The Carbon Dividend: An Environmental Proposal to Consider

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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

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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.

 

 

 

Bank Regulation and Bubbles

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The bubbles referred to here aren’t in Champagne or a luxurious bath. They are the rapid inflation of value in an asset class – maybe stocks or single-family homes – to unsustainable levels inevitably followed by rapid, uncontrolled deflation. The unmistakable pop. Those my age have muddled through a number of these bubbles. There was the incredible run-up in value of tech stocks in the 1990s. Then came the sub-prime mortgage lending bubble that popped in 2007.

Bubbles are important to consider these days because a central brake on the conduct of banks in contributing to bubbles, called the Dodd-Frank Act, is under attack by the de-regulators in Congress. Banks and bankers provide a crucial function in our economy. We need them to extend credit, which is the lubricant of the economy, but to do so in a prudent manner. Unfortunately, like most every industry, the banking industry is not self-regulating. Left to govern itself completely, the industry will engage in excessive and risky behavior. This has happened time and again and is just the nature of things.

Man Controlling TradeThe image to the right is a statue called Man Controlling Trade installed outside the Federal Trade Commission in Washington. It was commissioned in 1937, before the United States had completely crawled out of the Great Depression. Most historians agree that among the causes of the Depression was the credit banks granted for speculative investment in stocks. This was followed by the stock market crash of 1929, which led to the failure of 9,000 banks. This risky behavior with depositors’ money had been completely unregulated. The statue’s powerful horse is meant to represent the danger of uncontrolled economic behavior.

To bridle this risky bank behavior, Congress passed the Glass-Steagall Act in 1933. The principal feature of this law was a separation of commercial banking from investment banking. Commercial banks, which took in deposits and made loans, were no longer allowed to underwrite or deal in securities. This regulated environment continued until 1999 when it was lifted by the Gramm-Leach-Bliley Act, which allowed banks, securities firms and insurance companies to affiliate with one another through common holding companies.

The conventional wisdom is that deregulation under Gramm-Leach-Bliley led to the sub-prime mortgage crash in 2007. This is incorrect. The two portions of Glass-Steagall that Gramm-Leach-Bliley repealed had nothing to do with the issuance or purchase of mortgage-backed securities. Banks had been issuing mortgages, securitizing them with other financial instruments, and buying mortgage-backed securities for years before Gramm-Leach-Bliley. But unfortunately there was no regulatory structure that prevented banks from lowering underwriting standards on the underlying mortgage loans as the market overheated. This lack of regulatory control led, as it always does, to excessively risky lending and a bubble.

The Great Recession that began in 2007 spurred the adoption of the Dodd-Frank Act, a massive piece of legislation. Dodd-Frank was designed to reorganize government financial oversight and give greater transparency to the finance industry. It sought to address the notion that some financial institutions are “too big to fail” and end taxpayer bailouts of failed banks. It also sought to protect the consumer from abusive conduct in the finance industry. But it has been a regulatory nightmare. One commentator has noted that the Act requires regulators to create 243 rules, conduct 67 studies, and issue 22 periodic reports.

Dodd-Frank has been on the books only seven years and it is too soon to know how successful it has been and can be. We do know, however, that there has been no financial bubble since it was enacted. Nevertheless, Rep. Alex Mooney (WV 2nd) and others whose mission is to dismantle anything created during the Obama administration want a complete repeal of Dodd-Frank. Mr. Mooney is now on the House Financial Services Committee where he can do some real damage.

Rep. Mooney recently met with roundtables of community bankers in Charleston and in the Eastern Panhandle. The bankers complained that Dodd-Frank was designed for huge banks and doesn’t “scale down” to banks the size of most in this state. They claimed that over-regulation has raised their costs and made it harder and more costly to make loans. Maybe this is a legitimate complaint for small community banks, but what regulated industry ever believes that the hand of the regulator lays upon it too lightly? There are even some in the banking industry who argue that  community banks are “too small to succeed” because they cannot generate the return on assets of larger banks, a problem that cannot be blamed on Dodd-Frank. Whatever their regulatory burden, community banks do not seem to be hobbled in West Virginia – auto loans and home equity loans are a booming business now.

