Reforming Corporate Behavior

We have heard for years that the sole purpose of a corporation is to make money for its shareholders, end of story. This notion gained ascendancy after a 1970 article published in the New York Times by economist Milton Friedman, who huffed that the idea that corporations have a broader responsibility to society is “pure and unadulterated socialism.”

Friedman’s article provided intellectual cover for the slash and burn corporate greed in the following two decades. But today Friedman’s article seems like an odd period piece and his ideas out of step. In fact, the Business Roundtable (BRT) recently repudiated Friedman’s view and announced henceforth that satisfying other corporate stakeholders, such as employees and customers, will be given equal importance to producing wealth for shareholders.

The Roundtable, formed in 1972, is a group of about 200 chief executive officers of America’s largest corporations. Chief executives are employees of the corporations they lead, although clearly the most important and influential of them. CEOs are hired by corporate boards of directors and these directors are elected by shareholders. So CEOs lack the power to declare unilaterally that the mission of their corporation will change. The recent statement of the BRT is not binding on anyone, but each CEO certainly sought the approval of his or her directors before signing on to it.

The BRT’s original leadership were bi-partisan business statesmen. But the BRT soon evolved into a forum for chief executives to attack labor unions and the taxation of business. These were the libertarian views of the infamous Koch brothers and their ilk, who spent millions of dollars promoting this “free market, shareholder primacy” concept using an army of captured think-tanks. And the BRT began functioning like a trade association for chief executives, lobbying for compensation tied to corporate share price.

Much blame for today’s lack of corporate social responsibility has been placed on using short term financial results and share price to determine executive compensation. Large, publicly-traded corporations must report quarterly to the Securities and Exchange Commission on their financial and business position. These reports often drive share price. Short-termism encourages a focus solely on the near term results of a particular activity or policy, instead of on the value that can be created by long-term investment in employees, customers and communities.

Writing in the Harvard Business Review, author Andrew Winston neatly sums up the problem this way.

The world faces enormous, thorny challenges that business is feeling: climate change, growing inequality (and awareness that these CEOs make hundreds of times more than their employees), water and resource scarcity, soil degradation and loss of biodiversity and more. These issues require systemic efforts, cooperation, and pricing of those “externalities” (like pollution and carbon emissions) that business has been able to push off on society. The current shareholder-obsessed system is not fit for this purpose.

It is probably most accurate to say that the BRT’s new policy statement is a recognition of the change that has already taken place in the business environment, rather than an exercise in leadership. As The Economist magazine put it, the CEOs “have either seen the light or caved in, depending on whom you ask.” As one example of the change around them, polling among millennials reveals that this important demographic does not want to work for, or patronize, businesses that do not share their more progressive viewpoint.

Of course there are skeptics and opponents of the new policy statement. Some ask how we could expect a corporation like ExxonMobil, which has spent decades questioning climate science and undermining global action, to act responsibly now merely because its CEO has signed the BRT statement. Not likely because the energy giant would have to rethink its entire business. Energy companies have billions of dollars worth of coal, oil and gas still underground. Corporate managers cannot by law intentionally erode the value of the investments of their shareholders, many of whom are retirees, widows and orphans.

Former Treasury Secretary Lawrence Summers notes that most of the Roundtable’s CEOs are sincere and want to do the right thing. “But in a world of fierce competition, good intentions are not enough.” He advocates a program of legislation and regulation to complement and implement the BRT statement. These would include raising the federal minimum wage and penalizing the transfer of jobs overseas.

Assuming that the CEOs have “seen the light,” it may be because important political figures are also calling for better controls on how corporations behave. Businesses have no “right” to operate as a corporation. Corporations are chartered by the states in which they are organized and must follow the legal rules of those states. Theoretically, nothing prevents the state of Delaware, where many large corporations are headquartered, from amending its law to require, say, a ceiling on the difference between a CEOs compensation and that of the average corporate employee in the state.

Massachusetts Senator Elizabeth Warren has a plan for that, as she does for most everything. Recall that the basis of the Citizens United case that opened the floodgates of corporate money into politics was that corporations are to be treated like people under the First Amendment. Warren’s plan turns the tables. If corporations are to have the rights of people, they should have the corresponding obligation to act like good citizens, not like sociopaths whose entire obligation is to make money.

Warren’s proposal is called the Accountable Capitalism Act. It would require any corporation with revenue over $1 billion to obtain a federal charter, which would obligate the corporation to consider the interests of all stakeholders in corporate decisions. Under the bill workers of the corporation would elect 40% of the directors, and corporate political activity would have to be authorized by 75% of the shareholders and 75% of the directors, many of whom would be workers.

Writing in the online journal Vox, Matthew Yglesias says that there is “no getting around the fact that Warren’s proposal would be bad – really bad – for rich people.” So you can expect them and their political allies to marshal every resource at their disposal to oppose it. Warren’s entire proposal might be difficult to enact even if Democrats sweep in 2020. But you can be sure that pressure on corporations to act in more socially responsible ways will be on the political agenda for years to come.

Economic Development Depends On Human Capital

I recently attended the yearly Economic Outlook Conference conducted by the WVU College of Business and Economics. The Conference is presented in five regions around the state. This one focused on the Eastern Panhandle. The news was mixed, with positive jobs and income growth in the Panhandle and North Central West Virginia while the state’s coalfields continue to lag in all measures. But the presenters made one powerful point that was probably unexpected in a room full of business men and women. Our economic future depends on the development of our human capital.

First the good news. Since late 2016, West Virginia has added 7,000 jobs. Per capita personal income in the state reached $37,900 in 2017, an increase of 3.4% — the second highest growth rate in the nation during the period. West Virginia’s GDP grew strongly in 2017, better than 40 other states. This growth was driven by increased coal production for the export market and by gas pipeline construction.

But the good news has to be put into context. In the period 2011 to late 2016, nationwide employment increased by about 15 million jobs while in the same period West Virginia employment decreased 20,000 jobs, even factoring in the recent increases. While our per capita income has surged, it is still only around 75% of the national average.

West Virginia’s challenges are well-known. Our population is among the oldest in the nation and, accordingly, is among the least healthy. Obesity is a big problem among children and adults. We have been ravaged by the opioid crisis. Adjusting for the effects of our older population, our mortality rate is still the second highest in the nation.

Another worry is that West Virginia’s population declined in 2017, the fifth consecutive annual loss – a cumulative loss of more than 39,500 residents on a population of only 1.8 million. Jefferson, Berkeley and two counties in the North Central area are the only counties forecast to experience growth in the next five years. A declining population means a declining tax base with which to solve the state’s problems.

But the statistic most germane to the discussion in the room was the one on workforce participation. Only 53% of West Virginia’s adult population is either working or looking for work. This is the lowest rate of labor force participation in the nation. Jefferson and Berkeley are the only two counties with a higher labor force participation rate than the national average. Low labor force participation is a significant hurdle for long-run economic prosperity. New businesses will not locate here and existing businesses will be unable to expand without a reservoir of qualified employees.

