Energy & Environment

Moving Mountains

Desperate to modernize West Virginia's economy, Governor Bob Wise is pushing business-labor collaboration.
by | December 2002

Two or three times a week, Governor Bob Wise leaves his office in the West Virginia Capitol, walks across the Capitol grounds to the Economic Development Department, sits down at a table and starts making phone calls to corporate CEOs, one after another. Some are the heads of companies within the state, and Wise is checking to see if they have any problems he can help with. But most of the calls are to CEOs in other states and other countries. Wise tells them he has heard they are looking around for a business location and wants them to know what West Virginia can offer them--cheap utilities, lots of water, a stable workforce, and perhaps most important, a newly enacted array of tax breaks. Before he hangs up, he gives them his private e-mail address and private phone number.

All in all, Wise figures, he probably spends a third of his time lobbying to bring in new companies or hold on to the ones already there. That amount of time may not be remarkable for the governor of a poor state, but it seems remarkable for Bob Wise.

This is the same man who entered politics a quarter-century ago as a grassroots activist demanding that the state's coal companies pay higher taxes. It is the same man who led a consumer rebellion against telephone companies and proclaimed that his congressional office was simply "a large community organizing effort." Throughout his career, nobody has doubted Bob Wise's political ability or prowess as a salesman. What they never expected was that he would perfect those skills as a master seducer of CEOs.

Wise hasn't exactly mellowed--he's as intense as ever, and he still evokes populist themes to audiences that want to hear them. He thinks timber and coal companies all but starved the state in the old days. "We gave our profits away," he likes to argue. But Wise is a consensus politician now, and if there's a consensus on anything in West Virginia, it's that the state needs new industry--and needs it in a hurry. "The world has changed," he says. "I've changed. My critics and I understand economic development better than we once did."

The phone calls that Wise makes, the tax incentives he boasts about and the recruitment bonuses he offers are part of what is called "A Vision Shared," a high-profile development program that has become the preoccupation not only of the Wise administration but of every interest group and political faction in the state.

In many of its approaches, Vision Shared isn't much different from what other states do to recruit business. What makes it something new in West Virginia is the "shared" part--Wise's conviction that the state can rise from economic stagnation only with business and labor collaborating in a way that has been unthinkable in the past.

There is more than a little irony in all this. In recent decades, West Virginia basically has had two kinds of governors: pro-business Republicans and wealthy Democrats with strong personal ties to the corporate elite. All were determined to promote economic development; none lifted the state very far. The idea that an anti-corporate agitator from the 1970s might succeed where they failed is intriguing.

And yet it may work. There is a Nixon-going-to-China quality to some of Wise's policies: Building on 20 years of cozy alliance with the state's major Democratic interest groups--unions, teachers and trial lawyers--Wise is betting that he can coax compromises from them that none of his predecessors could have managed. Even some Republicans believe that. "If I tried something like this," says Vic Sprouse, GOP leader in the state Senate, "the unions and the trial lawyers would go to war against it." As things stand now, they are on board.

Of course, that may be because the really contentious issues remain to be settled: namely, the dysfunctional workers' compensation fund and tax laws geared to the steel-and-coal economy of the 1930s. The package of tax incentives and grant money that Wise pushed through the legislature this year was an impressive accomplishment but one that could be achieved without inflicting serious pain on any major economic interest. The hill gets steeper after this.

"We have to do the easy things first," says Steve Roberts, president of the West Virginia Chamber of Commerce and a convert to Wise's agenda. "Perhaps then we can develop the trust to take on the hard ones."

GRANDMA'S CLOSETS

It's indisputable that there are plenty of hard ones to take on. "I inherited grandma's closets with 60 years of problems," Wise likes to say.

While it is well known that West Virginia has spent the past century in recurring economic difficulty, it's not often appreciated by outsiders how much things have worsened in recent years and how strong a feeling of defeatism hangs over the state as a result. The recession of the early 1980s, which was severe throughout industrial America, was much worse in West Virginia; in many ways, it has never recovered. State income per capita is barely 70 percent of the national average.

Most crucially, it has been hit by an ever-accelerating exodus of its young people. During the 1990s, the number of West Virginians age 25- 34 declined by 12 percent, while those over 75 increased by 13 percent, allowing West Virginia to overtake Florida as the oldest state in the country, with a median age of almost 39 years. Studies have repeatedly shown that young adults don't leave immediately after graduation from college--they try living and working in West Virginia for a few years before growing discouraged about job opportunities and moving away.