Michael Barr, University of Michigan Law School professor and a key architect of the Dodd-Frank Act, says that the U.S. financial system is “incredibly healthy” in comparison to 2008 and presently in other countries. But not if you listen to House Financial Services Committee Chair Jeb Hensarling (R, Tex.), who blames a slow recovery from the Great Recession on Dodd-Frank. Hensarling has championed The Financial Choice Act, which would gut a number of important Dodd-Frank regulations.  This bill was recently reported out of his Committee on a completely partisan vote of 34-26.

Both sides of this issue have decent arguments. But considering the incredibly damaging effects of bursting asset bubbles, I for one am willing to risk a little sluggishness in bank lending in exchange for solid controls on bank behavior. Perhaps when the Financial Choice Act reaches the House floor, or the Senate, better recognition of the virtues of control will prevail.

Do Tax Cuts Lead to Economic Growth?

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Budget season in Charleston and Washington, D.C. has once again presented the spectacle of competing tax philosophies. Conservatives argue for cutting taxes as a way to unleash economic growth and job creation. They assert that high taxes discourage the most creative class from economic activity that will ultimately raise all boats. Liberals and progressives, on the other hand, believe that tax cuts unfairly benefit the rich and eliminate revenues that are required for programs that secure a just society. They further argue that tax cuts do not stimulate economic growth in the long term and point out that some jurisdictions with the highest tax rates in the country and the world also have the highest rates of growth. Who is right?

There is one aspect of tax cuts that is not debatable – it is simple arithmetic. If a government cuts taxes it lowers revenues. Unless spending is cut by an equal amount, the government creates a budget deficit. Budget deficits at the federal level are funded by government borrowing. But the more the government borrows, the higher its debt service burden will be in the future. This has two major consequences.

First, the more money that must be devoted to paying off debt, the less money is available for direct spending on needed government activity. Second, government borrowing sucks up investment funds from the market that would otherwise be available to businesses for making capital investment – new plant, machinery and technology. New capital investment is required for productivity growth, and productivity growth is required for overall economic growth.

Conservatives dispute that tax cuts lower revenues by resort to a form of economic voodoo called “dynamic scoring.” They argue that because tax cuts will stimulate economic growth, which will lead to a healthier base economy upon which the lower tax rates will apply, it is incorrect to focus only on the immediate drop in tax revenues created by the proposed tax cuts. According to this argument, eventual new tax revenues created by future economic growth should be counted to assess the true impact of the tax cuts.

Very few economists are comfortable relying on dynamic scoring because there are no certainties about the effects of tax cuts on economic growth. Revenue feedback from increased growth fluctuates, when it occurs at all, and never gets above 20% of the original cuts. Nevertheless conservative politicians love dynamic scoring. It is a sales pitch they can use to undercut opposition and it does not require them to provide facts or credible explanations. For example, Treasury Secretary Steve Mnuchin asserted on April 26 that the lower tax rates in President Trump’s tax plan will boost GDP growth from its current 1.7% rate to a new level of 3%, and that surge would completely pay for the plan. But in a poll of 37 economists conducted by the University of Chicago’s Booth School of Business, not one believed that the proposed tax cuts could pay for themselves.

The historic evidence is that tax cuts do not lead to long term economic growth. Recent history provides support for this. Both President George H. W. Bush and President Clinton raised taxes in the 1990s and the economy boomed. Incomes grew at the fastest rate since the 1960s. Then President George W. Bush passed a large tax cut in 2001 and boldly predicted that prosperity would follow. It didn’t. The economy stumbled at a low growth rate until it crashed in 2008. A similar example of this at the state level is provided by the Kansas experience, in which sweeping tax cuts were followed by sluggish growth. Of course, correlation is not necessarily causation – tax increases may not cause booms and tax cuts may not cause busts. Instead we are asking whether tax cuts lead to economic growth and there is just no evidence for this.

