The Missing Tax Cuts...The Source of State Budget Woes
Another day, another budget presentation that fails to mention the tax cuts that are at the heart of our state budget woes. According to the Gazette, the State Budget Director informed an interim committee that the current budget faces a $80 million shortfall and next year's budget will face a gap of $260 million. This is on top of the $75 million in cuts this year and the $134 million in cuts a couple of years ago. The Budget Director failed to mention the recent tax cuts that have reduced our revenues by at least $316 million this year. This is like reducing your hours at work and wondering why your paycheck is lower than it was when you were working full-time. It makes no sense. And it's simple math.
While the growth in Medicaid and the sluggish economic recovery (however, keep in mind we ranked 10th highest in real GDP growth from 2011 to 2012) have impacted revenues, the tax cuts are the most obvious reason for why revenues continue to be unable to support government services and programs.
According to the 2013 Tax Expenditure Report, the food tax elimination – which took place this year – reduced sales tax revenue by $145 million last year and will cost the state $174 million in 2013 (FY 2013/FY2014). The low-income tax credit – which our organization has supported – cost the state $16.3 million according to a recent fiscal note. Meanwhile, the large business tax cuts have cost us at least $126 million. I say "at least" because this is the amount the WV Commerce Department says businesses saved in FY 2012 (which was 1.5 years ago). It is unclear whether this figures includes the manufacturing investment property tax credit that was established in 2008 to reduce inventory and equipment taxes and cost the state an estimated $3.3 million in 2008.
As folks may recall, the corporate net income tax rate has dropped from 9% in 2007 to 7% in 2013 and will make its final plunge to 6.5% next year. The business franchise tax (a tax on the net-worth of a business) rate has dropped from 0.70% in 2006 to 0.21% in 2013. Beginning in 2015 the tax will be eliminated.
As we've pointed out before, the revenue from these two business taxes are at a 12- year low and they represent a smaller portion of private sector GDP than at any time over the last 22 years. One thing we also know is that business tax expenditures have not grown dramatically over the last several years, so it isn't because we've enacted a slew of tax credits or new deductions.
And another thing we know for sure is that the business tax cuts did not "expand the base" and increase revenues (supply-side effects), which the president of the WV Chamber of Commerce said back in 2011: "We may be able to lower the rate, but generate more tax revenues because of increased business activity."
The elimination of the food tax – which is not my favorite tax since it hits low- and moderate-income families especially hard – has also greatly impacted revenues. How lawmakers can praise the reduction of the sales tax rate on food on one day and the next day mourn the decline in revenues needed to support budget priorities is beyond me. It seems like cognitive dissonance or policymakers wanting to have their cake and eat it, too (probably the latter).
While lawmakers can be somewhat excused for this behavior (it's politics, after all!), the high-level functionaries in the West Virginia Budget Office or Department of Revenue really have no excuse for not pointing out that the recent tax cuts are a major driver of our budget gaps. You'd expect that both of these agencies would be data-driven, not politically driven to look the other way on the tax cuts and egg on more budget cuts with comments like "there's no appetite for raising taxes."
As we concluded in our report on the business tax cuts more than five years ago:
Last year, significant reductions were made to the business franchise tax without replacing the revenue lost to the General Revenue Fund, and the same course of action is being pursued today. The additional cuts in business taxes embodied in SB 465 and SB 680 threaten to significantly undermine the ability of the state to provide quality public services. Some combination of a sharp drawing-down of the state's reserves, reductions in state services, and increases in other taxes seems almost inevitable during the next decade.
In acting upon SB 465 and SB 680, it is important for policy makers to consider the fiscal implications, not just on a short-term basis but also for the long term. It is in the "out" years that state policymakers will have to make difficult choices concerning whether to raise taxes or cut government services. In the end, policy-makers should balance the short-term marginal effects of cutting taxes for businesses against the long-term benefits of investing in quality public structures.
Not to say we told you so, but we told you so. It's time for policymakers to accept that most of our budget problems are self-inflicted and not the result of a mysterious revenue problem or coal-severance tax declines. If we want to have a strong and productive economy, we need to be investing in our children, our workforce, and our infrastructure and not giving costly and inefficient tax cuts that are depriving our state of what it needs to get the job done. This starts by not leading the nation in budget cuts.
Grammatical Correction: h/t to Ken Ward noting that I meant to say "latter" not "ladder" and @WVPundette who noted via Twitter that I meant to say accept, not except.