WV Center on Budget and Policy > Blog > Economic Development > Taxes and Business Location – The Cracker Test

Taxes and Business Location – The Cracker Test

Today’s news that Shell Oil Company has chosen a site in Pennsylvania as the location for their new cracker facility comes after months of competition between PA, WV, and OH over which state would land the cracker, with each state offering a variety of incentives. (A “cracker facility” converts ethane from natural gas liquids into more profitable chemicals such as ethylene, which are then used to produce plastics and other by-products).

The news also comes on the heels of the Tax Foundation’s Location Matters report, which measured tax differences between states. The cracker situation creates a good test case for the  Location Matters report, and helps answer the question, “Did differences in state taxes influence Shell’s decision?”
 
The table below contains the relevant rankings and effective tax rates for each state from the Tax Foundation Location Matter report.
 

 

Ohio

Pennsylvania

West Virginia

 

Rate

Rank

Rate

Rank

Rate

Rank

Overall New Business

3rd

49th

33rd

New Capital Intensive Manufacturing

3.3%

3rd

6.1%

9th

6.4%

11th

New Labor Intensive Manufacturing

6.2%

3rd

11.8%

26th

10.3%

16th

 
As the table shows, if taxes mattered for business location, it should not have been a competition, Ohio should have been the clear choice. Ohio was ranked 3rd overall for taxes on new businesses, while Pennsylvania, the winner of the cracker competition, was ranked 49th, and West Virginia ranked 33rd.
 
Looking closer at manufacturing taxes, again it is clear that Ohio is obviously the best choice. The effective tax rate on new manufacturing is essentially the same in Pennsylvania and West Virginia, but is cut nearly in half in Ohio, both for labor and capital intensive manufacturing.
 
With Pennsylvania chosen as the site of Shell’s cracker facility, the Location Matters argument has failed the cracker test. By using business taxes as the metric, Ohio should have been the clear cut choice, but it wasn’t. 
 
Maybe next our policymakers in West Virginia will focus less on tax breaks and more on strengthening our workforce, updating our infrastructure, and investing in higher eductation.

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