchise tax from .7% to zero and reduced the corporate net income tax rate from 9% to 6.5%. Yet West Virginia is still a laggard in job creation and there are many of our fellow citizens unable to find work. It is regrettable that our leaders do not demand a thorough evaluation of the effectiveness of these earlier tax cuts before embarking on new ones. But West Virginia is not alone in this.

Our neighbor Ohio has shot itself in the foot over the last decade by cutting corporate taxes almost to zero in the hopes of stimulating job growth with no real success. Between 2005 and 2010, Ohio sharply reduced income tax rates and eliminated Ohio’s corporate income tax. While the country as a whole has gained jobs since then, Ohio has lost jobs. More recently, Ohio passed a tax-cut package that included income tax reductions and business-owner tax breaks. Yet Ohio job growth continues to lag the country as a whole.

Then there is the Kansas experience.  Led by Republican Governor Brownback in 2013, the Kansas Legislature passed a series of tax cuts on owners of “passthrough” businesses that opened up a $420 million budget deficit.  The Topeka Capital Journal later reported the rueful comments of one Republican legislator, who said that the evidence didn’t exist that the tax cuts led to meaningful growth and probably never would.

Why don’t corporate tax cuts work to stimulate job growth? There are several reasons.

  • tax cuts are like handing corporations a big check with no requirement that they spend the money on creating more jobs;
  • often the tax cuts go directly to a corporation’s bottom line to be distributed to out-of-state shareholders and other owners;
  • if the tax cuts are actually spent by corporations they can easily be spent in other states, or in ways that do not create jobs, such as part of bloated CEO pay;
  • corporate income taxes are such a small part of the cost of doing business in a particular state that cutting taxes will not be an inducement to locate new business in West Virginia versus other states; and
  • corporate tax cuts increase the likelihood of budget deficits that will result in spending cuts on public services that corporations value in locating new business, such as police, fire protection, good schools and recreation.

Of course, we expect our Legislature to adopt a workable budget, filling the deficit hole while generating enough to sustain and expand the important work that only government can do. None of us should criticize the Legislature for action and innovation. But corporate tax cuts are not the answer if we simply hope they will stimulate job creation.

If tax reduction is so important, why not link it to job creation in some accountable way? Why couldn’t we offer a tax credit to small business that would be eliminated for that business the next year if it has not created a certain number of new jobs? This scheme is familiar to state and county development authorities because it is sometimes used in the arrangements with corporations that receive tax inducements to open a new factory. And it would be similar to the “pay for performance” that corporations love. But in this case if corporations don’t perform by creating new jobs, they don’t get paid with state tax revenues.

The West Virginia Workplace Freedom Act

In early February 2016, West Virginia became the 26th state to adopt a “right to work” law, called the Workplace Freedom Act. The new law does not simply prohibit an employer and a labor union from requiring membership in the union as a condition of employment. It goes further and also forbids requiring an employee to pay any dues or fees to a labor union as a condition of employment. The law was vetoed by Governor Tomblin on February 12, 2016 but that veto was overridden by the Legislature on the same day. The new law was to take effect July 1, 2016.

Outlawing any required fee payment to a union is a significant step for West Virginia to take. It reveals that our Legislature was not so much interested in protecting employees from compulsory membership in an organization they might not support, as it was in financially crippling labor unions. In so doing the Legislature advanced a conservative political agenda of long standing. It is the financial harm created by the new law that led the West Virginia AFL-CIO and a number of individual unions to seek an injunction in Kanawha County Circuit Court. The injunction was granted on August 11, 2016 and the implementation of the law postponed until a full decision can be rendered.

To understand this legal and political struggle, a little background is necessary. Unions can gain the right to represent employees only within a bargaining unit — a plant or department. Being an employee in a bargaining unit is not the same as being a dues-paying member of the union. But once a union becomes the bargaining representative of employees in a unit, it has the right and obligation to bargain for and prosecute grievances for all of them, whether or not they are dues-paying members. This frequently involves large sums for trained staff, arbitrators, meeting halls, offices, libraries, and more.

Over time, union security contract clauses were developed requiring an employee to become a dues-paying member of the union within a certain period after employment. If he refused, the employer was contractually bound to terminate him. But because unions engage in political as well as bargaining activity, federal courts refashioned the deal so that no employee is obligated to pay dues for political activity to which he does not subscribe, but can be required to pay a “fair share fee” to cover the collective bargaining and grievance activity the union must provide him. This was the status of the law in West Virginia until last year.

