Ted Boettner: Some Tax Reforms Could Help W.Va., but Not the Proven Failures
Sunday Gazette-Mail -As the Legislature moves to revamp our state’s tax system this year, lawmakers should avoid doubling down on the failed policies of the past and work toward changes that will support working families and stronger investments in our economy. Read
While we all want good-paying jobs and a stronger economy, the large corporate tax cuts enacted since 2007 have failed to provide any measurable benefits. In fact, they have severely damaged our state’s ability to invest in the things that really create jobs that can support families and individuals, such as higher education, broadband, supporting small business, workforce training, and health care.
In the name of creating jobs and boosting our economy, lawmakers made several large reductions in business taxes — including phasing out the business franchise tax and reducing the corporate income tax and the business personal property tax for manufacturers and natural gas companies. All together, these cuts have cost over $225 million this year alone, about 5 percent of the state budget.
Meanwhile, West Virginia has 7,700 fewer private sector jobs than it did before the business tax cuts, including the loss of 11,000 manufacturing jobs, Over this period, the total number of West Virginians employed has dropped by nearly 40,000, from 778,000 to 739,000. West Virginia also has a smaller share of nation’s private sector and manufacturing jobs. This all happened while the state’s business tax ranking from the conservative Tax Foundation moved from 37th to 21st lowest in the nation.
There are several reasons why the business tax cuts failed to produce the jobs its supporters promised. First, while the corporate tax cuts where a large part of the budget, they represent a small share of the cost of doing business. All together, less than 3 percent of business costs in West Virginia are state and local taxes. Moreover, the cuts represented only a small fraction of the already low total business taxes paid in the state. The cost of labor, electricity, property, transportation, and raw materials are a much bigger cost of doing business and have a much larger influence on where businesses decide where to locate.
Second, most of the tax cuts were likely spent out-of-state. This is because the large majority of corporate taxes in West Virginia are paid by a small number of major multi-state corporations headquartered out of state. Most likely, the tax cuts were paid out in dividends to stockholders or the money was invested in other states. Moreover, corporate investment is usually driven by anticipated demand for their products and receiving additional cash isn’t going to make this happen.
Lastly, given the state’s balanced budget requirement, the reduction in revenues from the corporate tax cuts has meant removing a large amount of spending from the state economy with cuts in higher education and other government services.
To grow our economy and create a healthy balance of the things the state taxes, West Virginia will need tax policies that put more money in the hands of hard-working families and that dedicate more resources to investments that will grow the middle class and entice more people to raise their families in West Virginia.
This could include joining the 26 states that have enacted a state version of the federal Earned Income Tax Credit (EITC) for working families. In addition to raising the incomes of low-income families, studies have shown the EITC helps people leave welfare for work. It also boosts the number of people in the workforce, a measure where West Virginia ranks last in the nation.
The money these working families receive also stays in the local economy, boosting sales for local businesses and overall economic activity. Research has also shown that the EITC can improve the health of infants and their mothers, improving learning college enrollment of children, and increase their life-long earnings.
Other avenues for tax reform could include:
- Raising tobacco and alcohol taxes to improve the health of West Virginians and reduce state medical expenses.
- Updating the personal income tax by reducing taxes on the middle class and increasing them on higher income people, who have gained the most economically since the end of the recession while middle-class wages have stagnated or declined for most workers.
- Modernizing the sales tax to reflect the changes in our economy from consuming goods to purchasing services.
- Closing offshore corporate income tax loopholes.
- Closely scrutinizing and scaling back business tax subsidies.
Lawmakers could also explore taxing shale gas at a higher rate while offering a refundable credit to the industry if it is used in state. This could help encourage more processing of natural gas and the development of related products in West Virginia and more jobs in our natural gas industry.
All of these suggestions would not only put more money in the hands of hard-working families, they would improve our state’s economy while giving us the resources necessary to make our state a better place to live, work, and raise a family.