From what little we know of the proposed Trump tax plan, wealthier taxpayers will be certain to benefit from lower marginal rates on income and capital gains. The Congressional Research Service, a non-partisan service of the Library of Congress, analyzed the effect of reductions in the top marginal tax rates since 1945. In a September 2012 report the CRS said:

There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.

The CRS did find, however, that decreasing the top marginal tax rates was associated with increasing the share of national income going to those who were already wealthy.

So on the question of whether tax cuts lead to economic growth the careful answer, based on the evidence, is no. This begs the question what policies do increase economic growth, which will be the subject of a future article.

Rep. Alex Mooney Ignores the Panhandle’s Economic Needs

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Let’s face it. Panhandle voters did themselves no favor when they elected Alex Mooney as West Virginia’s 2nd District Congressman. Characteristics we’d like to see in a Congressman – independence of thought, sensitivity to constituent needs, flexibility in problem solving – appear to be lacking in Rep. Mooney. His actions and statements show him to be one dimensional. Whatever outrage President Trump proposes for the environment with the false promise of putting coal miners back to work is just fine by him.

For proof of this I invite anyone to review Rep. Mooney’s website for his public statements and news releases. Don’t expect to find any evidence of initiative in Congress meaningful to the Panhandle. Instead, a favorite Mooney posting is a “statement” lauding something President Trump has done and repeating tired Republican attacks on the Obama administration. Here is one issued on March 28, 2017:

Today, President Donald Trump signed an Executive Order that rolls back devastating [Clean Power Plan] regulations on American energy production. . . . . This Executive Order is just one of the many ways President Trump is standing up for West Virginia energy production and I am proud to stand with him in this fight. For eight years, former President Barack Obama waged an all-out war on coal and West Virginia values. As unemployment skyrocketed and coal mines closed, President Obama and his left-wing supporters focused on executing on his promise to bankrupt the coal industry.

Earlier, Rep. Mooney celebrated President Trump’s roll-back of the Obama administration’s Stream Protection Rule, which was designed to blunt the harmful effects of mountaintop removal mining. Based on wildly inflated figures from the National Mining Association, Rep. Mooney claimed that the Rule would have cost 70,000 coal mining jobs. Pretty soon Rep. Mooney will have to come up with some ideas that actually move us forward, instead of ritually dismantling what was done during the previous administration. But don’t hold your breath. This may take a while.

Six of eight counties in the Eastern Panhandle are part of the 2nd District – Jefferson, Berkeley, Morgan, Hardy, Hampshire and Pendleton. According to Census Bureau estimates, the 2016 total population of these six counties was 231,766, making up 37% of the 2nd District. Simply from the standpoint of the total votes in the Panhandle, you would expect Rep. Mooney to pay some attention to our economic needs.

There is no coal mining in the Eastern Panhandle. Our economy is heavily weighted toward white-collar jobs in healthcare and government, tourism and agriculture. Our conservation and environmental interest groups are thriving. A ruined environment, fueled by Big Coal and science-denial, directly harms our means of achieving prosperity and our enjoyment of life. Rep. Mooney’s dogged support of the coal industry is completely out of touch with our needs. In fact, it is out of touch with the needs of the entire state. Coal mining jobs make up only a minor slice of West Virginia’s current employment. Counting generously, there are 20,000 miners employed in West Virginia out of total employment of 740,000.

Instead of legislation to improve our economic prosperity, Rep. Mooney seems more interested in right-wing social legislation. He has twice introduced a Bill called the Life at Conception Act (H.R. 816), and has introduced a resolution (H. Res. 514) imploring the states to permit individuals to disregard laws and regulations on the ground of their personal religious beliefs. In the 114th Congress none of the Bills introduced by Rep. Mooney became law.

Certainly, there is more to being an effective legislator than the number of your Bills that are passed. But Rep. Mooney was one of those Congressmen who wouldn’t meet his constituents in face-to-face town hall meetings to explain what he’s doing for us. No doubt he was afraid to hear the pent up anger in his District. There is still time in his current term for Rep. Mooney to demonstrate that he understands the Panhandle’s economic needs. But it is hard to be optimistic.