It's almost impossible to overstate the importance of this trend to ordinary West Virginians. When pollsters ask them what they consider the state's most pressing issue, most of them mention the population drain. Wise plays to this concern as he promotes economic development across the state. His speeches quote a sentence from the Book of Jeremiah: "There is hope in thine end, saith the Lord, that the children shall come again to their own border."

THE NEW COAL

But if Bible quotations were a solution to this problem, it would have been solved a long time ago. The issue in a nutshell is that West Virginia remains deeply mired in the obsolete economy of heavy industries. All the Rust Belt states have had a similar problem, but over the past 20 years, they have made decent progress at moving beyond it, guiding their economies into the technology-driven present. But in West Virginia, nearly 20 percent of the jobs still are related to coal mining, and coal and utilities together pay 60 percent of the business taxes. There is a healthy mineral severance tax, but instead of being targeted for reinvestment in new businesses, the money is split proportionately among all the counties in the state, a de facto revenue-sharing program that is largely useless from an economic development standpoint.

So the task for Wise and Vision Shared is not merely businesses recruitment but the redirection of the state's economy, its reputation and even its perception of itself. "It's not only image, it's self- image," says Kenny Perdue, secretary-treasurer of the state AFL-CIO and a Vision Shared strategist. "To get people to come back, we've got to convince them that there's been a change."

There has been some. Along the 35-mile corridor from Clarksburg to Morgantown, in the northern part of the state, high-tech enterprises are beginning to emerge, based on the science of biometrics and tied to the FBI's Criminal Justice Information Center and Fingerprint Identification Center, both sited in Clarksburg in the 1990s through the influence of U.S. Senator Robert C. Byrd.

"In five years," Wise says hopefully, "West Virginia will be the Silicon Valley of biometrics." David Satterfield, who runs the Economic Development Department, exudes the same confidence. "We have the new coal," he boasts, "and it's identification sciences, biometrics and computer software development."

He may be right, but if so, the new coal is being mined painfully slowly. There are still only an estimated 450 biotech jobs in the state, far too few to describe the Clarksburg-Morgantown corridor as an economic cluster, let alone the birthplace of a genuine boom. The development office has created more than 40,000 jobs in the years since 1993, but the vast majority of them are in telemarketing and other low-paid service categories.

"We've got to do something," says Senator Sprouse, "unless we want to stay 49th in everything. We've got to do things even if they turn out wrong." His Democratic counterpart, Brooks McCabe, says the same thing. "Right now," he insists, "West Virginia is all about re- inventing itself. That's what Vision Shared is trying to do."

ATTITUDE ADJUSTMENT

To that end, West Virginia is promoting cooperation in ways it has pointedly avoided in the past. A few weeks after Wise defeated incumbent Governor Cecil Underwood in 2000, the two men jointly endorsed Vision Shared, the first draft of which had appeared in the closing months of Underwood's administration. This year, when Wise proposed a ballot measure permitting tax-increment financing for new state projects, it was with the backing of both political parties, the Chamber of Commerce and the AFL-CIO. Four years earlier, when Underwood tried something similar, the unions derailed it. This time, pacified by a "prevailing wage" clause placing a floor under TIF project wages, labor went along, and on Election Day the measure passed by a wide margin.

Amendment One was a modest accomplishment from a policy standpoint, especially given the fact that more than 40 other states have long had similar laws. But it was a tangible symbol that Vision Shared is about as bipartisan as anything in West Virginia ever gets. "We've got a history of confrontation. It's still in the back of our minds," says the AFL-CIO's Perdue. "But there's an attitude change amongst a lot of people. We have people collaborating that have not collaborated-- ever." Dana Waldo, president of the Business Roundtable, echoes that sentiment. "There's too much on the line for us to be fighting," he insists. "When you're looking up from the bottom, you've got to be together."

The coalition held together better than many expected during this year's session of the legislature, in which a long list of archaic tax incentives were repealed and a new series of measures aimed at building a more modern economy were enacted.

The previous generation of tax breaks, policy makers now concede, actually made the economy worse. Among the most notorious was the so- called "Super Tax Credit," instituted in 1985 to reward new business that created more than 50 jobs. It may have been the most complex tax incentive anywhere in America. The computation schedule was 12 pages long, with 16 pages of instructions. "Even CPAs couldn't figure out how to calculate it," says Brian Kastick, the current state Tax Secretary. "That was ridiculous--obviously it was more a hindrance than a help."