Why is our workforce participation rate so low? Part of the answer is that an older population naturally works less. But 27% of West Virginia’s prime-age workers (ages 25-54) are non-participants — also the highest among the 50 states. The complete answer is that our workforce is under-educated and under-equipped with job skills, in poor health, and challenged by hurdles to work common to poor and low-wage workers. The solution is to pursue policies that invest in ourselves, particularly our young and prime-age workers.

There are a number of thoughtful proposals for policies that could improve West Virginia’s low level of workforce participation. The West Virginia Center on Budget and Policy has long been active in encouraging these policies. Isabell Sawhill, a distinguished economist, has just published The Forgotten Americans: An Economic Agenda for a Divided Nation. Sawhill proposes a number of measures to increase workforce participation that value working as a source personal fulfillment as well as income.

Among the policy proposals from these sources are:

  • an increase in the West Virginia minimum wage;
  • a state earned income tax credit or worker credit;
  • enhanced child-care assistance;
  • increased funding for education at all levels, from pre-K to post-secondary; and
  • the development of more training programs for jobs that employers want to fill.

In upcoming posts, I hope to explore these policy proposals in more depth.

One of the presenters at the Economic Outlook Conference who seemed in sympathy with the need to develop human capital was Todd Hooker, Deputy Director for Business and Industrial Development at the West Virginia Department of Commerce. Yet he distributed a handout that reveals how difficult it will be to change thinking among business people about economic development.

Hooker’s handout touted “major wins” in economic development that consisted of the Proctor & Gamble and Macy’s projects in Berkeley County, the Gestamp metal stamping plant in South Charleston and the Hino Trucks plant expansion in Wood County. He suggested that these “wins” were produced by the elimination of the business franchise tax in 2015, and the reduction of the corporate income tax rates in 2011. But, of course, these tax measures reduced the government revenue available to fund policies that improve our human capital. Tax cuts for business are just corporate welfare that does not directly improve worker quality or availability.

In addition to informing the attendees, the recent Economic Outlook Conference may have done one other really useful thing. It may have been a step toward revised thinking among the economic elite about the need for government spending that develops the quality of our workforce. Because, after all, the future of our economic development depends on it.

Making Sense of the Rockwool Controversy

Plans by Rockwool (formerly Roxul USA, Inc.) to construct a 463,000 sq. ft. manufacturing facility in the City of Ranson have recently met with a firestorm of opposition. The facility, to be constructed on the old Jefferson Orchards property, will manufacture mineral wool insulation used in home and commercial construction.  Opponents argue that the plant will emit huge amounts of toxic air pollution in close proximity to schools, and claim that the approval process was intentionally under-publicized to avoid opposition. Proponents argue that this is the single largest development project in Jefferson County since the Penn National Casino, and that it will create 150 well-paid manufacturing jobs, boost ancillary business and generate tax revenue for a substantial future period. To a large extent, this has become a contest of values.

I admit that I have come to this controversy late and that there is a lot I don’t yet understand. As an observer, I was initially impressed with the maturity with which both sides approached it. Recently, however, the rhetoric from the anti-Rockwool faction has gotten rough and somewhat personal. Yet it is apparent that we are not dealing with villains on either side. One can hardly blame Rockwool for trying to develop its business in the U.S. or the JCDA for recruiting Rockwool to the county. The Rockwool project is the kind of development the JCDA has been pursuing for decades. It is what Authority members have understood their jobs to be. Conversely, the opposition is not made up of eco-terrorists determined to wreck any development initiatives. There is sincere concern about the environmental impact of this facility, as well as what it means for further industrial development in Jefferson County.

The Product and Manufacturing Process

Mineral wool insulation has become increasingly attractive in the building process because of its efficiency as an insulator and its fire resistance. Rockwool products are produced from a combination of natural basalt rock and recycled slag from the steel industry. These are melted, spun into a fiber and cured into insulation. The company claims that buildings account for 40% of all energy use, and two-thirds of that is used for heating and cooling. It argues that insulation can play a key role in reducing heating and cooling costs, reducing greenhouse gas emissions, and providing a more comfortable work/living environment.

Rockwool’s November 2017 application to the WVDEP stated that the furnaces will be fueled by both coal and natural gas. Milled coal will be delivered by truck and the gas by pipeline. At that time there were no overt plans for a gas pipeline to Ranson. But lo and behold, on June 16, 2018 Mountaineer Gas announced a new route for its proposed pipeline so it could serve the Rockwool project.

All other raw materials will arrive at the site by truck and be stored in enclosures or piles. One factor not sufficiently addressed by either side, or the state of West Virginia, is the cost of wear and tear on our highways from the heavy truck traffic, which will divert funds earmarked for road repair elsewhere.

The furnaces will operate at extremely high temperatures – greater than 2,700 F. Various filtering and capture technologies will be used to reduce the emissions from the process.  But excess heat from the furnaces, as well as particulate and greenhouse gasses that are not captured or filtered, will be emitted out of two 21-story smokestacks. Molten rock and slag will be extruded from the furnace, then spun and formed into the finished wool insulation, which will be shipped out of the facility by truck.

Rockwool recycles its own waste and when fully operational the facility will deliver no waste to the county landfill. The water and much of the heat generated in the manufacturing process will be captured and re-used.

Emissions and the Permitting Process

A critical step in the approval process for a new industrial site is an application to the West Virginia Department of Environmental Protection for a Prevention of Significant Deterioration (PSD) permit. A permit is required where a new facility is proposed for an area like Jefferson County that either has none of the regulated pollutants or is below the regulated maximum.

The application explains the manufacturing process and the places and manner in that process where emissions will occur. It then seeks to demonstrate that those emissions are below the limits set by federal and state regulations. This is an important point. Our federal and state governments have already decided what level of pollution is acceptable from “new sources.” If an applicant can show that its proposed facility will operate within those limits, then the regulations say the Secretary “shall” issue the permit unless there is some extraordinary reason not to do so. Many of us do not like where that leads, but that is reality.

The initial application for a permit was submitted by Rockwool on November 20, 2017. This application described the emissions expected from the facility’s operation. Public notice of the application was given in the November 22, 2017 Spirit of Jefferson. The notice, which was in the same size print as all other legal notices, listed the chemicals and particulate matter that have since become the major focus of opponents.

For example, Rockwool announced that its operations might annually emit 239 tons of nitrogen oxides, 148 tons of sulfur dioxide, 74.1 tons of carbon monoxide, 153,000 tons of carbon dioxide equivalents, 104 tons of methanol, 67.6 tons of formaldehyde, and so on. The public notice announced that written comments would be received by the WVDEP for 30 days and provided the telephone number for inquiries. This notice complied with the applicable regulation. In my opinion, opponents need to do better than to allege that Rockwool was somehow sneaky in notifying the public.  If there is any bone to pick with the process, it is with the laxity of the public notice regulations, not Rockwool’s compliance with them.

