Category Archives: Economy

The Tax on the Mathematically Challenged

Pick 3 Game Frequency

Untold thousands of Virginians just poured their money into the recent multi-state Mega Millions drawing won by someone in California.  Governor Jerry Brown sends his thanks for his cut.  But based on a recent news release our own governor is also very pleased with the performance of the Virginia Lottery as it approaches its 30th anniversary.

As with any other game of chance, the house has many ways to win.

Years of debate in the General Assembly led to a November 1987 lottery referendum, which passed with about 57 percent in favor.  The games started less than a year later.  According to information on the Virginia Lottery website, and plugging in the unaudited totals from fiscal year 2018, over 30 years the lottery has:

  • Received from players $37 billion in cash (sales).
  • Returned about $21 billion of that back to players in prizes. The net after taxes is not reported, so that might really be about $16 or 17 billion.
  • Transferred about $12.5 billion to the state earmarked for education (but there is no proof local schools are better funded than they would otherwise be.)
  • Spent about $2 billion on its own overhead and advertising and  another $2 billion on compensation to retailers. (State and local taxes gets a cut of that, too.)

Neighboring lotteries were rare initially, but now all surrounding states have joined in taxing people who don’t understand probability. Maryland has taken the additional plunge into casino gambling.  Strip away the masquerade and Virginia is right behind with the new “historical horse racing” which will allow 3,000 slot machines.

This has become a big business, more than twice the size of Virginia’s liquor sales through the ABC.  The bare-bones cash flow summary on the Virginia Lottery website is supplemented by details in the annual reports and survey information provided to Bacon’s Rebellion upon request.

With all the attention given to the large national lotto games, the bulk of Virginia’s revenue comes from the scratch-off games and the daily Pick 3, 4 or 5 games intended to mimic the illegal numbers racket.  Last year’s annual report stated the scratch-off revenue represented 56 percent of sales and the simple numbers games 30 percent.

Regular market surveys are based on a rolling 100 interviews per week or 1,300 per quarter, a very strong methodology, and you can see a recent report here.  If indeed 70 percent of adult Virginians have played in the past year, that’s about 4.6 million individuals.  That puts the annual average revenue per player at $465, but of course most of players spend far less.

Which means quite a few Virginians are spending far more.  Who are they?  How much do they spend? The data shared does not include that, but there are some hints. Continue reading

Tax Act Impact on Virginia: 5,782 Jobs

The Tax Cuts and Jobs Act of 2018 will create 218,000 full-time equivalent jobs across the United States this year, asserts the center-right Tax Foundation, which specializes in analyzing the impact of tax policy on the U.S. economy.

Using its Taxes and Growth econometric model, the Tax Foundation provided a job-creation estimate for each of the 50 states and Washington, D.C. In Virginia, predicts the model, the economic stimulus of corporate and personal income tax reform will create 5,782 jobs.

That number compares to 20,100 total jobs created between Dec. 2017 and May 2018, according to U.S. Bureau of Labor Statistics data. Annualized, Virginia was on track for creating 48,200 jobs in 2018, suggesting that the tax cuts are accounting for about 12% of the state’s job growth.

The tax cuts’ impact on Virginia falls in the middling range compared to other states. The 5,872 jobs created in Virginia amounts to 678 jobs per 1 million population, according to Bacon’s Rebellion calculations. On a jobs-per-population basis, the impact ranges from 1,640 in Washington, D.C. to a mere 110 in Oklahoma, both of which appear to be anomalies. Excluding those two, the impact ranges from 564 jobs per million population in Mississippi to 824 in North Dakota.

 

Back In Top 5, The Challenge Is To Stay There

Corks are popping all over Richmond as the business network CNBC announced this morning that Virginia is back in the top five of its annual survey of best states for business, ranking number 4.  It is the only state in the top five east of the Mississippi. The full Virginia report is here.

The photo on the CNBC page shows a Huntington Ingalls-built warship, but one of the amphibious ships built in Pascagoula, Mississippi.  Perhaps the web designers remember that the first time Virginia topped this list as number one the announcement was made from pier 3 at Newport News Shipbuilding with the future U.S.S. George Bush in the background as Governor Robert McDonnell took the bow.

Governor Ralph Northam will get to enjoy the spotlight this time, and should, but the credit needs to be spread widely. The person doing handsprings should be Stephen Moret, president of the Virginia Economic Development Partnership, who has been focused on improving these rankings since coming to Virginia to fix a broken agency its reputation.

Speaker Bill Howell and the others who joined with McDonnell in pushing forward the transportation tax package years ago deserve a nod, as those projects are starting to come on line. Virginia’s rank for infrastructure improved from number 25 in 2017 to number 20 for 2018, and may continue to rise now.