But that wasn't the worst part. The law didn't insist on net job creation. A coal or steel company could shut down a plant with 100 workers, open a new one with 50, and claim the money while causing a net loss in employment. In the first four years of Supercredit, coal companies took $35 million in credits while eliminating 1,300 jobs. After a decade, the program had cost the state $180 million. "They really didn't think through what they wanted to do," says Kastick. "The state was desperate. It ended up being abused."

Then there was the Industrial Expansion and Revitalization Credit, a subsidy that dated all the way back to the 1960s. Between 1988 and 1997, it cost the state $207 million. Yet when Kastick's department analyzed its value, it couldn't find any. Companies were permitted to make a single investment in new plant or equipment, and reap a whole sequence of benefits. "There is very little or no correlation," the study concluded, "between the use of the IERC and employment or economic output."

Indeed, that was what Kastick's study concluded about the state's entire network of business tax benefits. "Most of these tax credits are ineffective," it reported, "as tools of economic development."

The most significant achievement of Vision Shared so far has been to wipe out more than a dozen wasteful or useless tax incentives and replace them with ones that make more sense in a 21st-century economy. West Virginia now has strategic research and development tax credits for the design and testing of new product prototypes, from biometrics to polymers; a $25 million venture capital fund to attract new entrepreneurs; and a $10 million "sunny day fund" to help close deals with companies considering a move.

As a result, says Mike Basile, the corporate lawyer who spearheaded much of the lobbying for the package, West Virginia has "one of the most aggressive research and development programs in the nation." On the other hand, Basile is quick to point out, "tax credits are poetry. The other issues are the plumbing."

PLUMBING PROBLEMS

Most of the state's economic plumbing is in bad shape. The tax incentives may have been repaired, but the tax code itself remains antiquated and inefficient. It essentially assumes that the most important taxable wealth is in fixed capital infrastructure, such as coal mines and steel mills. Companies that have those are taxed at an unrealistically high rate, while service companies with few assets, an ever-growing proportion of the employment base, are taxed very lightly. The tax code for each sector of the economy is riddled with obscure exemptions and penalties. In the words of one corporate official, "we don't even have a tax system. We have bits and pieces." In 1999, the Underwood administration called for a special legislative session to rewrite the tax code, but it was never held.

A thoroughly modernized tax code might be the sort of dramatic accomplishment that could make Vision Shared an undisputed success. As the Business Roundtable's Waldo says, "We've captured the low-hanging fruit. We need one or two big policy hits that show we're serious about change."

Yet to assume that West Virginia can enact major tax reform when almost every other state has failed to do so sounds to some like a dangerous case of overreaching. Moreover, there remains the long-time curse of West Virginia's economic life: workers' compensation.

Workers' comp rates aren't abnormally high in the state. Rather, the problem is that the workers' comp system is $2 billion in debt, largely because of cases stemming from the years when 100,000 West Virginians worked in coal mines. Many of the companies that initially incurred this debt are out of business, but their bills have to be paid by those firms still in existence, even ones with no liability of their own.

A business in West Virginia might spend $35 in workers' comp costs for every $100 in wages it pays out. Comparable obligations in neighboring states can be as much as 75 percent lower. Mike Basile, the governor's Vision Shared strategist, calls ameliorating the workers' comp burden the "true litmus test" of any economic development agenda.

There is no shortage of experts, including some public supporters of Vision Shared, who fear that these fundamental problems will ultimately prove to be more than the current coalition can survive. "My sense is the big things won't be tackled," says Michael Hicks, of Marshall University's Center for Business and Economic Research. Hicks feels it's crucial for the state to have a new tax code, but he doubts there will be one. So does Robin Capeheart, who was Underwood's chief tax adviser. "There are issues on the periphery that you can get diverse interests to agree upon," Capeheart says. "But at some point, protecting interests is going to rise above the level of cooperation."

That pessimism is built on almost all the things that have held back West Virginia in the past--political pettiness, ill-conceived economic reforms, careless stewardship of capital and natural resources. The one real source of optimism is a sense of urgency that even skeptics agree has not been present before.

To many of them, the day of judgment will be the next census. If it shows what the one in 2000 did--an aging population, an exodus of educated talent and a poorly trained workforce--the opportunities for change may evaporate. "If we don't do something now," Waldo warns, "the 2010 census is going to be a disaster."

Bob Wise concurs: "We've got five years to turn the state around." It's enough to transform an old-time populist into a born-again corporate recruiter. And to make him dial the phone a little faster.

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