How We Talk About Economic Growth

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In the last few years of the Obama administration, The Wall Street Journal relentlessly criticized the administration’s failure to achieve sufficient economic growth. That newspaper complained that Obama’s over-regulated economy was to blame for a GDP growth rate of 2.1% — tepid compared to recoveries in the past.

The Journal is, of course, the voice of business people who often favor the conservative agenda of low taxes and lower regulation. But the Journal was on to something. The need for economic growth is hugely important and one thing both conservative business people and progressives should be able to agree on.

Progressives can rally behind strong economic growth because material prosperity improves the quality of life and opportunity for everyone. Unfortunately, as with so many other things, conservatives and progressives are each mired in their own rhetoric. Every issue seems to have its predictable arguments. A proposal for raising the minimum wage will inevitably be met with the argument that employers will have to cut jobs. A proposed international trade deal will be opposed by arguments that globalization harms the little guy.

But neither side talks about the social and political benefits that accrue to a country with a steadily growing economy. These non-economic benefits must be counted along with the hard financial and environmental factors when we evaluate any serious policy question. Doing so may actually tip the scale in favor of some policies that will promote growth versus the predictable counter arguments.

In his 2005 book The Moral Consequences of Economic Growth, Benjamin Friedman catalogues the social and political benefits of growth: openness, tolerance of different ethnicities and points of view, philanthropy, and a satisfaction with the democratic process, if not always its results. A stagnating economy, on the other hand, leads to rising intolerance and incivility, defensiveness, eroding generosity, rigidity of institutions, and a disrespect for the democratic process.

The mechanism for this effect is psychological. Economic growth, or the lack of it, drives a person’s perception of whether he is getting ahead or falling behind. There are two benchmarks for this. One is a person’s current economic situation compared to his past situation. The other is a person’s current economic situation versus the current situation of other people. These two benchmarks can be substitutes for each other. In a steadily growing economy, a person’s satisfaction with being better off than he was in the past can mitigate his impulse to be better off than his neighbors.

On the other hand, when an economy stagnates and a person is not better off than he was in the past, his need to be better off than his neighbor (or people of color, or immigrants) intensifies. His view of the economic pie becomes zero sum – his situation can only improve if someone else’s declines. If someone else seems to be getting ahead, he assumes it must be at his expense. Both the positive effects of a growing economy and the negative ones of a stagnating economy are magnified when people consider the opportunities available for their children.

This is not some pop social theory. American history provides many examples to confirm its accuracy. Between 1880 and 1895, real income per capita grew by only .7% per annum. In the same period Jim Crow laws, segregation in every aspect of life and appalling violence became the norm in the South. In rural America populism led to nativism, ethnic intolerance and open religious bigotry. In the West, riots protested the use of Chinese labor for railroad construction and immigration laws were tightened.

Contrast this with the post-WW II expansion. With the exception of several brief but painless recessions in the Eisenhower years, Americans enjoyed uninterrupted economic growth from the end of the war to 1973. Over the prolonged period from 1948 to 1970 real income growth per capita averaged 2.4% per annum. Home ownership became a realistic possibility for most Americans and white collar jobs opened to many. It is no coincidence that during this period political and economic democracy was extended to non-whites. Brown v. Board of Education mandated school desegregation and a decade later the Civil Rights Act of 1964 outlawed discrimination in employment, public accommodations and housing.

While none of the foregoing changes – good or bad – happened overnight, political change is possible when only a small number of voters change their minds. The recent shift in public sentiment about gay marriage comes to mind. Likewise, a stagnating economy need only influence a small segment of the populace to produce unfortunate results. Many political analysts have said that fewer than 20,000 economically frustrated voters in Michigan and Wisconsin elected the incompetent Donald Trump with his agenda of anti-Muslim animus and disregard for environmental and social justice.

Economic growth is a good thing. It strengthens not only our material prosperity but it permits the kind of positive social and political behavior we all want to see in our country. This is not to say that bad policies – ones that would irreparably harm the environment, for example – should be adopted simply because they are said to promote growth. What it does mean is that we should evaluate our economic policy choices by also considering the indirect non-economic benefits of growth. In the end, this may lead progressives to be less instinctively critical of pro-growth policies and bring the left and the right together toward a common economic agenda.

