Tax Reform Committee Recap

Monday, the  Joint Select Committee on Tax Reform met again to continue the discussion of the proposed overhaul of West Virginia's tax system. The committee heard from economists from WVU and Marshall University, as well as representatives from the conservative Tax Foundation, the Council on State Taxation, and the National Conference of State Legislatures. The experts gave the committee a broad range of general advice, though sometimes contradictory, while only giving a few specific tax reform ideas.

Dr. John Deskins, director of the Bureau of Business and Economic Research at WVU, advised the committee that the state's tax system should be simple, efficient, and fair, but noted that it was up to elected officials to decide what  fair means. While Deskins said that a consumption (sales) tax may be preferable to an income tax, since a consumption tax does not tax savings, he cautioned that completely eliminating the state's income tax and replacing it with a sales tax would be too drastic.

Dr. Jennifer Shand, director of the Center for Business and Economics Research at Marshall University, noted that West Virginia has a pretty good tax system with rates that rank favorably against our neighbors. Both Deskins and Shand emphasized that tax policy is just one aspect of economic growth, and that tax reform wouldn't likely be a silver bullet for the economy. Shand pointed to the Forbes Best States for Business Index, noting that while West Virginia ranks poorly overall, the state ranks well for business costs, including taxes, which we've previously discussed here

Both Joseph Henchman from the Tax Foundation and Mandy Rafool from the National Conference of State Legislatures talked about tax reform efforts in other states. Henchman's presentation focused on how state tax reforms affected the state's rankings on the Tax Foundation's State Business Tax Climate Index. Unfortunately for the Select Committee, the Tax Foundation's indexes don't tell us anything about how those reforms affected those states' economies, and both the State Business Climate Index and the Location Matters Index both completely fail to predict job, or any other economic, growth. Those, and other indexes like them, are simply arbitrary mish-mashes of data which are guided more by politics and ideology than by evidence.

Some of the advice given by the presenters was contradictory. While all of the presentations noted concern over the centralized nature of West Virginia's tax system, with the most business taxes being levied by the state rather than local governments, recommendations from COST and the Tax Foundation included eliminating two significant sources of revenue for local governments - the B&O tax and the business personal property tax.

And while both COST and the Tax Foundation called for the elimination of the business personal property tax, doing so would narrow the property tax base, necessitating higher rates, and make our system less equitable while eliminating a stable source of revenue. And while it is taken as an article of faith by some, there is little evidence that the personal property tax is hurting the state's economy, and none of the presenters to the committee offered any. And, in fact, no matter how you measure it, West Virginia's property tax burden ranks from near the bottom to fairly reasonable.

The same is true of the other concrete recommendation made by both COST and the Tax Foundation, for West Virginia to repeal its throwout rule in favor a single sales factor formula for its corporate net income tax. Moving to a single sales formula would allow multistate corporations to pay income taxes based only on their sales to consumers in West Virginia, rather than shares of its property and payroll, as well as sales, located in the state. Again, despite claims that West Virginia's formula is hurting the state economically, there's little evidence that single sales factor states perform better. Instead, states that move to a single sales factor lose substantial revenue.

And while each presenter acknowledged that education, infrastructure and other state investments are important to businesses and economic growth, missing from the meeting was how any of the proposed tax reforms would affect the state's ability to make those investments. As we're all familiar with the last time West Virginia followed advice from the likes of the Tax Foundation, tax cuts blew a $360 million hole in the budget, leading to multiple years of budget cuts, a disinvestment in higher education, rising tuition, and a crumbling infrastructure


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