Surplus Business Tax Collection Results from Poor Initial Tax Collection Estimates
A recent editorial in the Daily Mail claims that West Virginia's recent business tax cuts have resulted in surplus revenues for March 2011 ($25.7 million) and fiscal year to date ($79.5 million). Following a similar pattern, there was no evidence provided for this assertion other than anecdotal platitudes.
In making its case, the Daily Mail told readers that the recent business tax reductions increased the number of businesses locating in the state. The West Virginia Chamber of Commerce agreed, concluding, "As West Virginia corporate tax rates become more competitive, we'll see a broadening of corporate activity."
However, if the lowering of Corporate Net Income and Business Franchise tax rates makes West Virginia more "friendly" to businesses, we should expect to see an increase in the number of businesses coming into West Virginia. The chart below identifies the number of new corporation filings from 2006 to 2010. These new filings represent C corporations, the only businesses subject to paying the Corporate Net Income Tax. If C corporations were sensitive to changes in the Corporate Net Income tax rate we should expect to see an increase in the number of new filings as the tax rate lowers.
The data clearly shows that there has been a drop in new filings for C corporations from 2006 to 2010, declining from about 1,200 in 2006 to about 850 in 2010, a decline of 41%.
In 2006, there were 46 new partnership filings in the state, and in 2010, the number of new filings was 41. This decline happened after the Business Franchise tax had been reduced from 0.7 percent of capital value versus 0.41 percent in 2010.
The low and unrevised revenue estimate forecast accounts for the surplus. Corporate revenues estimates for both the month of March and for the entire fiscal year have declined precipitously since 2006. Revenue estimates from 2006 to 2009 for the month of March ranged from $60.2 million to $58.1 million. Since the Great Recession, however, estimates for the month of March dropped to $41.2 million in 2010 and $30.1 million in 2011, reflecting a 50 percent decline since 2006.
Finally, we can review the corporate business tax revenue estimates and actual collections from fiscal year 2006 to 2011. The data reveals reveals that the revenue collection estimate for FY 2011 of $209.5 million is lower than any prior recent fiscal year.
Actual business tax collections appear to be normal when compared to the pre-recession trend in actual revenue collections since 2006.
Finally, today's article in the Daily Mail acknowledged that estimating errors were to blame for inaccurate revenue estimate. Yet, the Daily Mail and the State Chamber of Commerce relied on the state's own inaccurate and pessimistic business revenue estimates to draw their favorite conclusion that improved business tax collections are the result of policy changes that lowered Corporate Net Income and the Business Franchise taxes.