Replacing West Virginia’s Income Tax with a Consumption Tax Promises Huge New Deficits for the Future

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West Virginia Senate Bill 335, now pending before the Senate Select Committee on Tax Reform, would phase out West Virginia’s income tax and impose an 8% consumption tax on a broad range of transactions. The legislative “findings” that precede SB 335 assert that a major change like this to our tax structure would be both fair and fiscally sound. As to fairness, this assertion is demonstrably false. SB 355 would increase the tax burden on low income and working class taxpayers and give wealthier taxpayers a substantial overall tax break.

In the face of at least a $500 million budget deficit this fiscal year and perhaps a larger one next fiscal year, West Virginia is in dire need of a tax plan that will grow long-term, stable revenues. Unfortunately, SB 335 would at best provide only temporary revenue relief and portends mounting future budget deficits. This revolutionary change to our tax structure would be bad law and worse policy.

It is important to understand how SB 335 would change West Virginia’s tax structure. The personal income tax is the state’s largest revenue source and makes up approximately 45% of the state’s General Revenue Fund Budget. Income tax collections for FY 2018 are expected to be $1.8 billion. Under SB 335, the personal income tax would be repealed on January 1, 2018 and replaced with a flat tax rate of .6% in 2018, .4% in 2019 and .2% in 2020. According to the fiscal note attached to the Bill, this would result in decreased income tax collections of $650 million in FY2018, $1.8 billion in FY2019 and $2.0 billion in 2020.

To replace that revenue, SB 335 would create a broadly based 8% consumption tax that would apply to the same sales as the current sales tax, but with the following enhancements: (1) food for home consumption, (2) non-medical professional services such as legal, accounting, engineering, architecture, real estate, advertising, funeral, and the like, (3) personal services such as hair, nails, skin care and non-medical personal home care, (4) public utility services such as electricity, natural gas, water, sewer, telecommunications, solid waste, and the like, and (4) numerous direct use purchases by business, electronic data processing, mobile home sales, health fitness services, and much more.

These consumption tax changes would result in tax collections to the General Revenue Fund of around $1.2 billion in FY2018 to $1.33 billion in FY2019. The figures do not account for “leakage” of sales by consumers who would make purchases in surrounding states with a lower consumption tax. Matching the projected decrease in income tax collections with the increase in projected consumption tax collections, the fiscal impact of SB 335 would be the following:

  • FY2018 — $550 million
  • FY2019 — ($370 million)
  • FY2020 — ($440 million)
  • FY2021 — ($610 million)

The increased revenues in FY2018 are produced only because the consumption tax increases would begin in July 2017 while the decreased income tax collections would not begin until January 1, 2018.

The fiscal note by the State Tax Department makes the following observation:

The proposed bill represents the most massive tax reform effort of any State in recent memory. Most states commit significant resources toward adequate measurement of tax reform impact on businesses and residents prior to adoption of a significant change. The resources and timeframe for the preparation of this fiscal note are woefully inadequate to properly measure the cumulative extent of all consequences associated with proposed changes.

Why then rush to consider SB 335? One argument for this change in the tax structure is that it would stimulate economic growth. But eliminating the state’s income tax can’t be counted upon to do this. The fiscal note states that SB 335 would effectively increase taxes on business inputs by an amount that is at least double the potential income tax savings on business profits. Meanwhile, the West Virginia Center on Budget and Policy notes that for the period 2005 to 2015 the nine states with the highest income tax had 5.6% GDP growth while the nine states with no income tax grew GDP only 3.2%.

Ask any merchant whether she would prefer to pay income tax on business income or be the state’s collection agent for a hefty consumption tax on her customers. My bet is that the income tax would be favored overwhelmingly. A consumption tax relentlessly faces the customer in each transaction and so discourages sales. This would be particularly true for businesses that deal in products and services that have never before been subject to the state’s sales tax. On the other hand, a business can plan for and sometimes mitigate the effects of an income tax through lawful deductions, credits and deferrals. Not so with a consumption tax.

