WV Center on Budget and Policy > Blog > Economy > Taxes, wages, and the costs of doing business.

Taxes, wages, and the costs of doing business.

At our recent annual meeting, the keynote speaker, economist and senior fellow at the Center on Budget and Policy Priorities Dr. Robert Tannenwald, talked about how West Virginia should place more emphasis on education, infrastructure, and health, rather than creating tax cuts for businesses as a way to promote economic growth. You can listen to an interview with Dr. Tannenwald here.

One of the key reasons Dr. Tannenwald cites as to why business tax cuts don’t actually promote economic growth was the fact that taxes represent a very small portion of the total costs of doing business. On average, taxes represent about 2-3% of the costs of doing business. This means that even minor changes in the costs of labor, transportation, or utilities can far exceed large reductions in business taxes.

For example, let’s consider business taxes and private wages in West Virginia and our neighboring states. According to the Bureau of Economic Analysis, in 2009, there were 577,386 private wage and salary employees in West Virginia. Private business paid out about $20.7 billion in wages, which gives an average hourly wage of $17.94, using 577,386 employees and 2,000 hours of work in a year.

West Virginia’s average hourly private wage is the lowest of its surrounding states, ranging from $0.69 lower than Kentucky to $6.71 lower than Maryland. The table below shows the value of this wage differential for West Virginia.

 

Hourly Wage Difference from West Virginia

Value of Wage Differential (2000 hours, 577,386 private employment)

KY

+$0.69

$795 million

MD

+$6.71

$7.75 billion

OH

+$2.56

$2.95 billion

PA

+$3.99

$4.61 billion

VA

+$6.38

$7.37 billion

In other words, if businesses in West Virginia paid the same wages as businesses in Kentucky, it would cost them an addition $795 million, an addition $7.75 billion if using Maryland’s wages and so on.

Now compare those numbers to taxes. According to the Council on State Taxation, businesses in West Virginia paid a total of $3.5 billion in state and local taxes in 2009.  And as the above table shows, the entirety of West Virginia’s business taxes can be offset by differences in wages of the surrounding states.

In fact, suppose West Virginia’s business taxes were cut by a third, from $3.5 billion to a little over $2.3 billion. The savings would be erased by only an $1.00 increase in average hourly wages. 

And this exercise only looks at one factor, wages. And if minor changes in wages can offset major tax cuts,
 it is easy to imagine
what changes in other factors like utilities, transportation, benefits, or occupancy can have all at the same time. When the effects of tax cuts can so easily be drowned out, then their efficiency as an economic development tool is certainly questionable.

 

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