Reforms for West Virginia’s Future

Recently, we spoke at the West Virginia State Capitol to a group of legislators and policy wonks, in collaboration with the Cardinal Institute, the state’s new free-market think-tank. Our topic was the lessons of Freedom in the 50 States for West Virginia. 

West Virginia scored 32nd on freedom in the latest edition of Freedom in the 50 States. This is a problem because our research shows that a one-unit increase in economic freedom drives a 1.2-to-1.8 percentage-point increase in real (inflation-adjusted) personal income growth the following year. Taking the midpoint of that range, that means if two states start out with economies of the same size, but one has a one-point advantage on economic freedom over the other, the first state will double the size of the second state’s economy in about 47 years. 

West Virginia’s economy has been stagnant for a long time, but there are signs that recent reforms are starting to turn that around. West Virginia enjoyed the third-best improvement on freedom out of all 50 states since the end of 2020. And perhaps not coincidentally, it has now started to enjoy net migration in-flows. 

There’s still more the Mountaineer State (#32) could do, especially since some of its neighbors — especially Pennsylvania (#18), Virginia (#12), and Ohio (#21) — do a lot better on freedom.  

We recently visited West Virginia’s state capitol in Charleston to talk to legislators and the public about our study and the policy opportunities that could promote freedom and free enterprise, as well as the economic growth these create.      

We argued that the number one area West Virginia could work on is fiscal policy, where the state scored 37th. The legislature did enact a big income tax cut in 2023, which should help with scores in future editions (the current index is good as of the beginning of 2023). But West Virginia also has high government spending at the state and local levels, high public employment, and debt, all of which suck resources out of the more productive private sector. 

It’s hard to turn around a state budget overnight. It takes commitment to finding efficiencies, moving functions to the private sector, and setting up rules that will restrain spending for the long term. 

One of the things West Virginia could start doing right away is downsizing the government workforce. State government employment as a share of total employment is more than twice as high in West Virginia as in the US as a whole. And local government employment is also higher than the US ratio. 

To find out where cuts might work best, we dug into the data to find out why public sector employment is so big in West Virginia. We found that West Virginia is the fourth-highest-spending state on highways in the US, as a share of personal income. The only states higher are Alaska, and North and South Dakota. Other rural, mountainous states like Vermont, Montana, and Wyoming are a lot lower. And we found that state and local government employment in highways, again as a share of total employment, is three times the national average.

The other area where spending and employment are high is “general administration.” West Virginia is the fifth-highest-spending state in that category. To us that sounds like inefficiency. Is West Virginia a noticeably better-administered state than others for all its extra spending and employment in this area? It doesn’t seem like it. 

Finally, the growth of non-instructional staff in elementary and secondary schools has been a major driver of escalating public education costs everywhere, but in West Virginia the problem is especially acute, with the percentage of local employees in this category well above the national average. Again, this figure suggests slack or inefficiency in the system rather than high-quality services. 

While most states have seen their debt-to-income ratios come down over time, West Virginia also has a stubborn debt problem. The state and local debt to income ratio is over 21 percent, while the liquid assets of governments in the state are only 13 percent of income. States that have enough liquid assets to cover their debt have significantly better credit ratings, our research shows, allowing them to pay lower interest rates on bonds. 

Getting government spending and employment under control will allow the Mountaineer State to improve its debt and assets position and reduce the stream of future tax revenues going to (mostly out-of-state) creditors. 

We also found plenty of inefficient government regulations West Virginia could eliminate. Certificate of need (CON) laws and outright moratoriums blocking the development of medical facilities are near the top of that list. Hospitals are a powerful lobby in every state, and it’s understandable that they want to keep competition out. But that’s bad for consumers — and for state government as a purchaser of medical services for its own workforce. 

Lobbyists will sometimes defend CON laws as protection from new medical facilities “cherry-picking” patients covered by private insurance, which pays higher rates than Medicaid. But using regulations to block such “cherry-picking” doesn’t reduce actual costs; it just hides them. It forces non-Medicaid patients — that is, most of us — to pay a hidden tax on our treatments. Meanwhile, it reduces medical competition and innovation.  

West Virginia scores badly on protecting private property from civil asset forfeiture. Currently, law enforcement officers get 100 percent of the proceeds from auctioning off property they have seized, giving them a strong incentive to seize more property. And innocent owners have to prove their innocence, rather than putting the burden of proof where it belongs, on the government. No criminal conviction is required. West Virginia needs asset forfeiture reform. 

West Virginia also scores below average on occupational freedom. The state doesn’t let nurse practitioners prescribe treatment without physician supervision, as many other states do. The state licenses a number of occupations some other states don’t, like sign language interpreter, sanitarian, clinical lab technologist, veterinary tech, athletic trainer, and well driller. 

West Virginia is also one of those states with a silly combination of anti-price-gouging and sales-below-cost laws. Retailers can run afoul of the former if they price their goods too high, and of the latter if they price their goods too low! Economists hate these laws because they impede the functioning of the price system to attract goods where they’re needed most. 

In short, West Virginia has a lot of policy areas where it could improve. Right now, you could say the state is mired in the economic theories and nostrums of the past, a Great-Depression-era philosophy of government jobs and “managed” competition. Fortunately, legislators have started to shake off the slough of interventionism in recent years, and they should keep at it. In a few years, West Virginia could have all the right policy conditions for an economic Golden Age.