Recently, the tri-state region of OH, PA, and WV has been experiencing an enormous boom in the natural gas industry. Hydraulic "fracking" combined with new horizontal drilling technology is enabling energy companies to safely harvest huge amounts of clean natural gas. The Marcellus and Utica shale formations underlying the region have more than three trillion cubic feet of natural gas, just waiting to be produced. As a result, several energy companies have flocked to the area to cash in. Hundreds of rural families who have owned homesteads in relative poverty for generations have literally become overnight millionaires merely by leasing their natural gas rights. Employers can't hire people fast enough to keep up with exploding demand. Most law firms' bottom lines are getting hammered right now, but my employer regional law firm - headquartered in Bridgeport, WV - experienced record breaking profits last year. These profits mainly came from the dramatic increases in oil/gas title and transaction work from the fracking boom. In short, economic outlooks are looking really, really good across the board.
This boom has convinced Shell Oil and another unnamed oil company to construct two "cracker" plants somewhere in the region. Cracker plants, like the one pictured above, chemically break down ethane (a byproduct from natural gas drilling) into usable ethylene. Guess how much it costs the companies to invest in and build just one cracker plant? $3.2 billion. Guess how many short-term, shovel-ready construction jobs that one plant would create? About 8,000. Guess how many long-term, good paying jobs that one plant would create? As estimated by the American Chemistry Council, 12,271 (2,484 in the chemical industry; 6,262 in the supply chain; and 3,524 from the 'induced' increases in consumer spending).
Naturally, with two cracker plants up for grabs, OH, PA, and WV are fiercely competing with each other to entice the companies to invest those billions and bring those tens of thousands of jobs to their states. So politically, something encouraging, albeit counter intuitive, has taken place in WV. Newly elected Governor Earl Ray Tomblin (D) ran his campaign on a very simple and focused message: "Lower Taxes. More jobs." To his credit, Tomblin is striving to keep that promise by working closely with large Democrat majorities in the WV House and Senate.
Last week, the Legislature fast tracked a bill to the Governor's desk. The bill slashed state property, inventory, and machinery taxes that a cracker plant would have paid from $30 million per year to $1.5 million per year - for the next 25 years! Do the math, those savings add up. Despite strong opposition from environmental and anti-development special interest groups, the tax cuts passed unanimously in the Senate, and only 1 member of the House voted no (strangely, a Republican). Legislators were calling it "by far the most important legislation we will pass this year." Gov. Tomblin quickly signed the bill to take it with him on a sales trip to Houston, where Shell is headquartered, as part of his pitch to bring the crackers to WV instead of PA or OH. Obviously, this has been a very popular move with West Virginians, who elected Democrat Tomblin on the promise of creating more jobs.
I applaud the Dem leaders of WV who, bucking conventional partisan wisdom, are trying to create more jobs (and, consequently, more tax payers); not by jacking up taxes, but by slashing them. They understood that to be competitive with other states whose taxes are lower, and whose legal and regulatory environments are much more conducive to run a business, things had to be changed. Vilifying, demonizing, and "punishing" evil job creators with higher taxes wasn't the route they chose. They knew that WV didn't stand a chance with where our tax levels were compared to PA and OH. West Virginians are hoping that this legislation will pay off and deliver the grand prize: billions in new investment and tens of thousands of new jobs. This is a great case study in how you ultimately grow your tax base, your tax revenues, the employment rate, your approval ratings, and your reelection chances. The Obama administration should take notes.
Were the tax breaks just for cracker plants or across the board? We see municipalities doing a small version of the same thing. Each one offers specific tax incentives to this or that company to relocate, claiming that the long-term benefits of a new facility outweigh the tax breaks. This produces a race to the bottom, with each government trying to outbid their neighbor in handing a break to a specific entity or industry. I wouldn't blame WV for doing so - it is an effort at self preservation.
ReplyDeleteI'm not positive, but I believe the incentives are just for the cracker plants. This principle also makes me think of Lebron James. Instead of choosing to play basketball in his beloved NYC, where taxes are through the roof, he took his talents to Florida where there is no state income tax. Playing with Wade was certainly a plus, but you can't tell me that, on a contract of his size, the considerable tax savings played no part in that decision. One could easily argue that the positive trickle down effects of one of the best basketball players on the planet playing all his home games, selling all those jerseys and tickets, and everything else that comes with him in FL far outweigh what Lebron isn't paying in state taxes.
ReplyDeleteSimilarly, on a global scale, if the corporate tax climate were better in the states, I wonder if Steve Jobs would have decided to mass produce Apple electronics here instead of in China. This is just one reason why China's GDP growth rate is a robust 9% while we're at a sluggish 3%.
Here's a great article related to the post re: taxes and competition.
ReplyDeletehttp://online.wsj.com/article/SB10001424052970204301404577172563616006788.html
I hope Chris Christie decides to run for President one day. This country could sure use his bi-partisan leadership and the results he's getting in NJ.
Interesting article, interesting platform for a democrat to run on. Of course this is also the state where one of your governor's shot the cap and trade bill with a hunting rifle right? Doesn't sound like your democrats are too liberal there.
ReplyDeleteChris Christie needs a name change and a diet. Haha
Hey, I like his name, and his other name.
DeleteYeah, then-Gov Joe Manchin put a bullet through the cap and trade bill during his campaign to replace Byrd in the US Senate. You have to realize, though, that cap and trade would be to WV what a massive tax hike on potatoes would be to ID or oranges in FL. It would bring this states's economy, heavily dependent on coal, to its knees. Anyway, as a general rule, dems here are fiscally conservative compared to your typical tax and spend dem from the coasts. Lots are avid hunters, so they oppose gun control. Most are pro life as well. The liberal dem hangout in WV is the faculty lounge at WVU College of Law.
ReplyDeleteI don't really care what the guy's name is or what he weighs. He isn't scared of entrenched public unions, treats voters as adults, has turned a budget deficit into a surplus, and gets results. Good enough for me.
Yea it was just a lame joke. What are the chances we see Romney-Christie if Romney brings down the nomination?
ReplyDeleteThat's what I figured. I think the chances are better we see a Romney-Marco Rubio ticket if mitt gets the nomination. I can't see Christie playing second fiddle to anyone, plus the Latino vote will be an important voter bloc. For the repub party to remain viable, it needs to do a better job at convincing this increasingly diverse country that it isn't just for old white guys who hang out at the country club. Do you think Biden will still be the veep candidate? I think obama's chances would improve if he benched Biden for Hillary.
ReplyDeleteI personally think he'll stick with Biden but I could be wrong. I thought Hilary said she wanted a break after Obama's turn is up? I think she'll be back in 2016.
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