In 1947, Congress allowed individual states to forbid union security clauses altogether. Almost immediately, states in the south and west passed “right to work” laws. Recently as the strength of Republicans grew in state legislatures, RTW laws passed even in industrialized states like Wisconsin and Michigan. Not wanting to be outdone by their conservative brethren elsewhere, the West Virginia Legislature took up the issue in January 2016. The Legislature commissioned a study by WVU predicting the effect of a RTW law on union membership, job growth, GDP growth and wage growth in West Virginia.

The method used in the WVU study was to compare the group of states with RTW laws to the group without them on these various economic factors for the period 1990 to 2012. To determine whether the RTW laws actually caused any of the observed differences, a complicated regression analysis was used. The WVU study predicted that the rate of union membership in West Virginia would fall by around 20% as a result of the adoption of an RTW law. The study also predicted a long term .4% employment growth benefit and a .5% annual increase in GDP growth.

But the WVU study found no causal relationship between RTW laws and wage growth, even though nearly all other studies like this have found a robust negative effect created by RTW laws on state-wide wage growth. For example, a 2015 study by the Economic Policy Institute found workers in RTW states earned $1,558 less per year than similar workers in non-RTW states. These results did not apply just to employees covered by a union contract but to all employees. “Where unions are strong, compensation increases even for workers not covered by any union contract, as nonunion employers face competitive pressure to match union standards.”

Behaving as if the modest coercion involved in requiring an employee to pay a fair share fee was an outrageous affront to liberty, the Legislature blew past the economic benefit to all workers that exists in non-RTW states. The Workplace Freedom Act states that a person may not be required to “pay any dues fees, assessments or other similar charges . . . of any kind or amount to any labor organization.”

The legal attack by the AFL-CIO on this law is that the state has unconstitutionally deprived unions of their property without just compensation by prohibiting them from charging nonmembers the proper fee for the services unions are required to provide. Ken Hall, President of Teamsters Local 175, testified that members would end up paying an extra $172 in union dues to cover services provided to employees who benefitted from them but refused to pay. These arguments were enough to convince Judge Jennifer Bailey of the Kanawha County Circuit Court to enjoin implementation of the law until a full decision could be made in the next few months.

It is hard to predict how this legal battle will be resolved. Like any human institution, labor unions have had their share of bureaucracy, incompetence and corruption. They have also had their share of success in advancing the interests of working people. Unions improve the economic lives of members and non-members alike. Progressives don’t generally support coercion, but requiring a fair share fee from non-members who benefit from union representation seems appropriate. What is really at stake is not some grand concept of freedom and liberty. It is instead the economic viability of unions and the Republicans in the Legislature know this. Without viable unions, corporate power to set compensation will be virtually unchallenged and working class compensation will continue to stagnate.

More Corporate Welfare In the Midst of a West Virginia Budget Crisis

Several committees met December 5, 2016, as part of the Interim Session of the West Virginia Legislature. The pall of a significant revenue shortfall hung over everything.

At a meeting of the Standing Committee on Education, Chancellor Sara Tucker of the Community & Technical College system did an admirable job explaining how the institutions in the system were adapting to the reduced revenue situation. Community colleges have begun a program of sharing personnel resources – not every college needs its own Human Resources Director or General Counsel. She was followed by Dr. Jerome Gilbert, President of Marshall University, who described the measures taken at his institutional to deal with the sharp decline in state funding.

Immediately following that meeting the Joint Committee on Tax Reform, Subcommittee A gathered to hear two presentations. It was almost as if this Subcommittee was functioning in an alternate universe. Here’s why.

Incoming Senate President Mitch Carmichael (R – Jackson, 04) has announced a goal for the upcoming session to make West Virginia’s tax structure “competitive” with surrounding states. In a statement reported in the State Journal on December 4, Carmichael said that cutting taxes on manufacturer’s equipment and inventory will be considered. This and other measures would serve the laudable goal of “creating an environment that the private sector can hire people and put them back to work.”

At the Subcommittee meeting, Mark Stowers, Vice President of Asset Management for Alpha Natural Resources made a presentation about corporate property tax on mining machinery. Alpha is one of the largest coal companies in the country and operates numerous mines in West Virginia. Stowers was plain spoken and direct about what Alpha wanted.

West Virginians pay personal property tax on vehicles they own on July 1 of each year. It’s the same for corporate equipment and machinery. Stowers explained that not all of Alpha’s mining machinery is in use at once. Of course, if a piece of equipment is in productive use at a West Virginia mine on July 1, Alpha pays the property tax on it. But if the equipment is idle, Alpha moves it out of state before July 1 to avoid the West Virginia property tax. Virginia and Kentucky have no such tax.