The WVDEP is required to make available for public inspection all of the relevant documents and to put another notice in a newspaper of general circulation containing the same information from the first notice, but additionally that there has been a preliminary determination in favor of the permit, soliciting public comment and providing the procedures for requesting a public hearing. This was published in the Spirit of Jefferson in March 2018. No public hearing was requested by any interested party so WVDEP did not hold one. As a state we should do better than this. Public hearings should be required for major new source pollution, not optional.

Apparently the emission amounts proposed in the application were below the permitted level in each case because the final permit, issued on April 30, 2018, approved the emissions.  Then on September 18, 2018 in response to the furor about the agency’s actions, the WVDEP issued the following statement:

There is no scientific evidence to suggest that the proposed facility will adversely affect human health or the environment. In addition to its plant in Mississippi, Rockwool has operated a similar facility in Canada for approximately 30 years. Based on the performance of the operations in Canada and Mississippi, and the WVDEP’s stringent air quality permit application review process, there is no reason to suspect that the facility in Jefferson County poses a threat to people living nearby or to the environment.

We are now left with the prospect of significant increases in toxic chemicals and particulate matter being emitted into the atmosphere at the Rockwool site, although most likely these will affect our neighbors to the east more than us. Notwithstanding Rockwool’s compliance with state emission limits, the Jefferson County environment will be considerably dirtier than before. The question is whether we value a clean environment more than the economic benefits that will accrue from the Rockwool project.

The Economic Bargain

The principal economic benefits Rockwool will bring to our community are manufacturing jobs and a substantial improvement in the property tax base that will fund schools. One thing our economy has lacked is solid manufacturing jobs for medium-skilled high school graduates. Rockwool says that when it is fully staffed, there will be 150 new jobs. A good portion of the 150 jobs, let’s say 120, will be in this category.  Others will be management and clerical jobs. Opponents argue that while all jobs are important, Jefferson County has 57,000 residents. They say 150 jobs are not worth selling our environmental soul.

Although Rockwool hasn’t disclosed a wage scale, competitive manufacturing jobs pay in a range between $15 and $22 per hour, in addition to benefits somewhere in the range of 22% to 40% of the wage rate.  So I’m figuring the annual payroll for Rockwool manufacturing jobs will be in the neighborhood of $6,500,000 ($20/hr. + 30% benefits x 2080 hrs. x 120 jobs). This money will be subject to state income tax and will circulate in the economy, boosting ancillary businesses such as grocery stores, gas stations, and the like. But it is not accurate to say that all this will be new money Rockwool brings to the county. Probably all of the people employed at Rockwool will come directly from other jobs, since unemployment is at an historic low. The new money will be the difference between what they were paid before and what they will earn at Rockwool.

In ten to twelve years, Rockwool will be paying millions of dollars of property tax to Jefferson County and the City of Ranson. Since these taxes will be based on the value of the taxed property at the time, it is hard to guess what they will be. We do know, however, that between 2020 when manufacturing operations will begin and 2030, Rockwool will pay vastly reduced taxes through what is called a PILOT Agreement. The Pilot Agreement has been approved by the Jefferson County Commission, the Jefferson County Board of Education, the City of Ranson, and several other officials.

The PILOT Agreement calls for real property tax payments of $225,000 in 2020 but no additional payments until 2026, when Rockwool will begin making escalating payments until an $815,000 payment in 2029. Presumably Rockwool will make full real property tax payments thereafter, which are not likely to be less than the 2029 amount.  Rockwool expects to install perhaps $75,000,000 in new equipment at the facility, but this will be completely exempt from personal property tax until 2028. Then the PILOT Agreement will permit personal property tax on the machinery, but will artificially lower the value of the machinery on which the tax will apply to 5% of its depreciated book value. This sounds like a sweet deal for Rockwool.

Some Conclusions

Although our decisions can’t be driven by this, it is hard to imagine any county in West Virginia – except Jefferson – that would turn down the opportunity for a facility like Rockwool, even considering the environmental impact. Most would be doing back flips to get it. Perhaps it is our relative affluence that allows us to be choosier.

So I am tempted – almost – to be understanding about the Jefferson County Commission’s role in this. When one looks around for a governmental body that could have slowed the process until everything was fully vetted and discussed, that body was the County Commission — not the JCDA which, as noted, is supposed to go out and secure opportunities for us to evaluate. Instead, all the Commission really did was climb on the bandwagon. The Commission has since issued a memo saying that it had no control over anything except whether the county signed on to the PILOT Agreement, but this ignores political reality and how much influence and control the Commission could have exerted if it had been solidly against the project.

Now some Commissioners are running for cover. Commissioner Tabb was one of the county officials who visited the Rockwool plant in Mississippi and was impressed with what she saw. But as of August 2, Commissioner Tabb changed her mind because of the citizen opposition to the air quality issue. She now opposes Rockwool. At the same August 2 Commission meeting, Commissioner Hudson said that the Rockwool situation is “starting to smell like a skunk.” Commissioner Compton also claimed he is opposed to the Rockwool project, saying “The reason I agreed to this was I essentially thought it was going to bring jobs. Did I think it was to this extent of pollution and whatnot? Absolutely not.”

It is not clear to me that anything can be done to stop the Rockwool project at this point. Permits have been issued and binding contracts have been entered. Rockwool has spent lots of money in reliance on these. If the County Commission or one of the other governmental agencies that approved the deal backs out, there will be expensive litigation and an uncertain result. Indeed, Rockwool through its attorneys sent a letter on September 12, 2018 asserting that the company would suffer damages up to $100 million if the Commission delayed the project.

What is clear is that the citizens of Jefferson County have not been well-served by our County Commissioners. They did inadequate due diligence and had no clue about about public sentiment on the environmental issues. As but one example, here is a statement in the PILOT Agreement that Peter Onoszko signed as Chairman of the JCC:

The Commission has found that the [Rockwool transactions] will promote the public interests and public purposes by, among other things, providing certainty and soundness in fiscal planning and promoting the present and prospective prosperity, health, happiness, safety and general welfare of the people of Jefferson County.

Really? That’s not going to go down well with the thousands of people who have signed up on the anti-Rockwool Facebook page and who pack public hearings night after night. Instead of owning their failure, our Commissioners profess to have been either duped or powerless. There needs to be some accountability in November.

Immigration and Our Prosperity

With so much heated rhetoric about building a wall at our Southern border and the cruel separation of families who seek asylum, it is easy to overlook what is perhaps the fundamental question in the immigration debate. That is whether immigration has a positive or negative effect on our collective prosperity.  Are we are better off with more immigration or less?

No foreign national has a right to enter the United States. The law and policy in effect at the time determine who will be permitted to enter for visits and who will be permitted to immigrate. That law and policy has changed over the years, but always in line with what is regarded as the national interest at the time.  Now the Trump Administration proposes to scale back immigration in a dramatic way. If the overall effect of immigration on our economy at current levels is negative, then there may be merit to Trump’s immigration policy, if not his inhumane implementation of it. If the effect is positive then more immigration is the answer.

