Here is an opinion piece in the State Journal discussing the business personal property tax that makes many of the same mistakes others make when arguing for business tax cuts. West Virginia taxes business personal property which includes manufacturing equipment and machinery. While West Virginia isn’t the only state with the tax, several states do not. The tax is a popular target for attack, and this article is no different. The tax is described as a”destructive” and “horrid policy” that anyone with common sense knows is a “job killer.” The argument goes that since West Virginia taxes business capital, capital intensive businesses will choose to locate outside of West Virginia in order to avoid the tax. The argument seems to be sound and is easy to understand, but it makes the same mistakes that “business climate” indices make.
First, it doesn’t make any sense to look at one tax, or in this case, one part of one tax, as the driving force behind job creation and business location. The marginal tax rate on new business investment, not the average tax rate on existing business capital, is what can have an effect on business investment. With the availability of deductions and credits, it’s possible to have low or even zero marginal tax rates on new investments, while having a sizeable average tax rate on existing business capital.
Second, any one particular business tax is typically only a small proportion of total business taxes. When businesses do consider taxes, they look at all their taxes, not just their personal property taxes. And if they do look at property taxes, they’ll see in West Virginia, despite taxing real and personal property, property taxes are pretty low. According to the Council on State Taxation, both real and personal business taxes made up about 29 percent of the total business taxes paid to state and local governments in West Virginia. This is below the national average of 36 percent and below that of nearly all our neighboring states. So a business that stays out of West Virginia to avoid to the personal property tax, would likely end up paying even more in real property taxes.
Third, while any one tax is a small proportion of total business taxes, business taxes are an even smaller proportion of the costs of doing business. State and local business taxes are typically 1-2% of the total cost of doing business. The costs of utilities, occupancy, transportation, and labor are all more significant. Variations in taxes among states can be easily made up for by variations in these other, more significant costs. For example, West Virginia’s average hourly wages are significantly lower than any of its border states. Kentucky’s average hourly wage is $1.27 higher than West Virginia while Maryland ranks highest at $22.01 per hour. This means that the differential in wages between West Virginia and its border states would far exceed the savings from the proposed elimination of the business personal property tax.
Fourth, we know that businesses look at more than just taxes when deciding where to locate. In fact, taxes are the least significant cost factor in business location decisions. The costs of labor, transportation, utilities and occupancy all outweigh taxes by far when businesses are deciding where to locate.
Finally, public services play just as an important role in business location decisions as the cost of doing business. Education is the most important public service business look at when making location decisions. The State Journal says that the any economist would call the business personal property tax a job killer. Economist Timothy Bartik, of the Upjohn Institute, has stated*,”Business tax reductions financed by cutting education or infrastructure spending will probably destroy jobs.” And according to our analysis and the State Tax Department, the business personal property tax contributed about $160 million to the public school system in 2009. Exempting business personal property would costs schools about $85 million each year, not to mention the millions that county and municipal governments would lose.
And don’t think that by cutting taxes, economic activity will increase enough to offset revenue losses. We have been down this road before. Our analysis, detailed in a forthcoming report, shows that cutting the business personal property tax would result in a net tax revenue loss. And, any increase in economic activity would be lost if public services were cut. I don’t see schools in the state improving their quality with an $85 million budget cut. It’s very possible that the results of a tax exemption for business personal property would make the state less attractive to businesses.
The tax itself may not be a job killer, but exempting it certainly could be.
*Bartik, Timothy J.1992. “The Effects of State and Local Taxes on Economic Development: A Review of Recent Research.” Economic Development Quarterly. p.109.