Stowers described a depot in Wise, Virginia with 900 pieces of equipment, most of which was moved there to avoid West Virginia property tax. This is not obsolete equipment. Stowers claimed simply that it was expensive to transport that equipment back to West Virginia, implying that Alpha might decline to move it back here to start up a new mine job.

One would expect an official of a large taxpayer to be reticent about admitting conduct that was undertaken for the sole purpose of tax avoidance. Under West Virginia law, a willful attempt to evade taxes in any manner is a felony, although it is unclear whether this provision applies to corporate personal property tax. But none of the legislators seemed concerned in the least that moving equipment out of state to avoid tax might be inappropriate. In fact they were generally sympathetic. The discussion focused on how the West Virginia Code could be amended to provide relief to Alpha and other similarly situated corporations.

For example, Sen. Mike Hall (R – Putnam, 04) mused aloud about whether the Code could be amended so that idle machinery could be valued at little or nothing, thereby producing tax revenue of little or nothing. Del. Rupert Phillips (D – Logan, 24) declared that the coal industry was “near and dear to my heart” because of the number of coal industry jobs in his district. The one Panhandle legislator present, Del. Eric Householder (R – Berkeley, 64), appeared to be busy with his cell phone and had nothing to say.

With the express intent to avoid corporate property tax Alpha is playing a shell game that ordinary citizens could never get away with. Imagine moving your automobile to a county just over the state border on June 30 and then claiming that no property tax was owed because it was not within a West Virginia county on tax day. This would be a non-starter because the law taxes “all personal property belonging to persons residing in this state, whether such property be in or out of the state.”

If providing Alpha and other coal companies with property tax relief had the effect of increasing employment or coal production upon which the state’s severance tax would apply, then maybe there would be some logic to the property tax relief. But shouldn’t that first require some hard evidence that the property tax is actually causing coal companies to decline mining opportunities in West Virginia? Are we simply going to take a coal company’s word for it? A real loss of severance tax, if there is one, could be compared with the amount of revenue to be lost from cutting corporate property tax and then a proper policy choice could be made. But there was certainly no inquiry of this sort from the Subcommittee.

Really, in a time of starkly reduced revenue for all the important things the West Virginia government does, why does our Legislature spend any time considering tax relief for coal companies? If West Virginia actually collected the property tax on machinery taken out of state to avoid tax, instead of letting coal companies get away with this shell game, imagine how useful the revenue would be for our universities and community colleges. Relief from property tax sounds like just another example of corporate welfare we simply cannot afford.

Trump Voters Now Have Second Thoughts on Repealing Obamacare

The Kaiser Family Foundation has issued the results of a new poll concerning repeal of Obamacare. Anyone with a pulse knows that repeal has been made a rallying cry for Republicans in Congress, in fact their centerpiece in the ideological attack on the Obama administration. But it appears that Republican ideology has gotten out ahead of the desires of voters, who are not as much interested in ideology as they are in understandable, affordable and stable healthcare.

When asked about a series of health care priorities for President-elect Trump and the next Congress to act on, repealing the ACA falls behind other health care priorities. Two-thirds of the public (67 percent) say lowering the amount individuals pay for health care should be a “top priority” for President-elect Trump and the next Congress. This is followed by six in ten (61 percent) who say lowering the cost of prescription drugs should be a “top priority,” and nearly half (45 percent) who say dealing with the prescription pain killer addiction epidemic should be a “top priority.”

When given two competing approaches to the future of health care, six in ten Americans (62 percent) prefer “guaranteeing a certain level of health coverage and financial help for seniors and lower-income Americans, even if it means more federal health spending and a larger role for the federal government” while about one-third (31 percent) prefer “limiting federal health spending, decreasing the federal government’s role, and giving state governments and individuals more control over health insurance, even if this means some seniors and lower-income Americans would get less financial help than they do today.” This level of support  for federal healthcare spending is the stake in the heart of the conservative ideological vampire.

Overall, 49 percent of the public think the next Congress should vote to repeal the law and 47 percent say they should not vote to repeal it. But of those who want to see Congress vote to repeal the law, a larger share say they want lawmakers to wait to vote on repeal until the details of a replacement plan have been announced (28 percent) than say Congress should vote to repeal the law immediately and work out the details of a replacement plan later (20 percent).

In its reporting on the KFF poll, the Washington Post pointed out that the same repeal question has been asked 16 times in the last two years and the most recent poll results show the lowest support for immediate repeal without a replacement — a drop of 6% since October. The biggest part of this drop is among Republicans whose support for immediate repeal without replacement has dropped 17%.