There are several categories of lawful entry into the U.S., for example visitors who seek to immigrate, temporary non-immigrant visitors, and asylum seekers. Temporary non-immigrant visitors are people like tourists, business visitors, students, and temporary workers. One category of non-immigrant is called H-1B and is used for highly skilled technical or professional workers frequently in short supply. Part of the admission process for all non-immigrants is that they declare their intention to depart the U.S. at the end of their temporary stay.

Visitors who intend to immigrate are subject to a much more rigorous evaluation than non-immigrants. Some seek immigrant status, signified by the “green card,” on the basis of a relationship to a close family member already here. This has recently been referred to as “chain migration.” Roughly 850,000 people enter lawfully each year in this category.  Others apply based on a sponsorship by a U.S. employer that can demonstrate a need for the person’s skills and an inability to find that skill in the U.S. labor market. Roughly 140,000 people enter each year in this category.  Most of these are highly trained scientists, technicians or professionals.

Unlawful, or “undocumented,” foreigners are mostly people who come here as non-immigrant visitors and who simply fail to leave when their temporary stay runs out. But most of the publicity about illegal immigration centers on those who cross the border without papers and melt into our society. People who are unlawfully in the U.S. are not entitled to work but frequently do. It is unlawful for a U.S. employer to hire a foreigner who is not authorized to work, but this rule is largely ignored in many industries, such as landscaping and restaurants.

The Trump Administration is determined to reduce the number of immigrants coming to the U.S. under any circumstances, lawful or unlawful. Last year Trump announced his support for legislation to reduce legal immigration by half over ten years. The reductions would come from migrants entering on the basis of family connection.  The number entering on the basis of job skills would remain the same. The legislation would institute a merit-based system to determine who is admitted to the country similar to those in effect in Canada and Australia. President Trump also plans to admit no more than 45,000 refugees from around the world in fiscal year 2018, a significant drop from the cap of 110,000 set for 2017 by President Obama.

What is the rationale for these policies?  In his original immigration plan, Trump declared that the influx of foreign workers “holds down salaries, keeps unemployment high, and makes it difficult for poor and working class Americans – including immigrants themselves and their children – to earn a middle class wage.” But as we have seen over the last two years, this country is at close to full employment.  Our unemployment rates are at historic lows. Some industries, like the Maryland seafood industry on the Eastern Shore, can’t operate for lack of workers, native or immigrant. The level of employment in this country seems to rise and fall in response to larger forces than the relatively small number of immigrants coming to the country.

But what about the effect of immigration on employment opportunities and wage rates for native Americans?  Here the answer is mixed and there is some evidence that immigrants do create a negative effect on some segments of the economy. In 2016, the National Academy of Sciences published a 300,000 word report on the economic consequences of immigration. It found that unskilled immigrants (both lawful and unlawful) compete with those most similar to themselves in the U.S. economy – immigrants who arrived just before them and unskilled, undereducated natives. Immigrants may reduce employment opportunities and slightly lower wage rates for these groups. But the report says “When measured over a period of 10 years or more, the impact of immigration on the overall native wage may be small and close to zero.”

Foreigners who lawfully enter the U.S. pay taxes. Lawful permanent residents — those who hold a green card and intend to stay here permanently — are subject to Social Security/Medicare taxes and income taxes just as U.S. citizens. Lawful temporary non-immigrants who are authorized to work here for temporary periods also pay these taxes, although there are some exceptions. But there are costs of providing public services to immigrants and the NAS report concluded that in the first generation or two after immigration the costs for immigrants are somewhat higher than the taxes they pay. This negative effect is reversed in the longer term when the children of immigrants become productive citizens. Immigration then becomes a net positive for the American economy.

But the NAS report also showed that the negative effects of immigration are not present with respect to highly educated immigrants.  Those with a college degree who emigrate to the U.S. at age 25 pay $500,000 more in taxes than they collect in benefits over a lifetime.  Those with a graduate degree create a surplus of over $1,000,000.

The net positive long-term effect of immigration is likely to become more pronounced. The working age population of the U.S. is declining, reflecting the retirement of the baby-boomer generation. As there will be fewer workers in the future to support the Social Security benefits of retirees, the solvency of the Social Security system is in jeopardy.  In 1960, there were five workers for every person receiving Social Security benefits.  Now the worker-to-beneficiary ratio is 2.8 and projected to fall even lower. Increased immigration is clearly called for on this basis alone. Lawful immigrants to the U.S. tend to be younger than their U.S. counterparts and are more inclined to participate in the labor force.

The Wall Street Journal recently published an opinion piece by Sol Trujillo, President of the Latino Donor Collective, in which he enumerated the contributions of Latino immigrants to the economy. He noted that

Latinos are the new face of the U.S. workforce, making up 70% of the recent growth in the labor market, and accounting for a whopping $2.13 trillion in gross domestic product as of the end of 2015. Today, this single demographic cohort would be the eighth-largest economy in the world—larger than Brazil, Italy or Canada.

There is also considerable anecdotal evidence that immigration is beneficial for prosperity in the U.S. Individuals who are prepared to leave their home countries and their family support systems for better opportunities are very likely to take advantage of those opportunities.  Inc. Magazine called immigrants “the most entrepreneurial group in America.” It said that “from 1996 to 2011, the business startup rate of immigrants increased by more than 50 percent, while the native-born startup rate declined by 10 percent, to a 30-year low.” Despite accounting for only about 13 percent of the population, immigrants now start more than a quarter of new businesses in this country.

Those of us in West Virginia and other states with rural populations must have noticed the very substantial number of foreign-born physicians who are happy to staff rural hospitals and clinics. Take, for example, the staff at Grant Memorial Hospital in Petersburg, West Virginia here in the Eastern Panhandle. When we assess the effects of immigration on our prosperity, these immigrants cannot be overlooked.

The Washington Post just reported that for the third time in four years the U.S. has won the International Math Olympiad. The Math Olympiad is the hardest and most prestigious math competition for high school students in the world. Many on the U.S. team were second or third generation Americans.  Their surnames were Lin, Gu, Huang, Ren, Singhal and Ardeishar. Immigrants are often high achievers in challenging fields, such as mathematics, physics and computer science.

If we can put aside the nativist impulses that fuel President Trump’s “base” and much of his immigration policy, the picture becomes clearer. Overall higher rates of immigration are healthy for our country on many levels. But higher overall immigration should consist of increases in skilled workers and decreases in unskilled workers. To that extent, reducing family-based immigration where low skills are involved is appropriate.  Furthermore, the number of unlawful low-skilled workers who come here seeking employment should be reduced, not by building an expensive and ineffective wall, but by actually enforcing or strengthening the law now on the books that prohibits hiring them. As Francis Fukuyama recently wrote in the journal Foreign Affairs

What is needed is a better system of sanctioning companies and people who hire illegal immigrants, which would require a national identification system that could help employers figure out who can legally work for them. Such a system has not been established because too many employers benefit from the cheap labor that illegal immigrants provide.

