When lawmakers last week rushed through a series of bills offering incentives and tax cuts to a steel company interested in opening a new plant in West Virginia, state officials assured them the deal would pay off.
Brian Abraham, Gov. Jim Justice’s chief of staff, pointed to an economic report by West Virginia University’s Bureau of Business and Economic Research that estimated the company’s investment would generate nearly $25 billion for the state’s economy and bring in nearly $439 million in state taxes over the next decade.
“So we think it’s a wise investment,” Abraham said.
The only problem: there were errors and questionable assumptions in the WVU report that could impact its projections.
The version of the three-page report presented to lawmakers included discrepancies in the number of construction workers the project would employ and an unrealistic expectation that all plant employees in the border county would live and pay taxes in West Virginia. While the economic impact of the project would remain substantial, both issues could have led the WVU report to significantly overstate the benefits of the project.
The result is that lawmakers made a decision about the project based on a report that didn’t receive enough scrutiny and gave them a possibly inflated picture of the benefits of the plant.
‘Project Dark Star’
Last week, lawmakers were in a rush. Called into a special session by Gov. Justice days before their regular 60-day session, legislators spent less than two days approving massive amounts of subsidies to an unnamed project, later revealed to be the Nucor Corporation. The multi-billion dollar company plans to build a $2.7 billion steel mill in Mason County.
A few lawmakers questioned the wisdom of the move, but the legislation was ultimately overwhelmingly approved, with only a handful of lawmakers voting against it.
The deal between the state and Nucor is laid out in a Memorandum of Understanding, a document that officials did not provide to the public while lawmakers were considering it, but was obtained this week through the Freedom of Information Act. The deal — which refers to the Mason County plant as “Project Dark Star” — stipulates that the state will turn over $315 million in incentive money to Nucor in stages: The state would make a $125 million investment once the company invested $500 million, another $150 million once that investment reached $750 million and $40 million if Nucor buys land — expected to be in the Northern Panhandle — with the intention of developing a transload facility.
Beyond the $315 million, the legislation also offers Nucor, and any other eligible company, various tax incentives, including an income tax credit of 50% of what the company invests into the manufacturing project.
“I cannot see why [this deal is] being rushed through without actually looking at it,” said Sen. Owens Brown, D-Ohio, who last week was the only senator to vote against the first bill of the package, which covered the tax incentives.
George Mason University researcher Michael Farren said these kinds of projects are often rushed through authorization because it leads to less scrutiny.
“This rushed judgment leads to policymakers feeling the need to hold their nose and go along with a plan where if they had more time to consider it, they at least would have likely driven a harder bargain with the company and save the taxpayers some money,” Farren said.
And lawmakers weren’t the only ones feeling rushed.
WVU Research Assistant Professor Eric Bowen, who authored the Nucor report, said his university bureau only had a few days to work on it.
“I would say that’s kind of rushed,” he said last Thursday. “We’d like to have at least a few weeks on it, you know, rather than a few days.”
This week, he said via email that this timeframe didn’t affect his work. But the original version of Bowen’s three-page economic report that was given to lawmakers included some questionable assumptions and inaccuracies that may have overstated the economic impact of the Nucor plant.
21,000 workers for Dark Star?
A glaring assumption: that every Nucor plant worker would live in West Virginia.
“We essentially assumed everybody who’s working there lives in the state and spends their money as typical state residents,” Bowen said. “We don’t know where people are going to live when they’re working here in the state. So that’s just one of the standard assumptions we make.”
But Mason County, the location for the facility, is right across a bridge from Gallipolis, Ohio. It’s also only about an hour from the Kentucky border.
“It’s not an exaggeration to say that Ohio and Kentucky could end up being the big winners here,” said Greg LeRoy, the director of policy nonprofit Good Jobs First. “Because they’re not going to have to give up any tax breaks. But they’re going to get some jobs, maybe a lot of jobs.”
If a chunk of the Nucor workforce ends up living out-of-state, that will affect the net economic benefit West Virginia will gain from the project, because workers could spend money and pay taxes elsewhere. And the $438.8 million the WVU report estimates the project could generate in taxes over a decade already doesn’t take into account the tax subsidies lawmakers approved.
But those projections could be even lower, depending on how many construction workers Nucor needs to build the plant. And that number seems to be a hard one for the researchers to pin down.
Bowen said originally, the West Virginia Department of Economic Development told him that the project would employ at least 1,000 workers over the two-year construction process (which would create 2,000 jobs total). The department did not respond to an email with questions.
