What’s the Real Reason for Eliminating Business Personal Property Taxes?

Next week the Joint Select Committee on Tax Reform will meet again to continue the discussion on overhauling the state’s tax system. When they last met, the Committee sent strong signals that more business tax cuts would be the top priority, despite their recent failure to create jobs in West Virginia and the subsequent budget deficits that they created.

While West Virginia’s last stab at tax reform saw cuts to the Corporate Net Income Tax and the elimination of the Business Franchise Tax, one tax was left untouched – the business personal property tax.

The business personal property tax has long been decried as a job killer, of course without any evidence. Each tax reform proposal since Governor Underwood’s in 1999 (back in 1999 it wasn’t quite a job-killer yet, instead it was described as having a “very strong negative effect on business,”) have tried to eliminate it, but these past attempts have died, all failing to address the thorny issue of how to pay for it, although the recent Manufacturing Property Tax Adjustment Credit allows manufacturers to deduct their property taxes from their corporate income taxes. In 2014, property taxes on commercial and industrial personal property totaled $304.5 million, a sizable chunk of the state’s property tax base.

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Flat-out eliminating 1/5th of our property tax base would be incredibly fiscally irresponsible, despite the rhetoric around it. But there is one way we can look at “reforming” this tax.

The big argument against the business personal property tax is that it is a job-killing tax that most other states don’t have, putting West Virginia at a disadvantage. While that argument doesn’t hold much weight, let’s entertain it for the purposes of this blog post. The funny thing about that argument is that it has almost nothing to do with the burden of the business personal property tax, just its existence. How so? West Virginia has one of the lowest property tax burdens in the country, almost no matter how you measure it.

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Only in 1 of the above 8 different measures, the tax rate on an industrial facility in an urban area, does West Virginia’s property tax burden rank above the national average, and even then by only a few fractions of a percentage point.

So if West Virginia’s property taxes are low, yet the business personal property tax creates a disadvantage, that implies that West Virginia’s businesses wouldn’t mind paying more in real estate taxes in order to get rid of their personal property taxes. After all, nearly every state that doesn’t have a personal property tax has higher overall property taxes, meaning those states have higher real estate taxes, like in Ohio.

So if West Virginia got rid of its business personal property tax and replaced it with a higher tax on business real estate, the state would be getting rid of a so -called “job-killer,” would look more like other states, and wouldn’t be increasing the overall property tax burden. Sounds like a good idea, right? Well here’s what it would look like.

As I mentioned above, the property tax on business personal property produces about $304 million in revenue, while the property tax on business real estate produces about $485 million. So if we were to get rid of the business personal property tax and replace it with business real estate taxes, we would need a total of $798 million from business real property ($485 million + $304 million). In other words, the property tax in business real property would have to increase by 62.8%.

What would that look like for the typical business in West Virginia? Well, it depends. This study from the Lincoln Land Institute uses different fixed value property examples to compare property tax burdens. Using those examples, we can show how such a change would look for different types of businesses in West Virginia. In the table below is the property tax bill for two businesses in West Virginia: a commercial business with $1 million in real property and $200,000 in personal property, and an industrial business with $1 million in real property and $1 million in personal property.

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Under West Virginia’s current tax structure, both businesses pay the same overall tax rate, with the commercial business paying $19,712 on $1.2 million of property, or 1.64%, and the industrial business paying $32,854 on $2 million of property, again 1.64%. Both real and personal property is taxed at the same rate for both business, and the amount of tax paid is directly related to the total value of the property.

Now here is the property tax bill for the same two businesses, except with personal property exempted, and the tax on real property increased by 62.8%, offsetting the statewide loss of the personal property.

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Now both businesses no longer pay the same effective rate. The commercial business pays $26,745 on their $1.2 million worth of property, for an effective rate of 2.23%, while the industrial business pays an effective rate of only 1.34%. Getting rid of the personal property tax and relying on real estate taxes favors the business with a greater percentage of its property as personal.