American businesses were recently handed a $1.5 trillion tax break thanks to President Trump’s Tax Cuts and Jobs Act.  But handing business lots of cash with no strings attached is not smart policy. Making it easier for them to find and employ talented workers is. So the number of H-1B and other temporary work visas should be at least doubled.  Ensuring that U.S. workers are not displaced is already a part of the application process for these visas. And a method should be found to admit increased numbers of seasonal agricultural workers in situations where no U.S. workers can be found and the wage rates can be kept high enough not to undermine the larger labor market.

In the final analysis, immigration can be a tremendous boon to our prosperity. In his Wall Street Journal opinion piece, Sol Trujillo proposed a basic IQ test for America. We flunk if we do not recognize that radically limiting immigration would be like shooting ourselves in the foot.

Government by the Rich, for the Rich

The much maligned Tax Cuts and Jobs Act (TCJA) is regarded by most Americans as a naked effort by the Republican Party to reward its key donors, among them the wealthiest of Americans. Public polling has consistently been negative for this “reform” legislation. The law’s modest temporary tax relief for the middle class is just window dressing. The public has simply disregarded this window dressing and correctly assessed the stink from what has been served up to them.

The TCJA is an enormously complex law, with poorly understood provisions the effect of which won’t be known until well after the law takes effect. Since the tax code has a profound effect on the behavior of individuals and businesses, and hasn’t been revised since 1986, a major revision should be thoroughly debated in the light of day. But to do that would have permitted the TCJA’s ugly flaws to be exposed and for opposition to solidify. So in adopting the TCJA Republicans jettisoned any pretense of democracy.

There were no public hearings. Some of the law’s provisions were added at the very last minute. The Congressional Budget Office had no time to evaluate the Republicans’ flimsy claim that increased business activity spurred by the tax cuts would raise substantial new tax revenues. The Bill was available for review roughly three days before the final Senate vote. The Democrats, who were not opposed to revisions to the corporate tax structure and might have made reasonable suggestions, were shut out of the process. This is how the Republicans govern.

One wonders why a massive tax cut was so important for Republicans in the first place, particularly in the face of negative public polling. The Trump Administration is riding the wave of economic recovery that began well before Trump took office. National unemployment is hovering around 4%, generally regarded as full employment. Corporations are already sitting on $2.3 trillion in cash reserves. They do not need massive tax cuts to free up cash for investment. The answer is that big donors are furious about not receiving the big tax cuts that were promised when the Republicans repealed Obamacare, which they failed to do.

Nobel-prize winning economist Paul Krugman has argued in the New York Times:

A large part of the answer [for why a huge tax cut was so important] is that many Republicans now see themselves and/or their party in such dire straits that they’re no longer even trying to improve their future electoral position; instead, it’s all about grabbing as much for their big donors while they still can. Freedom’s just another word for nothing left to lose; in the GOP’s case, that means the freedom to be the party of, by, and for oligarchs they always wanted to be.

Krugman can be intemperate at times, but he seems to be on to something. At all the key forks in the policy road, the Republicans have rewarded themselves and their rich friends. The TCJA represents a huge redistribution of wealth from the poor and middle class to those in the upper income brackets who hardly need it.

By far the largest impact of the TCJA will be the reduction of corporate tax rates. These reductions will themselves be responsible for nearly $1.5 trillion in reduced tax revenues. The Republican argument is that corporations will use this new cash to increase business capital investment, hire new workers and raise wages. But there is nothing in the TCJA that requires a business to use the tax cuts in this way. Many businesses have said they will use the money for non-productive uses like increased dividends and share repurchases. These uses only serve to increase the value of the corporation’s stock in the hands of those who own it.

Who benefits when the value of corporate stock goes up? Only 52% of the American public owns any stock whatever, even in retirement accounts, and those owners surely won’t be found in the bottom half in wealth and income. President Trump is fond of bragging about how the stock market is breaking records. Can’t you just hear the Champagne corks popping in all the nation’s homeless shelters?

In my next post, I will detail how the rich will directly benefit from the TCJA at the expense of the rest of us. Certainly, this statute ought to be one of the first things on the agenda of any new Democratic majority in Congress to reverse. In fact, instead of just undoing this bad law, the TCRA may unleash the Democrats to make substantial changes to the tax code to benefit affirmatively those whom the Republicans have, for now, shut out.

Industrial Development in West Virginia

In early November 2017, West Virginia economic development officials announced a memorandum of understanding with China Energy, said to be the world’s largest energy company. The deal would involve an $84 billion investment in various West Virginia energy projects over a twenty-year period. These projects would focus on power generation, chemical manufacturing and underground storage of natural gas liquids and derivatives.

The central project would be the development of an “Appalachian Storage and Trading Hub,” which in simple terms would be an underground storage cavity into which natural gas would be pumped. Development officials have long argued that easy access to natural gas products via the hub and pipeline infrastructure would attract investment from the chemical and plastics industry.

The potential for more fossil fuel and petrochemical development has set off the predictable debate between environmentalists and progressives on one side and business interests on the other. The first volley came in an opinion piece in the Charleston Gazette-Mail on December 3, 2017, by Lissa Lucas, a candidate for the House of Delegates from Ritchie and Pleasants Counties. She argued

I can’t help but compare this [potential Chinese investment] to Antero’s $275 million dirty “investment” in my county, which has resulted in a frack dump upstream of the only public drinking water intake in the county, destroyed roads and an invasion of 600 freight trucks a day on a small community, in exchange for a handful of jobs that may not even go to local people.

She made two important points. First, natural gas collection and storage is dangerous. This was later confirmed in the Washington Post on December 13, 2017, which reported that a huge natural gas collection and distribution hub in Austria exploded the day before. Lucas pointed out that West Virginia is simply not prepared for industrial disasters now, much less those we would risk from the Appalachian Storage Hub. Second she argues that instead of further investments in fossil fuel extraction, West Virginia should be investing in “renewable tech” like solar panel manufacturing.

The response came in the December 5, 2017, Gazette-Mail from Mark Sadd, a Charleston lawyer representing energy and development clients. He first attacked Lucas as advancing a “reactionary” point of view because she rides “this broken progressive horse of politics and policy.” He argued that the new Republican majority in the Legislature has thrown off these progressive shackles, which he blames for decades of sluggish growth.

[Lucas’] damning rhetoric omits the possibility that politicians of opposing views genuinely believe that mineral extraction, though messy and polluting, on balance creates more advantages than disadvantages for their constituents and the greater society. For West Virginians, it enriches thousands of households with royalty income hitherto unrealized and fills government coffers through severance and other tax revenue.

He closed his piece by making this bold but incorrect assertion: “there is mounting evidence . . . that a strategy of lower taxation, privatization, deregulation and legal reform . . . is working for West Virginia.”