So, Bowen put that 2,000 number into the report. But his report estimated those workers would earn $1.4 billion in wages. That works out to a $700,000 salary for each construction worker.
When asked about this last week, Bowen said that $700,000 was not a correct salary projection and each worker was projected to earn $65,000 a year instead.
“I probably should correct that in the report itself, because it’s really inaccurate to say that 1,000 people are going to earn $1.4 billion,” he said last Thursday.
But he acknowledged that revising the $1.4 billion in construction worker wages would reverberate through the other calculations of the Nucor plant’s overall economic benefit.
When asked if changing that number would affect the project’s estimated tax benefit and overall $25 billion ten-year economic impact, he replied:
“It would only be lower if we changed the compensation.”
But he clung to another option: keeping the overall construction worker wage amount the same, but dramatically increasing the estimate of the number of workers needed.
Bowen said he thought the state’s original figure was too low, and that national estimates suggest a project of this size would create approximately 21,000 jobs, or more than 10,000 workers a year, which would include everyone involved with the construction including engineers, architects and janitors.
“Ten thousand?” asked Steve White, director of West Virginia’s Affiliated Construction Trades Foundation, a coalition of construction unions, upon hearing the number. “That is a fictional number. The pyramids probably might’ve used 10,000. We would never have a construction project in West Virginia with 10,000 workers on it.”
He said the 1,000 figure was a “good guesstimate.”
A spokesperson for Nucor didn’t return a call asking for the number of construction workers it expects to hire for the plant. But a recent $1.7 billion Nucor steel plate mill in Kentucky was expected to create an average of 960 temporary construction jobs, peaking at 1,500.
The revised report
On Tuesday morning, Bowen published a revised report, with a few differences from the one cited to the lawmakers deliberating the deal.
In the new paper, he writes that the 2,000 construction jobs may be “understated,” citing the 21,000 number. But he also presented a different rationale for his estimates of what the project’s construction workers will earn. This week, he said via email that the exact amount of compensation wasn’t based on the number of needed workers. Rather, it was based on Nucor’s commitment to spend $2.7 billion on the project.
“Based on national averages, we would expect $1.4 billion (a little more than half) of that to be paid out in labor costs,” he said.
White says this still seems way too high. But Bowen says it doesn’t matter even if the labor costs were overestimated, since Nucor, either way, has committed to spending $2.7 billion on costs associated with building the plant.
“If labor costs are lower than expected, the rest of the money would still be spent in the state’s economy and provide an economic impact,” he said. “So the distribution of the dollars might be different, but the impact would be essentially the same.”
But this also could be an overestimate.
White says there’s a difference between investing in a worker who would pay taxes and spend that money in West Virginia, and buying materials and equipment from outside the state.
“This is not equipment that you’re going to go down to Lowe’s and buy and have an impact on the local [economy], this is equipment you’re going to buy from somewhere else in the country or the world,” White said. “So where you buy it is where the impact will be.”
Bowen said WVU’s modeling software did take into account purchases from out of state, but did not specify how much.
Big economic impact either way
White said, inflated numbers or not, the economic benefits provided by the Nucor plant are still huge, and lawmakers would have likely voted for it anyway.
“When you’re talking about 2.7 billion [dollars]…then you don’t need an economic impact report, you don’t need to talk about anything else,” he said. “That’s a huge number.”
Yet, he said overestimates like those that were given lawmakers may take away from what he thinks should have been a more important part of the conversation: maximizing the impact of the deal for West Virginians, such as by incentivizing local workers to get construction and permanent jobs, which is not mentioned in the legislation or the Memorandum of Understanding.
And Farren, who does free-market-oriented research at George Mason University’s Mercatus Center, says, regardless of the money the Nucor plant may bring to the state, academic, peer-reviewed research shows that the vast majority of subsidies don’t change a company’s decision where to locate or expand. In that case, West Virginia gave tax breaks and direct cash to a multi-billion dollar company that likely would have located within state lines anyway.
“The larger story is that the current generation of policymakers just put the next generation of West Virginia taxpayers on the hook for a particular economic project,” he said. “Policymakers [are] basing decisions that they are binding future generations of West Virginia taxpayers to on incomplete accounting of the information — a hasty decision using an incomplete accounting of the information.”
Clarification: This story has been updated to clarify two points. First, that the 10,000 worker estimate made by WVU included everyone involved in the building of the Nucor plant, not just construction workers. Also, a sentence has been updated to make it clear that Bowen said the $700,000 salary projection was incorrect.