So where as before, West Virginia had a broad property base, with low and equal rates, that resulted in tax burden directly proportional to a business’s property value, the state would instead have a narrower property tax base, with unequal rates, and a burden more influenced by what type of property a business owned, rather than its value.

What’s the point of this exercise? I don’t really expect the state to exempt business personal property and shift the tax burden onto business real property, but that’s kind of what the rhetoric around “tax reform” seems to imply. But does anyone really think that a hypothetical tax system with unequal rates and higher taxes on commercial businesses is really better for creating jobs and economic growth? However, it’s the unspoken assumption behind the campaign against the business personal property tax.

The fact is, those who don’t like the business personal property tax simply don’t like paying it. It has little to do with jobs or economic development, or else there would be some evidence of its negative impact after all these years. West Virginia has a property tax system characterized by its broad base, low rates, and equal treatment of all property. Those who advocate for eliminating the tax on business personal property are in effect calling for its base to be narrowed, its rates to be higher, and its treatment unequal, all so they can pay less while others pay more.

Budget Beat – April 24, 2015

Tax Reform Continues to Make Headlines

On May 4, the Joint Select Committee on Tax Reform will hold its second meeting to look at how to “update” the state’s tax system. So far committee members have floated around some hefty suggestions, like eliminating the Personal Income Tax and further reducing business taxes. Suggestions for how to replace that lost revenue and pay for these cuts have been less in the news.

Ted’s opeds in the Charleston Daily Mail and the Sunday Gazette-Mail both explain why the legislature should move with caution before slashing anything else from the state budget, the state Personal Income Tax in particular. As he states, here are some other avenues that tax reform could take:

  • Raising tobacco and alcohol taxes to improve the health of West Virginians and reduce state medical expenses.
  • Updating the Personal Income Tax by reducing taxes on the middle class and increasing them on higher income people, who have gained the most economically since the end of the recession while middle-class wages have stagnated or declined for most workers.
  • Modernizing the sales tax to reflect the changes in our economy from consuming goods to purchasing services.
  • Closing offshore corporate income tax loopholes.
  • Closely scrutinizing and scaling back business tax subsidies.

Tax Incentives? What Tax Incentives?

Here’s something to chew on from a North Carolina study: according to Economic Development Quarterly, “contrary to the belief among many economic development practitioners that tax credits are a motivating factor for firms to engage in economic development, only 30% of executives in incented companies were aware that their company had received a state economic development tax credit.”

Time for a West Virginia EITC

Tax time is hard for all of us, especially low-income working families. The federal Earned Income Tax Credit (EITC) provides tax relief to those families, helps them keep money in their pockets, and, in turn, boosts the local economy. Twenty-five states and the District of Columbia also have their own EITC which gives those same families relief from state taxes as well.

West Virginia has over 180,000 people living in poverty. That’s more than the populations of Charleston, Huntington, Parkersburg, Wheeling and Beckley combined.

It is time for a state EITC in West Virginia to help those families.

This would help reduce the current inequity in the state’s tax system where those who earn less than $16,000/year pay an average of 8.7% of their income in state and local taxes, while those earning above $306,000 pay only 6.5%.

For more on why West Virginia needs a state EITC, check out Sean’s blog post.

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Budget Cuts Hitting Home

Tax cuts are already causing harmful budget cuts, another example of which hit the news today with an announced tuition hike at West Virginia State University. College students are paying the price for years of budget cuts as tuition increases create a greater burden on their families’ budgets.
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Happy Earth Week!

Budget Beat – April 17, 2015

Legislature Gives Glimpse Into its Ideas for Tax Reform

Tax Reform Committee Holds First Meeting

It’s been a taxing week, so to speak, between April 15 and the first meeting of the Joint Senate Select Committee on Tax Reform on Monday.

The meeting was the public’s first chance to get a glimpse into the new Republican leadership’s ideas of how to reform the state’s tax code. There was a lot of discussion about further tax cuts, or even the elimination of the Personal Income Tax.

The Personal Income Tax makes up a large percentage of the state’s $4 billion+ budget, about 40% of revenue in 2016. Eliminating it would leave a huge hole in the state’s ability to pay for important expenses like highway maintenance and funding for higher education.