These two opinion pieces are great examples of the depth of our culture war. Since no details of the China Energy deal are available, and it may never happen, neither of these commentators is able to make any factually grounded arguments pro or con. They have both simply reacted reflexively, expecting the worst because of the opponent on the other side of the debate. Lucas sees greedy corporations and foolish politicians; Saad sees anti-progress environmentalists and progressives.

Saad is correct on one thing — environmentalists and progressives often automatically oppose any industrial development, no matter how it might contribute to prosperity. There is no way this can be a winning strategy. Instead we need to evaluate carefully any proposed industrial development and learn to welcome the best among them. These are not always going to be the clean tech kind Lucas advocates, but often they will be.

What should this evaluation entail? Here are some things to consider. What tax incentives are necessary to secure the development? These incentives frequently reduce property taxes on the developed property in hopes that income tax revenues over the long term will be more valuable. But this depends on how long the development will be in productive use and how many new jobs are created. Where will the development be located and how will it mesh with the existing culture and economy of the place? How will the true costs of operation be internalized into the development? Taking Lucas’s example of destroyed highways, how will the proposed development clean up its own mess instead of requiring the taxpayers to do it? What are the environmental risks and how likely are they? How realistic is an industrial disaster? How many West Virginians will be employed? For how long? In what jobs? The list is long.

In the Eastern Panhandle, we have recently had the same sort of debate over the proposed Potomac River Pipeline, which would provide natural gas to Morgan, Berkeley and Jefferson Counties. Opponents argue that the law now makes the ratepayers responsible for reimbursing Mountaineer gas for construction of the pipeline. They also point out that Mountaineer Gas would have the power of eminent domain to take private lands for the construction of the pipeline. And they argue that there are two pipeline incidents in the U.S. every day, including the 2012 Columbia Gas pipeline explosion in Sissonville, West Virginia, that destroyed several homes and melted an 800-foot section of I-77. Separately, the Pipeline and Hazardous Material Safety Administration reports that between January 2010 and November 2017, our natural gas transportation system leaked 17.55 billion cubic feet mostly of methane gas.

Taking the opposite position in the Martinsburg Journal, former Jefferson County Development Authority Executive Director John Reisenweber and Authority President Eric Lewis exhorted us to “build it now.” I think it fair to say that neither of these two gentlemen has ever met a development project he didn’t like. In the article they pointed out that natural gas is far more environmentally friendly than other fossil fuels. They further minimized the risk of accident by noting that there are already a dozen gas pipelines under the Potomac. But their major point was that the lack of natural gas has prevented industrial development in Jefferson County. Here we get to the nub of the issue.

Two of the factors to consider with respect to any industrial development project are where it will be located and how it will mesh with the existing culture and economy of the place. Putting aside the arguments about safety and environmental risk involved with a pipeline, do we need industrial development in Jefferson County? I think the answer is no.

Our unemployment is the lowest in the state and well below the national average. Our per capita income is the highest in the state. Our economy is based solidly in tourism, recreation, agriculture and government employment. A factory might be right for Berkeley, which has a history of large industrial installations and will soon be home to a gigantic Proctor & Gamble plant. But smokestacks are clearly not right for Jefferson. This view is not anti-development, it is simply opposed to the wrong kind of development for us. And since the industrial development that a gas pipeline would bring would be wrong for Jefferson County, we don’t need to decide who is right about a pipeline’s environmental impact or safety.

West Virginia’s High Stakes Stimulus Plan

The West Virginia Legislature has a single required duty when it meets each year — pass a balanced budget. When the regular session began in early 2017, the revenue available for funding state programs had dropped to $4.05B, approximately $500M less than was spent in the previous fiscal year. Against this backdrop, Governor Justice proposed a number of new revenue sources and programs, few of which got any traction.

Being in no mood to raise new revenues, the Legislature was prepared to force the state to “live within its means” by drastically cutting programs and services. But on June 13, at the proverbial last minute, the Governor sent a letter to the Speaker of the House of Delegates with a revised revenue estimate of $4.225B. This higher revenue estimate enabled the Legislature finally to pass a budget without hyper-cuts to state programs. But the estimate was based on wishful thinking and may force the Legislature to confront an even larger deficit next fiscal year.

Careful readers of the Governor’s revised revenue estimate would have noticed a portentous footnote that made his higher estimates dependent upon the passage of two bills related to roads:

These estimates are contingent on revenues and projected economic activity associated with the passage of Engrossed Senate Bill 1003, relating generally to WV Parkways Authority, and Engrossed Senate Bill 1006, increasing funding for State Road Fund, as recommended by the Governor.

So the final budget commits the state to certain spending in FY 2018 that will be “funded” by uncertain, estimated tax revenues from future economic activity. According to the Governor, that increased economic activity will be generated by ramped up roadbuilding and repair, itself dependent upon the public sale of new bonds. The bulk of these new bonds cannot be issued until voters approve the bond issue in a special referendum to be held October 7, 2017.

In fairness, $140M in new revenues for the roadbuilding effort will be secured by the $.035 per gallon increase in the gasoline tax, increasing the motor vehicle privilege tax and a variety of new DMV fees. Plus $400M to $500M in new bonds will be sold by the West Virginia Parkways Authority and financed by increased Turnpike tolls. The roadbuilding from those bonds will be confined to ten southern West Virginia counties contiguous to the Turnpike.

But the large majority of the new bond revenue will depend on public approval in the special referendum. This will be the second largest roadbuilding bond effort in state history and, if successful, will raise about $2.4B. The last such effort was a 1996 road bond amendment for $550M, or about $859M in today’s dollars. One major worry is whether the bond referendum will pass. Between 1973 and 1996, voters defeated road bond referendums three times and no road bond proposal has been before the public in 21 years.

In his public statements about the issue, Governor Justice has been apocalyptic about the possibility of a failed bond referendum, warning “[i]f it fails, this state is history. That’s all there is to it. . . . You will have a complete melt-down if this doesn’t go through.” Even if the referendum does pass, several months will be required to sell the bonds, issue and award contracts and get construction underway. None of the roadbuilding and repair financed by these new bonds can begin until the spring of 2018. On this schedule the state is unlikely to benefit from any increased economic activity until FY 2019.

There are other problems with relying on future economic activity from roadbuilding to fund the budget. Clearly there will not be a one-to-one return on the dollars spent, at least in the short run. A certain segment of the funds generated by the bonds will be consumed in state administration, and another segment in overhead and profit for the roadbuilding companies. Although wages to laborers will increase while the work is underway, there is no guarantee that these laborers will spend the money in West Virginia or be taxed as residents here.

On the other hand, there is an economic multiplier that always increases the benefit of public spending as it gets recycled through the economy. If we are careful, each stage of this spending can yield tax revenue. Furthermore, better roads will have a long term, although hard to measure, positive impact on the ease of commerce and may be part of attracting new business. The best that can be said for the roadbuilding stimulus is that it can pay off if everything goes according to plan or better. Yet how often does this happen?

The Governor should get some credit for pushing these measures through. He will certainly be the goat if, as seems likely, the expected revenues do not materialize in FY 2018 and the Legislature faces a larger deficit next spring.