Also improved over last year was the ranking for education. Despite growing costs Virginia’s higher education system, public and private, remains the envy of many other states, but the focus now extends beyond degrees to work-related certifications.

This ranking is a marketing coup with no immediate value to the average Virginian. Staying in the top five over time will have value, however, as more business location or investment decisions start with Virginia on the short list.

Looking at the details there are only a handful of individual categories where the state ranked extremely well (workforce, education, business friendliness) and only two where Virginia was below the median – the related categories of cost of living and cost of doing business.  First or second quintile scores in several categories resulted in the good overall score.

Those outliers deserve some attention. A huge component of the cost of living and cost of doing business is the cost of electricity and other forms of energy, and the trend lines there are bad despite the energetic public relations efforts of a certain large utility. Another huge component of both is state and local taxes, which are under growing pressure to rise and where Virginia has a chance to be creative thanks to federal tax reform.

Not a time for any resting on any laurels. But some martinis at lunch are indicated.

Florida Mounts New Raid on Virginia Carrier Fleet

U.S.S. George Washington arrives in Virginia for almost-cancelled overhaul (Huntington Ingalls Photo)

Here we go again.  Florida wants one of Virginia’s aircraft carriers. U.S. Sen. Mark Rubio, R-Fla., and others are apparently trying once again to authorize the Mayport naval base to make the improvements it would need to become home port for one of the eleven jewels of the fleet. Virginia’s congressional delegation is gearing up to fight off the idea for the third time in a decade.

In a recent joint letter they wrote that limited defense funds shouldn’t be spent on “a non-existent requirement and duplicative capability that will cost the Navy nearly $1 billion over 15 years.” Right now five carriers sail out of Norfolk and one is being overhauled in Newport News.

The official position of Huntington Ingalls Industries, parent company of Newport News Shipbuilding, will probably be no position. The line has been that the company builds and maintains the ships and where the customer chooses to park them is none of the company’s business. But expect the rest of Virginia and Hampton Roads to care deeply, because along with the personnel who serve on the ship there are hundreds more support jobs ashore, and all of the economic benefit created by those many thousands of sailors and dependents.

It is a little dance the Florida and Virginia politicians do, burnishing their images with the home folks. We are probably seeing another attempt because the White House has changed hands. You might think these are weapons systems vital to the world’s stability, but we all know they are also political boodle of the highest order. Michael Dukakis sank his chances in Virginia in 1988 by proposing to cancel two carriers.

The total cost of the upgrade to the Florida base to host a carrier full time would approach $600 million, given the special facilities tied to its nuclear reactors. This apparently would defend us against the dangerous naval threat posed by, what, Venezuela? Brazil? Cuba is within easy reach of land based squadrons. There is no strong argument for moving a carrier to Florida except to boost Florida.

Norfolk likely will lose a carrier one day but it will go to the Pacific. And when the Pentagon is ready to make that move, adding to the five carriers now based in California, Washington and Japan, Virginia’s political class needs to drop its objections. That will be based on sound strategic requirements, unless of course President Trump makes a Glorious Peace with Dear Leaders Kim and Xi.

There also remains a chance Norfolk will lose a carrier because the Navy stops building them or chooses not to overhaul one and puts it in mothballs instead, as almost happened to the U.S.S. George Washington (CNV 73, pictured above). Given the total cost of ownership of a carrier strike group, that threat will not go away.

Make The Next Round A Double

USS Gerald R Ford CVN 78 Christening 2013

Virginia leaders like to get up on their soapboxes and worry that Virginia is too dependent on defense spending and promise elaborate strategies to diversify the economy.  Be grateful in some places the focus remains on building more combat ships at Newport News Shipbuilding, keeping its 20,000 plus employees and thousands of suppliers and contractors fully engaged well into the future.

As the House and Senate in Washington inch toward a fiscal year 2019 defense budget, the House has offered a version that expands on the Trump Administration’s proposal by setting up a single order for two nuclear aircraft carriers.

USS New Mexico Crossing Hampton Roads

The Senate isn’t there yet.  CVN 80, the future U.S.S. Enterprise, is already in the early stages of construction but the main construction contract has not been signed.  The proposal is to contract for the unnamed CVN 81 at the same time.

Huntington Ingalls Industries, parent of the shipyard, claims that ordering two carriers at the same time would save the Navy $1.6 billion because it would allow more negotiating leverage with the supply chain and would keep the workforce steady state. While working there I heard it was ideal to start a new carrier every four or five years, but the gap between them recently has been more like seven years.  One result of that is a labor valley every so often.