One suggestion from the legislature on how to fill that hole is to increase the state’s sales tax, including establishing a tax on personal services from accountants and lawyers to hair stylists.

While this would create much-needed revenue, it would further shift the state’s tax burden onto those least likely to afford it. Poor people pay a larger share of their income toward sales tax than the wealthy, thus further shifting the overall tax base onto low-income families.

For a great look at the history of tax reform in West Virginia, and its dismal impact on creating jobs, check out Sean’s blog post.

For more on Monday’s Tax Reform Committee meeting, read this week’s Charleston Gazette and State Journal, or listen in to West Virginia Public Broadcasting.

For more, here’s Sean’s presentation from this week’s National Association of Social Workers, WV Spring Conference.

 2015 NASW OLeary presentation

Suggestions Made and Caution Urged

There was widespread reaction to the reforms suggested by the Tax Reform Committee. Governor Tomblin asked legislators to be “fiscally responsible” and the WVCBP suggested proceeding with caution, while using this opportunity to make the tax system more fair to working families.

Time to Modernize West Virginia’s Excess Acreage Tax

An idea considered by Governor Underwood’s Commission on Fair Taxation would have increased and overhauled the Excess Acreage Tax. This could incentivize economic development in West Virginia, particularly in the southern part of the state. More details in Ted’s blog post.

Dear White People at WV International Film Festival

The West Virginia Film Festival kicks off tonight at the LaBelle Theater in South Charleston with lots of great films. Come out and watch Dear White People on Tuesday, April 21 at 6PM to be followed by discussion on racial equity with participants of the Race Matters in WV project.

Dear White People

Become a Mentor to Someone in Need

Help KISRA (the Kanawha Institute for Social Research and Action) provide a second chance for someone in need by joining its mentor program. KISRA’s second chance mentoring program is designed to help non-violent offenders reclaim their place in the community, stabilize their lives and achieve self-sufficiency. Apply here.

Will Tax Reform Work This Time?

Yesterday, the Joint Select Committee on Tax Reform met for the first time to start laying out the plan for comprehensive tax reform in West Virginia. Citing ALEC’s dubious Rich States/Poor States report, Senate President Bill Cole and House Speaker Tim Armstead said that West Virginia’s tax structure is broken and burdensome, and is holding back economic growth, and tax reform is just what the doctor ordered.

Now if all that sounds familiar, it should, because it all was said about less than ten years ago during West Virginia’s last tax reform effort. Under then-Governor Joe Manchin, West Virginia underwent tax reform. And then, as it is now, the complaint was that West Virginia’s tax system was too anti-growth, and put us at a competitive disadvantage. In particular, the Chamber of Commerce complained in 2006 that the tax responsibilities of business were too high, blaming our Corporate Net Income Tax rate and the Business Franchise Tax as the source of the state’s uncompetitiveness.

Over the next two years, the Chamber got exactly what it asked for as the Corporate Net Income Tax rate was reduced from 9.0% to 6.5% while the Business Franchise Tax was phased out and eliminated entirely.

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At the time, the tax cuts were widely praised by conservative anti-tax groups, who predicted great things for West Virginia. The Cato Institute called West Virginia’s tax reform the “most pro-growth tax reform” in the country, giving Governor Manchin an “A” grade for fiscal policy, while the Tax Foundation said that the state’s tax cuts would put West Virginia, “in a better position to compete regionally with Pennsylvania and Virginia and place itself in a better position nationally.

Not everybody was enamored, as Ted warned in 2008 that the tax cuts could prove costly, while doing little to grow the economy. The Center’s warnings went unheeded, as Chamber of Commerce President Steve Roberts quipped that Ted’s warning was his “opinion” and it, “doesn’t mean the opinion has any resemblance to reality.”

And as it turns out, Ted ended up being a whole lot closer to reality. The business tax cuts blew a huge hole in the budget, to the tune of $236 million this year alone. Business tax revenue will be lower in 2016 than it was in 1990, and the state has faced year after year of budget problems, problems that would have been worse if it weren’t for the fortunate timing of the Marcellus Shale boom.