The benefits from a roadbuilding stimulus plan, even if they occur, will mostly be short term – while the roadbuilding is underway. What we need instead of short term, stopgap measures, is a serious plan to stabilize and grow revenues. The Legislature knows what revenue tools are available – income taxes, sales and gross receipts taxes, excise taxes on certain items, estate taxes, and others. We need the proper mix of these revenue tools so that we take full advantage of good economic times in the coal and gas industry, but also have solid revenue streams when these industries decline. Above all we should avoid the faddish, trickle-down economics of corporate and personal income tax cutting so favored by some conservative Republican legislators.

 

 

West Virginia’s Budget Disgrace

The soap opera in Charleston appears to be over. After failing to come together on any meaningful changes for increasing revenues or reforming the tax structure, the Legislature adopted a “bare-bones” budget that cuts more deeply than ever into valuable state programs. This was a default to the lowest common denominator and a failure of statesmanship. It defers many important questions for a later Legislature. One Delegate said that the budget was the result of “complete and utter dysfunction.” The process wasted everyone’s time and money.

While there is blame to go around, this result was the product of opposing positions taken by members of the same political party. Senate Republicans insisted that there would be cuts to personal income taxes or nothing. House Republicans insisted on broadening the sales tax base and were suspicious of income tax cuts in a deficit environment. Week after week neither side moved. The Democrats were impotent on the sidelines and the Governor lurched from one folksy hyperbole to the next, offering some bone-headed proposals of his own. The whole process was a disgrace.

The Legislature gathered in general session knowing in advance that revenues in the state’s General Revenue Fund were projected to fall short of the spending level from last fiscal year. The shortfall was roughly $500 million. There has been agreement on both sides of the aisle that tax reform will be necessary for West Virginia to stabilize and increase revenues and avoid volatility in our budgeting.

But for many Republicans, particularly a Senate faction led by Robert Karnes (R, Upshur), tax “reform” meant radical reductions to the personal income tax, the largest single source of state revenue. Karnes and his crowd actually think that cutting income tax for wealthy “job creators” will raise revenues.  By allowing these people to keep more of what they make, reasons Karnes, they will leap into action, juicing up business and the economy. This widely debunked nonsense was exposed most recently by the Kansas experience where substantial income tax cuts put the state’s economy into the toilet.

Karnes and the Senate Republicans labored under a false belief that also afflicted House Republicans. It can be reduced to a simple equation: tax = bad. In an environment where we needed more revenue to avoid harmful cuts, only the House Republicans were willing to put their toe into the water to find new revenue sources. Even then, House Republicans wanted to add new items upon which to levy sales taxes rather than raise the tax rate itself, presumably so they could then claim they didn’t raise taxes. They rejected a Senate bill because it “amounted to a tax increase.” The conservative Tax Foundation, which followed the situation in West Virginia closely, said “It would almost be easier to enumerate the taxes the legislature didn’t consider as possible solutions to the budget shortfall over the past few months.”

West Virginia has well-documented problems. On just about any measure of successful governance we are last in the country or very close to it: per capita income, workforce participation rate, educational attainment, health indicators and obesity, opioid addiction. You name it. Governor Justice’s initial proposed budget recognized that important spending on education and social programs had to be retained in order to ensure that we did not become a failed state. But later he seemed to lose his head by aligning himself with Senate Republicans and their income tax cuts, presumably on the theory that even a bad idea is better than no idea. In the end he lost respect from everyone, even members of his own party.

The best summary of the cuts our FY 2018 budget will make versus the spending from FY 2017 (which itself involved cuts from prior years) has been provided by the West Virginia Center on Budget and Policy.   The budget cuts $7.5 million from colleges and universities and $2.5 million from community and technical colleges. Public broadcasting was cut nearly $1 million, the line item for the Division of Culture and History was cut 14%, and the West Virginia Commission on Women, the Division of Educational Performance and the Tobacco Education Program were all completely defunded.

We need some new thinking and new leadership who recognize that good government is expensive and that we cannot cut our way to prosperity. If West Virginia is determined to elect Republicans to majority roles in the House of Delegates and Senate, these public servants need to rise above squabbling among themselves, reject the latest fashion in right-wing economic theory, and a find a way to grow revenues over the long haul. Yes, that might mean even raising taxes, which West Virginians would welcome if we applied the revenue toward solving some of our many problems.

 

The Carbon Dividend: An Environmental Proposal to Consider

In February 2017, the U.S. Supreme Court dealt a blow to the Obama Administration’s climate centerpiece, the Clean Coal Plan. The Court put a hold on federal regulations to implement the Plan that would have curbed carbon-dioxide emissions from power plants. These emission reductions were the main way the U.S. proposed to meet its commitment under the Paris Climate Accord. The legal case attacking the Clean Power Plan was commenced by West Virginia Attorney General Patrick Morrisey, among others . Then President Trump doubled down by “withdrawing” the U.S. from the Paris Accord, claiming that our commitment forced American workers and taxpayers to absorb the cost “in lost jobs, lower wages, shuttered factories, and vastly diminished economic production.” Now given the hostility of EPA Administrator Scott Pruitt to the mission of that agency, it is hard to be optimistic about our chances for avoiding climate disaster. Where do we go from here?

At least one suggestion has come from an unlikely source. Several elder Republican statesmen have come forward with a proposal for a gradually increasing carbon tax imposed at the first point that fossil fuels enter the economy – the well, mine or port. The tax might start at $40 per ton. The revenue from this tax would be returned as a tax-free dividend to each American with a social security number in periodic checks or direct deposits. At $40 per ton the dividends would be $2,000 for a family of four in the first year. The initial proposal is that all of this tax revenue would go directly to dividends – none would be diverted to other purposes, even to climate R&D.

Among the proponents of this plan are James Baker, George Schultz, Lawrence Summers and Henry Paulson, all senior former government officials and thought leaders in the country. They rightly assert that “[t]he opposition of many Republicans to meaningfully address climate change reflects poor science and poor economics.” For them, the Carbon Dividend is a way for the GOP to return to the environmental achievements of earlier Republican administrations and properly align itself with voter sentiments.

Since the Plan was initially proposed in February 2017, it has attracted support from Exxon-Mobil, BP, General Motors, Pepsico, Proctor & Gamble and many other huge corporations. The value for these organizations comes in the form of better public relations, fewer “command and control” regulations and an end to federal and state tort liability for emitters. We should also not discount the possibility that the corporate executives making the decision to support a Carbon Dividend are concerned about the future of the planet like the rest of us.

In any event, the Carbon Dividend proposal shouldn’t be skeptically received simply because it is favored by some Republican conservatives and large carbon emitters. In order to achieve the critical national purpose of controlling greenhouse gasses we will need everybody on board. Instead, the Plan should be evaluated first on whether it would make meaningful reductions in greenhouse gasses and then on whether it could generate sufficient political support for adoption.