If the West Virginia legislature truly wants to create stable future revenues for all the important work government has to do, while keeping West Virginia “open for business” as our state marketing slogan once promised, it needs sober up about what replacing the income tax with a consumption tax would really do.

 

 

Eliminating the Income Tax and Creating a New Consumption Tax: Bad Law and Worse Policy

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Mischief is well on its way to becoming law in West Virginia. The Republican-controlled Senate Select Committee on Tax Reform is about to propose to the full Senate the passage of SB 335, which would phase out the state income tax and transform the current 6% sales tax into a broader 8% consumption tax. The conceptual basis for the proposed law is that the state provides the marketplace in which sales can take place so that vendors and purchasers who engage in transactions should be required to pay for the privilege of using that marketplace. If that silliness weren’t enough, the Bill’s legislative findings provide the following gem of a non sequitur. “The Legislature further finds that, in the free market system, the best judge of a purchaser’s ability to pay, for the purchase of the goods and services, is the purchaser, and, thus a broad-based consumption tax is firmly based on that principle of sound and fair taxation.” There is nothing sound or fair about this revolutionary change in West Virginia’s tax structure and it should be stopped in its tracks.

The fiscal soundness of SB 335 will be addressed in the next post on this site, upcoming promptly. But it is on the question of fairness where SB 335 fails us badly. Consider the point in the legislative findings that the purchaser is in the best position to know whether he has the ability to pay for a purchase. That may be true in the abstract, but completely misses the point when it comes to a consumption tax. There are many of our fellow citizens who are poor and spend only on the necessities of life – food, clothing, shelter, and the like. For them these purchases are not optional. They are not in a position to ponder whether “ability to pay” might lead them to decline such a purchase. For consumption by low-income citizens there is no magical marketplace of free choice like that existing in the dream world of some legislators.

Contrast this with the choices available to the financially comfortable. The purchaser of school clothes for kids in a well-to-do family has many options and certainly could choose to purchase less expensive clothing. But really, the ability to pay for a purchase is not the question for these consumers. It is their willingness to pay for the purchase plus the tax. And suppose the well-to-do purchaser decides not to make a purchase because of the tax. That would only hurt state tax revenues and thereby the operation of state government. The ideological foolishness of a consumption tax is quite apparent from this. The logical effect of making every business transaction 2% more expensive will be to make those transactions smaller in amount, less frequent, or avoided altogether. One can imagine many purchases being made across the border in states with a lower consumption tax.

One thing is certain – enacting SB 335 will shift a greater tax burden onto West Virginia’s poor and working class and away from wealthier taxpayers. Low income taxpayers, including seniors dependent on social security, are not currently subject to high income tax rates and do not pay much in total income taxes. Higher income taxpayers pay considerably more income tax. Contrast a consumption tax, which doesn’t concern itself with how wealthy you are, only how much you spend and on what things. As mentioned, SB 335 proposes to raise the state consumption tax from 6% to 8%. If it passes, the total tax paid by the low income taxpayer will rise slightly because of the additional 2% tax on his purchases, while the wealthy taxpayer will get a nice overall tax reduction. This is because the additional 2% sales tax paid by the wealthy taxpayer on her purchases is far less than the income tax she would avoid.

Sen. Robert Karnes (R-Upshur, 11), the same legislator who chairs the Senate Select Committee on Tax Reform, has sponsored two bills that are apparently intended to blunt criticism of the fairness of SB 335. One, SB 377, calls for a payment of up to $200 to be made by the state to low income senior citizens who file a yearly claim to receive it. The actual amount of the payment would be based on a declining percentage of the taxpayer’s income above the federal poverty level. SB 378 would create a similar payment, called an “earned income credit,” for low income workers. This is a misnomer because there would be no West Virginia income tax against which to credit it.

The inadequacy of these two sops is obvious. First they do nothing for the low-income unemployed who have no earned income to report. This omission is consistent with the view of many conservatives that if you are poor and unemployed it must be your fault. Second, these “credits” bear no relationship to the amount of additional consumption tax low-income individuals will be forced to pay. For example, a person earning $20,000 who is forced to spend it all to survive will pay an additional consumption tax of 2% on all purchases — a total of $400 in additional tax. Neither of the proposed “credits” could ever be more than $200. Finally, they require the taxpayer to file an additional tax document and wait for approval of the once per year payment. This does nothing to help him make ends meet on a day to day basis.