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 The 2006/2008 tax reform worked in one sense, in that it dramatically reduced the state’s business tax burden while improving our state’s “business tax climate.” But it failed to actually improve the state where it matters most: jobs. The chart below tells the story. While West Virginia’s business tax rate fell from 7.6% of gross state product in 2007 to 5.8% in 2014, and while the state’s business tax climate rank improved from 37th to 21st, annual employment fell by 39,000.

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Instead of competing better nationally, West Virginia has fallen further behind. While the rest of the country is setting records for job growth, there are not only 39,000 fewer West Virginians working than before the tax cuts began but also 11,000 fewer manufacturing jobs. To see the real impact of the tax cuts, just take a look at tuition at colleges and universities in West Virginia, which are on the rise as budget cuts to higher education, brought on by tax cuts, have taken hold.

Unfortunately, West Virginia’s policymakers seem intent on doubling down on this failed policy that hasn’t created jobs or made the economy stronger. The strategy couldn’t be clearer than when Senate President Cole talked about improving West Virginia’s ranking in ALEC’s “Rich States, Poor States” report. The blueprint for reform from the ALEC report, which has consistently failed to predict any sort of economic growth, is simple: take from the poor and middle class and give to the rich. It’s a recipe for economic inequality and declining middle-class incomes, all while depriving the state of the ability to invest in the future. Those policies have failed West Virginia already, and are failing elsewhere. We don’t need to give them a second chance. What we need to do, is move from austerity to prosperity by strengthening the middle class. 

Time to Modernize West Virginia’s Excess Acreage Tax

With tax reform looming on the state’s public policy agenda, now would be a opportune time to revisit the state’s Excess Acreage Tax. Since 1905, a corporation purchasing 10,000 acres or more of property in the state is subject to a one-time five cents per acre tax on owning the property. In 1999, Governor Underwood’s Commission on Fair Taxation (3-694) recommended increasing this tax to 50 cents per acre, making it an annual tax, lowering the threshold to 1,000 acres and allowing a credit against the state’s severance tax. This is a step in the right direction and it is long overdue.

As many West Virginians know, one of the state’s historic economic problems has been large absentee land and mineral ownership.  As we discussed in our 2013 report Who Owns West Virginia in the 21st Century?, this problem has not gone away. In 2012, the top 25 land owners in the state owned about 18 percent of the state’s private land and none of the top 10 largest land owners were headquartered in West Virginia. In Wyoming County, two out-of-state companies – Heartwood Forestland Fund and Norfolk Southern – owned over half of the county’s private land in 2012.

Adequate taxation of large landowners could not only spur development of more land in the state (especially in southern WV) but could also provide needed revenue to fund economic development and lower the tax responsibilities of landowners with improvements. According to data from the West Virginia Property Tax Department,  approximately 352 corporate entities (excluding non-profits) owned at least 1,000 acres of land in the state for a total of 3,380,000 acres. At 50 cents an acre, this would amount to an estimated $1.7 million in annual tax revenue – not including the tax credit against the state’s severance tax which would lower this amount. The state’s largest private land-owner – Heartwood Forestland Fund, which owns about 500,000 acres in the state – would have an annual tax bill of about $250,000.

While the proposal of increasing the tax from 5 to 50 cents is a step in the right direction, it might not be high enough to incentivize the development of more land or provide adequate revenue to fund economic development and other priorities. Adjusted for inflation, the five cents per acre tax that was established in 1905 would be the equivalent of about $1.25 today.

One idea would be to create a graduated Excess Acreage Tax rate that increased with the amount of property owned over 1,000 acres. This could help provide a much greater incentive to the largest land owners to develop or sell their land and it would help ensure that those at the bottom end don’t buy more land.