In 2016 Rep. Alex Mooney, the Panhandle’s Congressional representative, voted to repeal Obamacare through budget reconciliation. That is once again the method favored by Congressional Republicans. Attention Rep. Mooney! Only 20% of all respondents in the KFF poll want you to repeal Obamacare without a replacement. Here’s hoping you can think for yourself.

Sen. Joe Manchin can spot a bad deal for West Virginia when he sees one. Manchin told reporters on January 4, 2017 that he would not vote to repeal the ACA without a replacement on the table. Manchin’s office said that if the law is repealed, 172,000 West Virginians would lose health insurance coverage and the state would lose $840 million in federal funds to provide health care for low-income families.

“Most of the people [in West Virginia] that have benefited from this one way or another voted for Trump,” Manchin said. “They don’t know what they have or how they got it. I will tell you this: You repeal it and take it away, they will know who took it away.”

Progressives may be conflicted. Sen. Charles Schumer urges Democrats not help the Republicans in Congress come up with a prompt replacement if they vote to repeal immediately through budget reconciliation. His view is let the Republicans suffer the wrath of the voters for creating the unnecessary healthcare disaster that Sen. Manchin predicts. That is certainly attractive in a partisan way, but it seems like more one-upmanship and political posturing. The real suffering from this approach will be by the people who are back to having no healthcare.

Hillbilly Elegy

Hillbilly Elegy, by J.D. Vance, has received a lot of attention recently. It is the story of a young man with Appalachian roots whose immediate family moved to Middletown, Ohio. The family was rife with domestic violence, divorce, drug abuse and stress. It was also full of love. Vance eventually succeeded beyond the wildest dreams of his “hillbilly” friends and family, graduating from Yale law school, landing a well-paying job, and having a loving stable marriage.

The book is a canvas upon which you can paint your own conclusions. The Wall Street Journal lauded it for demonstrating how folks can overcome social and economic liabilities through mentoring and a large dose of personal responsibility. Vance does attribute much of his success to his grandparents who guided and protected him. But he also acknowledges that government programs, such as Pell grants and low-interest student loans, were important. Vance says that while the social problems and destructive behaviors of the working class cannot be solved by government alone, government policies can act like a thumb on the scale in favor of the working poor.

But another force took over later. At Ohio State, where Vance attended as an undergraduate, and at Yale he was the beneficiary of connections. Connections helped him get into an Ivy League law school; connections helped him get interviewed and hired by a prestigious law firm. He realized that using connections is how the upper middle class and very wealthy routinely succeed. Lack of connections is a big reason why the poor and working class cannot flourish with the same regularity.

In the current debates about economic growth and tax policy, we often hear arguments that suggest a person’s economic status is a measure of his or her virtue. As Robert Reich put it in his book Reason, “If you’re rich you must somehow deserve it. If you’re poor, you deserve that, too.” But many of the super-wealthy inherited their wealth and added nothing to society to get it. Think Paris Hilton. More to Vance’s experience, Reich notes that the false connection between wealth and virtue fails to recognize that

the rich were lucky to be born into families that gave them access to excellent primary and secondary schools, talented teachers and tutors, summer “enrichment” programs, prestigious universities, and all the contacts and connections that come from wealthy parents and classmates and membership in exclusive clubs.

So our current unequal society is not “the way it was meant to be” or some market-driven judgment on which of us are worthy of financial reward. Instead it is structured from the beginning to favor those who are already wealthy, in many cases through nothing but the luck to be born to the right parents.

This inequality is not inevitable. J.D. Vance noted that within two generations after his hillbilly family moved to Middletown, Ohio and got good jobs with Armco Steel “they had caught up to the native population in terms of income and poverty level.” Thoughtful and effective government policies can provide the needed thumb on the scale in favor of the working class to create jobs, income and a hopeful future. The cultural change and the connections will follow.

Why Excessive CEO Pay Matters to the Rest of Us

Corporate Chief Executive Officers have done very well for themselves during and after the Great Recession. By 2015 the ratio of CEO annual compensation to that of a typical worker had risen to 276 to 1, a much higher ratio than in other developed countries. CEO compensation has gradually taken up a larger and larger share of all corporate revenues. But shouldn’t a corporation be totally free to establish the compensation of its chief executive? Actually, no. The reason is that the rest of us pay for excessive CEO compensation – literally.

Two recent studies reveal how successful CEOs at the largest U.S. corporations have been in skimming the compensation cream. The first produced by the Economic Policy institute in July 2016 dealt with CEO compensation, defined as salary, bonus, restricted stock grants, options exercised and long-term incentive payouts. It found that between 1978 and 2015, inflation-adjusted CEO compensation rose 940.9% — this was 73% faster than stock market growth for the same period. The typical worker’s annual compensation over the same period grew just 10.3%.