Even if such a major change to our tax system could solve our budget problems (more on that later), how can it be called fair when it benefits the rich and further burdens the low income residents of the state?

Rep. Alex Mooney Deals a Blow to West Virginia’s Mountain Streams

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Rep. Alex Mooney (WV 2nd) is celebrating the demise of the Interior Department’s Stream Protection Rule. This Rule, made effective in the waning days of President Obama’s tenure, would have created a buffer zone between mountain streams and mine sites and would have protected drinking water in accordance with modern technology. The Rule would have mainly affected mining done by mountaintop removal where mining refuse is pushed into stream valleys. But Rep. Mooney and his Big Coal backers claim that the Rule would have killed over 70,000 jobs in the coal industry. Unfortunately, Rep. Mooney’s grasp of coal economics and employment numbers is feeble, perhaps influenced by his ideological impulse to dance on the grave of the Obama Administration.

The scientific evidence of the harm done by mountaintop removal with valley fills is unassailable. In January 2010, Science Magazine published an article detailing that harm, written and researched by twelve preeminent scientists including one from WVU. They found that burial of headwater streams by valley fills causes permanent loss of ecosystems. Stream biodiversity and water quality suffer. As they emerge from valley fills, mountain streams are saturated with sulfate, calcium, magnesium and other harmful ions. These persist even after mine-site reclamation. Groundwater samples from domestic supply wells have higher levels of mine-derived chemicals than well water from unmined areas. The article, written before Obama’s stream protection Rule, concludes

mine-related contaminants persist in streams well below valley fills, forests are destroyed, headwater streams are lost, and biological diversity is reduced; all of these demonstrate that [mountaintop removal with valley fill] causes significant environmental damage despite regulatory requirements to minimize impacts.

Balanced against this certain environmental harm is Rep. Mooney’s rather hysterical claim that huge numbers of West Virginia coal jobs would have been lost under the Rule. It should surprise no one that Rep. Mooney’s numbers come straight from the National Mining Association. That group’s analysis asserted that as many as 77,000 jobs might be lost nationwide under the worst scenario, but possibly far fewer under more likely scenarios. Those are not all West Virginia jobs, or even Appalachian jobs. And there is good reason to doubt the bona fides of NMA’s numbers because they do not take into account the reclamation and compliance jobs that would be created by the Rule.

Congress required the Office of Surface Mining Reclamation and Enforcement to estimate the proposed Rule’s impact on employment, not just on coal jobs. In a document entitled SPR Myths vs, Facts, it debunks industry claims that between 40,000 and 77,000 jobs would be lost:

The final [Stream Protection Rule] will not have an adverse impact on jobs. The regulatory impact analysis (RIA) for the rule estimates overall that employment will show [an annual average] increase of 156 full time jobs. Where coal production is unprofitable under market conditions, jobs are predicted to decline by an average annual aggregate of 124 fulltime jobs. This will be more than offset by an average annual gain of 280 fulltime jobs needed to comply with the rule where mining remains profitable, such as additional jobs like heavy machine operators for materials placement and water sampling professionals. For purposes of comparison, the Energy Information Administration reports that total coal industry employment in 2015 was equal to 65,971, decreasing 12% from 2014.

In a February 22, 2017 opinion piece, the Morgan Messenger took Senators Capito and Manchin to task for claiming that rolling back the Rule would save state coal jobs. “They don’t do our state any favors by pretending to have turned back the loss of coal jobs,” the Messenger said, noting that coal jobs have been declining for years due to economic factors unrelated to environmental regulations. Rep. Mooney is guilty of the same and more. By accepting and further promoting the coal industry’s false narrative about a “war on coal” he delays the reckoning we in West Virginia must have about replacing coal jobs and severance revenues. He keeps us in the perpetual coal rut. The roll back of the Stream Protection Rule is no cause for him to celebrate.