Two carriers included in a single contract would still need to be built in sequence, since there remains only one dry dock and crane capable of accommodating the assembly process. But as Enterprise sailed out of Dry Dock 12, the pre-built sections of CVN 81 would be ready to start going in. Enterprise will be the replacement for the first-of-its-class U.S.S. Nimitz, CVN 68, aging into its 40s and nearing retirement.

The ship in the dry dock now is CVN 79, the future U.S.S. John F. Kennedy. She is about 80 percent structurally complete and her christening and launch date are coming up fast. Debate continues over the utility of the large deck nuclear carrier in this submarine and missile-infested world, but it remains one weapons platform that our rivals obviously covet but cannot yet duplicate.

There is more potential good news for Virginia in the House version of the defense plan. The Navy is now starting two Virginia Class submarines annually, splitting the work between Huntington Ingalls and General Dynamics, but the old Los Angeles Class boats are retiring fast. The House adds a third submarine start in 2022 and 2023 – which is also when construction of the first new ballistic missile submarine, the future U.S.S. Columbia, should be in full swing at both Newport News Shipbuilding and Electric Boat.

Finally in the mid-2020s the aforementioned U.S.S. Nimitz returns to the yard for decommissioning of her nuclear components. That’s a couple thousand more jobs, too. So diversify the economy, certainly, but as they say in politics: Don’t forget your base.

After watching the christening of the U.S.S. George Bush CVN 78 in October 2006 I was heading out on Warwick Boulevard and there was a protester with a sign saying the money should have been spent on jobs. That was one clueless ideologue.

Note:  Both attached images were by the excellent staff photographers at NNS.

The Tax Cuts Are Working

by Jack Hubbard

We’re barely three months into 2018 yet, and Virginia is already off to an incredible start.

The passage of the Republican tax plan in late 2017 has allowed Virginia’s more than 700,000 small businesses to breathe a sigh of financial relief.

Prior to the passage of the Tax Cuts and Jobs Act, the majority of small businesses (95%) were taxed at nearly 40% by the federal government. After state and local taxes were added in, that number often reached 50%. This astronomically high tax burden diverted valuable resources from job growth to government coffers. President Trump and Congress knew something had to be done.

Under the new tax code, small businesses whose income is less than $315,000 can now claim a 20% tax deduction, leaving more resources for investment and job creation. In Virginia, that increased deduction applies to nearly all of Virginia businesses. And these businesses now can take these tax savings, reinvest them, and expand their enterprises.

What happens when businesses expand? New hiring follows, putting more Virginians on the career ladder. And more Virginians working leads to greater investment in the Old Dominion.

Additionally, the tax plan’s lower tax rates and increased deductions have empowered businesses throughout the country to pass on tax savings and to their employees. So far, more than four million Americans have received a pay increase or bonus from their employer since the tax bill was passed. Larger companies such as Walmart, BB&T Bank, and Capital One have all increased starter wages.

Here in Virginia, the Bank of James in Lynchburg has raised starting wages to $15, added vacation days, and increased its charitable giving plans.

The list of beneficiaries of the tax bill continues to grow. Even many public utilities have announced that they will be cutting rates on their customers. Residents in nearby Washington, D.C., will see their electric rates cut after Pepco announced lower rates during the first quarter of 2018, and I can only hope that Virginia companies follow suit. These cuts are occurring only because President Trump and Congress did their jobs, and people are seeing real  money in their pockets.

Media reports notwithstanding, the Tax Cuts and Jobs Act has proven itself time and again in only one month since its passage.

While Democrats may call tax savings “crumbs,” the real-world benefits of tax cuts suggest otherwise. Job creators—and the people they serve—are more optimistic than ever. Imagine what the rest of 2018 will have to offer.

Jack Hubbard owns the The HomeMade Gin Kit in Alexandria.

Chesterfield County Leaking Affluent Households

Which better represents the future of Chesterfield County? Rudd’s Trailer Park……. (Photo credit: Richmond Magazine

This column was published originally in the Chesterfield Observer. While the details of migration trends in and out of Chesterfield is unlikely to prove of great interest to anyone outside of Chesterfield, the analysis shows how citizens can use IRS migration data to gauge the health of their home locality. 

Hobbled by the sequestration-driven budget squeeze of defense spending, Virginia experienced its fourth consecutive year in 2016 of out-migration, the University of Virginia’s Demographic Research group reported late last year. While 301,000 income tax-filing households moved into the state, 315,800 moved out, for a net loss of 14,800 households. The last four years are quite a comedown for a state that previously had seen healthy population inflows every year since the Internal Revenue Service began compiling the statistics in 1978.