The increasing tax on production of carbon-based fuels will make them more expensive relative to renewable energy sources. This tax-created advantage for renewables would spur their use. The higher cost of products made with fossil fuels would be passed on to consumers in the form of higher gasoline prices and electricity bills. Consumers would gradually demand cheaper products and energy from renewable sources.

The dividend feature would also, in theory, encourage more responsible consumption on an individual level. The dividend would be calculated by dividing the total tax revenue by the number of recipients in the taxing jurisdiction. Although this is not explicitly stated, presumably the amount of the dividend would be calibrated to meet the additional cost of fossil fuel products incurred by the consumer. A consumer would be rewarded by reducing his or her carbon footprint, because by doing so the positive spread between the dividend and the higher cost of energy-related goods would increase. It is estimated that approximately 70% of Americans would come out ahead.

But it seems that the real beauty of this proposal is the way it addresses the psychological resistance people have to acting in their own best interest on the climate issue. A white paper published by New America explains this point. The threat of global warming lacks immediacy, seeming to be remote and disconnected from everyday lives. It is difficult to convince people to endure costs now that will benefit others in fifty years. The dividend provides immediate benefits for behavior that is required to secure a much larger, though long-term benefit. It fundamentally alters the cost-benefit time horizon and it would make political support for adoption much more likely.

Is a Carbon Dividend plan politically possible? It would be certain that powerful political interests in states heavily involved with fossil fuel extraction – West Virginia, Texas, Wyoming, Louisiana, and others – would be opposed. Without a “silver bullet” a Carbon Dividend plan would have no better chance than a cap and trade scheme. In other words, no chance. But the dividend might just be that silver bullet. By immediately distributing a financial incentive to support the plan directly to voters, the Carbon Dividend would pay us to do what we should want to do anyway.

There is, of course, the problem of workers whose jobs might be lost because of the decline in fossil fuel industries. This is a problem that exists now for coal miners due to cheaper natural gas prices and automation. A Carbon Dividend Plan would hasten the demise of these industries. Hard as it is for many in West Virginia to accept, the necessity for an effective national response to climate change may require some decisions that have unpleasant local effects. These local effect cannot be the tail that wags the dog.

The West Virginia Budget Crisis

Remember the large budget deficit that confronted West Virginia lawmakers at the start of the legislative session? One estimate in November 2016 was that in FY 2018 (beginning July 1, 2017) we would generate only $4.055 billion in revenue, roughly $500 million short of anticipated spending. That brought many legislators to Charleston for the general session prepared to strip spending down to a bare minimum and force the state “to live within its means.” Fortunately, those views softened when confronted by political reality.

Now projected FY 2018 revenues are about $40 million better than first predicted due to an improving coal market and a $33 million transfer from general revenues to the Workers Compensation Fund that won’t be made. But the remainder of the budget shortfall hasn’t disappeared. How the shortfall will be closed is the subject of a House and Senate conference committee meeting today. So far, the fiscal and political stress created by the shortfall has caused Governor Justice and quite a few legislators to behave as if any idea – even a demonstrably bad one – is better than nothing.

June 12 is the sixteenth day of a special session devoted to this project. The extension to allow the conference committee to meet expires on June 13 and if a solution is not reached immediately the tax reform effort may be abandoned entirely. The two opposing camps are the Governor and Senate Republicans — who want to reduce income taxes — and nearly the entire House who want to raise sales tax rates and coverage without reducing income taxes.

Neither approach is progressive. Sales taxes hurt lower and middle income citizens who have no choice but to spend almost all of their income on taxed items. Because income taxes are generally paid more heavily by wealthier citizens, the proposed income tax reductions coupled with the sales tax increases would result in an overall tax decrease for the wealthy but an overall tax increase for lower and middle income taxpayers. According to the West Virginia Center on Budget and Policy, the plan lowers taxes on the top 20% of West Virginia households and increases taxes on the remaining 80 percent of households.

Nevertheless, a sales tax increase seems likely to be in any budget deal. But it is uncertain what the new rate will be. The conference committee is now considering an increase from 6% to 6.5%. Whatever higher rate is chosen, it would be applied to previously untaxed items such as telecommunications services, digital goods, electronic data processing services and health fitness memberships. The 6.5% rate is projected to raise $96 million in FY 2018 and $106 million in FY 2019.

Beyond that, the thinking of the Governor and the Senate Republicans has come unmoored. They want to reduce income taxes by 7% in FY 2018 and in similar amounts staged over coming years. What should trigger these further reductions has been the difficult issue. Senate Republicans have only agreed to this “modest” series of reductions in income tax because opposition to their original proposal was fierce. An income tax reduction is the brain child of Sen. Robert Karnes (R, Upshur), a conservative ideologue, who headed the Senate Select Subcommittee on Tax Reform. You may wonder how a reduction in income tax collections will close the budget gap?

You’ve heard the Republicans’ answer before – tax cuts will lead to more growth and job creation, which will lead to higher tax collections. The problem is this theory has never worked. While there may be some small growth benefit in tax cuts, it never amounts to as much as the tax revenue lost. This played out painfully over a decade in Kansas, which finally abandoned its tax cutting regime by adopting tax increases passed by a Republican legislature over the veto of Republican governor Brownback.

But it is Governor Justice who has gone the furthest into fantasyland. After properly opposing massive spending cuts that would have rendered West Virginia a shell, Justice has gone over to the income tax views of the Senate Republicans in order to get a deal. He defends their position because “just think of how far they’ve come” from their original proposal to cut income taxes 30%. In other words, we should all support a bad proposal because it is not insane like the first one.

Governor Justice has engaged in what can only be described as weak and illogical explanations for his positions. He acknowledges that increasing sales taxes may swamp any benefit low and moderate income taxpayers would get from a reduced income tax. But then referring to that reduction he asks why we wouldn’t want to “give money back to the guy mowing the grass?” When pressed he has further supported the reduced income tax idea by suggesting it would be “a great move for our image and a great move to potentially bring people to our state.” Don’t bother looking for any hard numbers.

Governor Justice also has urged the adoption of a tiered coal severance tax that would generate less tax revenue when coal prices are low and increased revenue when they are high. The net impact would be a $49.9 million reduction in severance tax collections for FY 2018. This proposal is either the result of strong coal industry lobbying or faulty thinking, or perhaps both. Surely other industries in the state with greater economic impact than coal, such as healthcare, would benefit from favored tax treatment. This is just one more example of pandering to extractive industries that do not represent our future.

So in the end, how does Governor Justice believe the budget gap will be closed? He predicts an additional $100 million in tax collections from economic growth that will result from the tiered coal severance tax and his $2.8 billion infrastructure spending plan. This guesswork, called “dynamic scoring,” is so speculative it would make Donald Trump blush. There are easily a hundred ways that this tax revenue could fail to materialize even if the infrastructure plan is pursued. This is why state budgeting based on estimates of economic growth is considered unsound.

Governor Justice once appeared to be the sensible, stable player in the budget and revenue battles. Now he seems to be the chief inmate in the asylum.