New West Virginia Revenue Proposal is Little More than Sleight of Hand

August 2, 2017

Fresh off what Governor Jim Justice (D) hailed as landmark legislation raising an additional $140 million for highway construction, the governor is championing a new tax proposal with the potential to increase highway construction costs by up to $150 million—$10 million more than the new revenues authorized on what he previously proclaimed a “truly monumental day.”

Looking for revenue to fight opioid addiction (West Virginia has the highest overdose death rate in the country), Justice has proposed a 5 percent “fee” to be paid by state contractors on winning road construction project bids, which he would like to see taken up in a new special session. According to the Justice administration, the fee would raise an estimated $150 million.

The problem with this proposal is obvious and has been pointed out by legislative critics: if every winning contractor is subject to the fee, bids will begin to reflect it, and most if not all of the $150 million burden will be placed back on the state in the form of higher road construction costs, wiping out the additional revenue Justice secured in his roads bill.

Prices, of course, are not a product of costs; no one can demand an amount higher than the market will bear simply because the inputs were too expensive. In this case, however, all contractors will be laboring equally under the additional fee, and demand (in this case, the state’s) is relatively inelastic. It follows that most of the cost will be incorporated into construction bids, and that functionally, the new “fee”—which is really a tax—would simply transfer funding from roads to drug treatment.

That in itself may be a valid policy choice, but orchestrating the transfer through a new fee on state road construction contracts is a Rube Goldberg way of doing it, and to the extent that it’s being sold as a way of generating revenue without prejudice to existing funding streams, it is highly likely to prove a disappointment.

Justice outlined how he thought the fee would work in practice, imagining a company bidding on a $10 million job (before fee). “So I’m going to go back, and I’m going to sharpen my pencil. I’ve got to get under $10 million. So you sharpen the pencil and take a little bit out of labor, a little bit out of fuel, a little bit out of parts, take a little bit out of how much your equipment payments are and you come to 9.9. You submit your bid at 9.9, and you get the bid. And you have to pay the 5 percent fee.”

It’s a nice thought, but not one likely to bear out in practice. Companies aren’t perfectly efficient, and sometimes narrow margins prompt them to find cost savings they didn’t know existed. Generally speaking, though, if these bidders thought they could reduce costs (read: increase profits) without sacrificing the project, they would be doing so already. The state highway fund may not bear the entirety of the new fee, but it would bear the brunt of it in terms of pricier contracts and, ultimately, less construction.

West Virginia’s opioid crisis is a serious concern and requires serious solutions. It is doubtful that the governor’s intent is to scale back transportation projects to fund efforts to combat the state’s drug epidemic, but if that is his aim, there are more responsible and straightforward ways to accomplish it. And if that is not his intent, it may be time to go back to the drawing board.


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