The picture looks somewhat better for Chesterfield County, which saw a net gain of 687 households from people moving in and out of the county in 2016. Some 10,300 households entered the county while 9,600 left and another 123,400 stayed put.

….or this McMansion?

People move from one locale to another for a multitude of reasons, but it’s normally a good sign when more people move in than out. Insofar as people follow jobs when they move, a net gain in migrants could mean that more jobs are being created. An inflow of residents also pumps up demand for housing, retail and services, thus stimulating local economic activity.

On the flip side, an influx of households places greater burden on the county to provide education, public safety, streets and roads, and other basic government services. In an ideal world, the newcomers bring in more taxable income and spending power to help pay for those services than those who leave. Unfortunately, that’s not what’s happened in Chesterfield. Households that moved here in 2016 reported an average income of $56,200; those that left reported $58,500 – for a total net loss of $17 million in countywide income. Admittedly, that’s a drop in the bucket compared to the $10.1 billion in total income reported by all non-migrants. But if this becomes a trend and persists for years and decades, it could fundamentally change the nature of the county.

A large percentage of the coming and going consists of people moving to and from neighboring jurisdictions in the Richmond metropolitan area. In 2016, Chesterfield experienced a net gain of 401 residents from Henrico County, 229 from the City of Richmond, and 56 from the city of Petersburg. However, the county lost a net of 126 households to Powhatan County.

The good news for Chesterfield is that it is importing more affluent households from Richmond, Henrico and Petersburg than it is exporting.

Newcomers from Richmond earned on average $46,100, while those moving from Chesterfield to the city reported only $39,500 in income.

Similarly, Henrico immigrants to Chesterfield earned $60,200 on average while households going the other way earned only $49,900.

The differential for Petersburg was $37,200 on average for households heading from the city to the county compared to a lowly $29,800 for households heading in the reverse direction.

However, Chesterfield lost significant income to Powhatan County in 2016. While the number of migrants is relatively small, the income differential is vast. Households moving from Powhatan to Chesterfield made $48,900 on average while those leaving Chesterfield earned $87,200, a differential of $37,300.

The largest sources of in-migrants from outside the region are Fairfax County, Virginia Beach, and Wake County, North Carolina (in the Raleigh metropolitan area).

The wrong conclusion to draw from this data is that Chesterfield taxpayers might benefit from crafting policies and ordinances that make the county less attractive to the poor, say, by blocking real estate projects developed for lower-income households. Aside from the ethical issues raised by discriminating against the poor, that’s not even good policy. Poor people will gravitate toward the cheapest, least desirable housing stock available in the metro area, whether it’s public housing projects in Richmond or aging cul-de-sac neighborhoods of small, rundown 1950s and ’60s era ranch houses in Chesterfield, regardless of any policies the county pursues.

A better strategy is to make carefully considered investments that help build a more prosperous, livable and sustainable community for all. Tracking the IRS migration data is a good way to tell how well county leaders are doing to create a desirable place for everyone to live, work and play.

Virginia Consumers’ Heavy Debt Load

Consumer spending is a driving force behind the U.S. economy, accounting for about 70% of economic activity. When consumers borrow, they stimulate economic growth. When they stop borrowing, the economy retrenches. Thus, when analyzing the prospects for the nation’s economy, economists take into consideration the size of the consumer’s debt load. All other things being equal, a debt load that is high by historical standards suggests that consumers have less room to grow the economy by borrowing (although the consumer economy still can grow when people back to work, get better paying jobs, or benefit from tax cuts).

Compared to other states, Virginia’s consumers are among the more heavily indebted in the nation. Indeed, comparing payments for credit cards, student loans, and housing as a percentage of annual income, Virginians’ indebtedness is sixth highest in the country, according to Credible, a consumer finance website.

Virginia has enough economic troubles as it is, ranging from dependence upon federal spending to infrastructure issues to undeveloped innovation ecosystems. High consumer debt is icing on the cake.

For what it’s worth, Credible doesn’t provide a complete picture. The numbers don’t include auto-financing debt, a significant contributor to consumer debt.  Maybe the consumer picture in Virginia isn’t as bad as it appears…. Or maybe it’s worse.

Meanwhile, there’s this news: Nine years of central bank stimulus and debt-bingeing around the world has made the U.S.  and other economies more vulnerable than ever to a rise in interest rates, says William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements. “Market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” he says.

