Every Dollar Counts: The Need for Transparency and Evaluation of Business Tax Incentives
Every year, West Virginia’s policymakers scrutinize the state’s budget. Every dollar spent must be accounted for, and how much is allocated to education, healthcare, infrastructure and other public services must be carefully considered. And once the fiscal year is over, the budget process begins again, and what programs are funded and where the tax dollars are allocated are examined and debated by the state’s policymakers. Read full report
However, one form of “back door” spending receives virtually no scrutiny from the state’s policymakers, despite costing the state millions each year. The use of tax incentives for economic growth and job creation has a major impact on the state’s budget each year, but currently West Virginia policymakers lack the tools and information needed to properly evaluate them. Instead, millions of taxpayer dollars are handed out with little oversight and accountability.
West Virginia, like many states across the country, has relied heavily on tax incentives to encourage businesses to locate and expand in the state, and to promote economic growth. However, the actual cost and true economic impact of the state’s business tax expenditures is unknown, and neither policymakers nor the public know the return on its investment. As tax incentives remain a major policy tool for economic development, it is critical that the state regularly and effectively evaluates them and uses that information to inform the state’s policy choices.
This is not a new problem in West Virginia. In 1999, the Governor’s Commission on Fair Taxation reported to then-Governor Cecil Underwood that, “Many (tax credits) have little or no relation to economic development. Further, research is necessary to determine the overall impact of such credits.” More recently, the Wise Administration in 2002 examined 22 of the state’s existing business tax credits and recommended eliminating half of them despite being unable to prove if they led to job creation or economic growth.
What Are Tax Expenditures?
West Virginia code defines tax expenditures as “exclusions, deductions, tax preferences, credits and deferrals designed to encourage certain kinds of activities or to aid taxpayers in special circumstances.” Examples of state tax expenditures include the Family Tax Credit, which decreases or eliminates the personal income tax liability for taxpayers below the federal poverty line, and the Homestead Exemption that reduces the property tax liability for those 65 years old or older, or permanently disabled.
Tax expenditures cost the state money in much the same way as direct spending, because they result in the loss of revenue that would otherwise be collected. For this reason, tax expenditures are often referred to as “spending simply by another name.” But, unlike annual public spending that is subject to annual appropriations each year, tax expenditures are not. Thus, they more closely resemble an entitlement program (for example, Medicaid) than discretionary spending programs (for example, higher education) because any person or entity that meets the requirements for them can receive the benefits.
Many of West Virginia’s largest tax expenditures are tax incentives for businesses. While the goal of these tax incentives might be to boost job creation, attract new businesses, and promote economic growth, very little is done to account for and evaluate them. Unlike direct spending, which is reviewed and documented each year in the budget process, the review and evaluation of the state’s tax expenditures is done sporadically, with little evaluation of their effectiveness.
Examples of West Virginia’s business tax incentives include the Economic Opportunity Tax Credit, the thin-seam coal tax credit, the Film Industry Investment Tax Credit, and the Manufacturing Property Tax Credit.
Evaluating Business Tax Incentives in West Virginia
States that effectively evaluate business tax incentives get the most “bang for the buck.” States that successfully use tax incentives to promote job creation and economic growth do so because they know whether or not their efforts are working. This is according to a recent report by the Pew Center on the States called “Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth.” According to the report, evaluations of tax incentives for businesses must cover four key areas:
Timeliness - the evaluations should be timely, and provide policymakers with the most up-to-date data as possible.
Scope - the evaluations should contain relevant data about recipients and they should cover all major tax expenditures.
Impact - the evaluations should accurately measure the full economic impact of the tax expenditures.
Goals - the evaluations should identify and draw clear conclusions about the goals of the tax expenditures. Goals of tax expenditures can include: creating quality jobs, benefiting distressed areas, or making the state more economically competitive. Within each goal the evaluations should identify relevant measures, like the number of jobs and wages, and whether recipients were hiring state residents.
The “Evidence Counts” report shows that West Virginia is “trailing behind” other states when it comes to evaluating its business tax incentives. Other groups, like Good Jobs First have also ranked West Virginia below most other states when it comes to transparency and accountability of economic development incentives.6 This report uses the standards for successful tax incentive evaluations outlined in the “Evidence Counts” report to examine and critique West Virginia’s efforts at evaluating its business tax incentives.
West Virginia’s business tax incentive expenditures are accounted for and evaluated by the State Tax Department in three separate documents. The West Virginia Tax Credit Review and Accountability Report reviews four of the state’s business tax credits on the basis of cost and jobs created. The West Virginia Tax Credit Disclosure List accounts for every business claiming a business tax credit, listing its name, address, and a cost range. The West Virginia Tax Expenditure Study lists the various tax expenditures offered by the state by the tax it offsets, and also includes rationales for the expenditures and aggregate cost estimates.
However, each document has significant shortcomings that deprive state policymakers of the ability to effectively evaluate the state’s tax incentives, or even answer basic questions about them, like how much the credits cost, and who is currently receiving them. None of the evaluations cover all of the four key areas of evaluations identified by the Pew report; instead the reports include incomplete, inconclusive, and out-of-date data.
This issue brief examines how West Virginia reviews its business tax incentives, including how they are evaluated, where the state is falling short in its evaluation, and how it can move toward providing greater transparency and accountability.
Robin Capehart, et al. “Recommendations to the Governor,” (The Governor’s Commission on Fair Taxation, The State of West Virginia, December 1999.)
Michael J. Hicks and William F. Shughart II, “Quit Playing Favorites: Why Business Subsidies Hurt Our Economy,” in Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How to Fix It, ed. Russell S. Sobel (The Public Policy Foundation of West Virginia, 2007), 124-125.
WV Code §11-10-5s(c)
The National Commission on Fiscal Responsibility and Reform, “The Moment of Truth: report of the National Commission on Fiscal Responsibility and Reform.” (December 2010).
The Pew Center on the States, “Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth.” (April 2012).