EXCESS ACREAGE TAX

If we started with a tax rate of 50 cents per acre between 1,000 and 2,499 acres and ended with a top rate of $5 per acre over 250,000, it could yield an estimated $10.6 million in revenue (not including the severance tax credit). If the lowest rate was set at a $1 per acre and increased by a $1 per acre until it hit $10 for landowners over 250,000 acres, it could yield $21.2 million annually. It would also be wise policy to exclude any producing farms, which is something we do not want to discourage with the Excess Acreage Tax.

Along with reforming the Excess Acreage Tax, lawmakers could also consider revamping the state’s preferential tax treatment of unimproved land. As the Lincoln Institute of Land Policy has pointed out, using the use-value assessment (UVA) approach instead of the market-based approach that is used on other types of property can dramatically lower property value and taxes.  For example, in Wyoming County, Heartwood Forestland Fund owns a parcel containing 12,463 acres that has an appraised value of $2,358,450 (assessed value is $1.4 million) and their total property tax bill in 2014 was $31,490. This means Heartwood is paying about $2.53 per acre, with an appraised value of just $189 per acre. Using a market-value approach would mean that this land would be valued closer to $500 an acre.

Governor Underwood’s Commission on Fair Taxation was correct in recommending much-needed changes to the state’s Excess Acreage Tax.  As the legislature moves ahead with reforming our state’s tax code this year, they should consider reforming the state’s Excess Acreage Tax. This could not only incentivize economic development in West Virginia, but also provide a much-needed source of revenue as coal continues to decline in southern West Virginia. 

UPDATED

Budget Beat – April 10, 2015

Tax Reform for the People

April 15 is right around the corner and whether you are expecting a refund or writing that check, it’s a good time to reflect on the mind-bending systems called our tax code.

The federal income tax is progressive, meaning that it doesn’t unfairly and disproportionately tax low-income people. West Virginia’s tax system is upside-down, resulting in low- and middle-income families paying a larger share of their income in taxes than those with the best ability to pay. 

Who Pays 4.10.15

West Virginia policymakers have tackled tax reform several times, most recently by then-Governor Joe Manchin. And the Republican legislature’s newly formed Joint Select Committee on Tax Reform will hold its first meeting this Monday, April 13 at 2:00 PM in the House Chamber. We will recap that meeting in next week’s Budget Beat.

Much of the discussion surrounding tax reform usually revolves around making the state’s business climate more friendly by reducing or completely eliminating business taxes. In fact, over the past 10 years, West Virginia has moved from 34th to 21st in its business tax ranking after cutting the corporate income tax and phasing out the business franchise tax. While these tax cuts have cost the budget millions each year, they have failed to bring jobs to the state. In fact, West Virginia has lost nearly 28,000 jobs during that same time period.

Business Tax Cuts No Jobs 4.10.15

For lots of ideas on how tax reform can be structured to benefit West Virginia’s working families, instead of corporations, check out our recommendations in this year’s report on the state budget.

Rich States, Poor States Debunked

Another annual ranking is Rich States, Poor States complied by the American Legislative Exchange Council (ALEC). This year West Virginia fell six spots on this index which looks at tax rates and regulation. Here’s an interview on yesterday’s West Virginia Metro News with one of the report’s authors.

For a complete debunking of the ALEC index, check out this report by Good Jobs First which shows that, in reality, the less a state conformed with ALEC policies the better off it was. 

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Tax Freedom Day

Every year the Tax Foundation releases a report on Tax Freedom Day which it describes as the day when “the nation as a whole has earned enough money to pay its total tax bill for the year.” The Center on Budget and Policy Priorities recently published a report debunking the concept, however, stating “few Americans would likely feel more ‘free’ if Tax Freedom Day came earlier in the year because the federal government stopped providing for national security, ensuring homeland security, conducting food safety inspections, or testing prescription drugs.”

Senator Manchin Votes to Expand Social Security

Senator Joe Manchin joined five other Democrats to co-sponsor an amendment to the Senate budget bill that would have expanded Social Security benefits. The amendment was ultimately defeated with a 42-56 vote. According to the AARP, one in four West Virginians receives Social Security which provides $9.5 billion in economic output for the state at a rate of $1.61 for every $1 received.