The edifice of inflated equity and asset markets is built on the premise that interest rates will remain pinned to the floor. The latest stability report by the US Treasury’s Office of Financial Research (OFR) warned that a 100 basis point rate rise would slash $1.2 trillion of value from the Barclays US Aggregate Bond Index, with further losses once junk bonds, fixed-rate mortgages, and derivatives are included. It said losses could dwarf the “bond massacre” that bankrupted Orange County California in 1994 – and detonated Mexico’s Tequila Crisis. …

The global fall-out from such a shock could be violent. Credit in dollars beyond US jurisdiction has risen fivefold in 15 years to over $10 trillion. “This is a very big number. As soon as the world gets into trouble, a lot of people are going to have trouble servicing that dollar debt,” said Prof White. The offshore dollar funding markets would dry up, triggering a liquidity squeeze. Borrowers would suffer the double shock of a rising dollar, and rising rates. …

Central banks are now caught in a ‘debt trap’. They cannot keep holding rates near zero as global inflation pressures build because that will lead to an even more perilous financial bubble, but they cannot easily raise rates either because it risks blowing up the system. “It is frankly scary,” he said.

Recessions are painful but cleansing. Economies need small but regular downturns to wring out speculative excess and maintain long-term stability. The U.S. is enjoying a burst of stronger economic growth this year thanks to tax cuts and a rollback of regulations, but the business cycle is one of the longest-running in U.S. history. It can’t go on forever, and it won’t.

I know my warnings must be tiresome. I raised the same alarm when I wrote “Boomergeddon” back in 2010, and look where we are now. The economy seems just fine…. just like it did before every big catastrophic market meltdown.

Retirement, Not Jobs, Pushing Virginians Out of State

Virginia has been losing population to domestic out-migration for the past five years. Most people (including me) have assumed that the reason for the exodus (well, not really an exodus, more of a drip… drip… drip… leakage) can be attributed to sub-par economic growth. In other words, more people are leaving than coming because more jobs are being created elsewhere than here.

But the latest data from United Van Lines calls that assumption into question. United’s data roughly tracks that of the Internal Revenue Service taxpayer change-of-address data in noting that for every 100 moves in and out of Virginia 53% were outbound compared to only 47% being inbound.

But get this: Two-thirds of the reasons cited for moving into Virginia were jobs, while only a little more than half were so cited for moving out. The widest outbound-over-inbound gap was for retirement, the second widest for family. Virginia also suffered smaller gaps for health and lifestyle.

Why would there be such a large retirement gap? Our 5.75% top income tax bracket? Hellish traffic in Northern Virginia? Too many polar vortexes? Perhaps readers can chime in with their speculations.

Farewell Parade

Don’t mess with Virginia.

by Stephen D. Haner

I was very flattered that the U.S. Navy arranged that parade of ships just to mark my departure from Newport News Shipbuilding last month.

I’m kidding, of course, because the recent demonstration of naval firepower out in the Pacific (pictured above) was arranged for Dear Leader Kim and his friends Vladimir and Xi. But it is such a magnificent image I had to share it. I don’t think enough Virginians know that all three of those nuke carriers were built right here in the Old Dominion, along with the other eight in the fleet.  And many of the nuclear submarines submerged around that task force are also Virignia-built.

Virginia’s most famous product is not peanuts or tobacco.

Virginia builds naval supremacy.

Shipbuilders come and go from the shipyard every day – most with far more than my 12 years of service — and a lobbyist is far less important and far easier to replace than a nuclear-qualified welder.  I stole that line from the CEO, who is fond of saying even his job is easier to fill than some of the specialty jobs on the waterfront.

When I started, they issued me a Blackberry, and I joked that it was a leash.  “No,” the vice president dryly responded. “This is a nautical company. That’s a tether.” The tether later became a smartphone, but it has never been more than a few feet away in the past 12 years except for two trips overseas. It has been gone almost a month now and I still reach for it.

And it was a tether. My relationship with Bacon’s Rebellion started long before I got hired by the yard, but I quickly discovered that the yard was off limits for my commentary. As a former reporter and political communicator my lobbying style has always involved working with the media, and in my first session I had a routine discussion with a local reporter about a routine bill. When my quotes appeared in the Daily Press, the negative reaction was swift and instructive.

So I have never discussed the shipyard on Bacon’s Rebellion and rarely mentioned it. Now that I’m an ex-shipbuilder that may change a bit, at least with regard to its general operations and its products and its importance to the Virginia economy. Somebody else will be responsible for communicating its views to the General Assembly and the state executive branch. I may use this space from time to time to share with you some of the things I learned working in that marvelous place with so many dedicated people building the most complicated machines in the world.

Reports of my retirement are like the reports of Twain’s death – premature.  I may handle a few more clients in the coming years. But the shipyard is fading from sight off the fantail.

Stephen D. Haner, principal of Black Walnut Strategies, is a Richmond-based lobbyist.