CEOs were spectacularly successful because of their power to direct compensation to themselves within their corporations, not because they were correspondingly more productive, more talented or better educated than other workers. This is demonstrated by the facts that between 1978 and 2015 CEO pay grew faster than corporate profits, the pay of others in the top .1% of wage earners, and the pay of college graduates in general.

U.S. tax law has also contributed to the explosion in CEO pay. A 1993 tax reform law capped the tax deductibility to corporations of executive compensation at $1 million, except that corporations could still deduct any amount of “performance-based” pay from their income taxes. What happened? You guessed it – performance based pay has been heavily adopted. The Joint Congressional Committee on Taxation estimates that closing this loophole would generate more than $50 billion in additional tax revenues over 10 years.

The second important study was produced in December 2016 by the Institute for Policy Studies. It focused on wealth inequality in retirement savings between corporate CEOs and the rest of us. Among the key findings were that the 100 top CEOs have company retirement funds worth $4.7 billion, an amount equal to the entire retirement savings of the 41% of U.S. families with the least retirement savings.

CEOs have amassed such huge retirement accounts because U.S. tax laws favor executives. If you have a 401(k) at work, you have strict limits on how much you can set aside tax-free each year. Workers 50 and older can contribute a maximum of $24,000 each year. But most CEOs of big corporations have no contribution limits because they enjoy special unlimited deferred compensation plans. In 2015 roughly half of Fortune 500 CEOs invested in these plans a total of $227 million more of their pre-tax income than if they had been subject to the same limits that apply to ordinary workers. If they had been subject to the same limits, these CEOs would have owed $90 million more in income taxes last year.

CEOs pay income tax on the money in these special plans only when they withdraw it. At present, the top income tax rate is 39.6%. President-elect Trump has proposed cutting this rate to 33%. If his proposal were enacted, CEOs who withdraw their money from the special retirement plans would avoid $196 million in income taxes.

If we have the political will we can stop this giveaway to already grossly over-compensated members of society.

Del. Michael Folk: No Friend of Education

Del. Michael Folk (R – Berkeley, 63) professes to be interested in promoting quality education in West Virginia, but he has an odd way of showing it. In February 2016, Del. Folk was the lead sponsor of two bills that would have abolished key components of the education system in West Virginia. One of these, HB 4611, would have abolished the West Virginia Council for Community and Technical College Education.

HB 4611 would not have abolished the colleges themselves, but instead would have transferred to each of them the power and duties of the Council. Perhaps Del. Folk believed that this would eliminate an unnecessary level of bureaucracy and cost. But that appears to be incorrect.

The non-partisan fiscal notes attached to the Bill state the problem with this potential legislation:

The enactment of this legislation would have a substantial negative financial impact on the State, institutions and students served by public higher education. The Council is a critical and necessary partner in [sic] with the West Virginia Department of Commerce and others in the process to support existing businesses and attract businesses such as Proctor and Gamble and Macy’s to West Virginia. Corporations will not locate to the State without significant workforce investment commitments from a State agency that serves as the coordinating entity for Community and Technical Colleges. This coordination cannot occur at the local level.

There would be other financial consequences as well. The Council receives federal and state grants of over $2.8 million that would not be received directly by institutions. The Council also provides facilities management services to each college. The fiscal notes estimate that if each college were forced to hire its own director of facilities management the net additional cost would be $1,134,000.

Inadequate education is holding back our economy. In 2015, the West Virginia Center on Budget & Policy published its eighth annual report on the state’s economy. The report focused on West Virginia’s labor force participation rate (LFPR), the lowest in the nation — where it has ranked since 1976. Using a regression analysis, the Center isolated several factors that are drivers of the low rate. One of the most important was inadequate education.

West Virginia’s educational attainment rate is also one of the lowest in the nation. Only 21% of the state’s prime working-age population (25-54) has a four-year college degree, compared to the national average of 31%. In this same age category, 42% have only a high school education, the highest rate in the country. But when the LFPR statistics are parsed, it is clear how critical education is. Those West Virginians with a college degree have a higher LFPR than the national average, ranking the state 14th highest.

More working West Virginians mean a more prosperous economy, more secure and stable families, and much more. A more educated West Virginia means more of our fellow citizens will be working. Against this backdrop, Del. Folk’s attempt to abolish the West Virginia Council for Community and Technical College Education was reckless and irresponsible. Let’s hope he does not repeat the attempt during the new legislative session.