What Could Tax Reform Look Like?

So what would tax reform look like in West Virginia? First, let’s go ahead an eliminate the business personal property tax. We know that the business personal property tax brings in about $250 million in revenue. While most of property tax revenue goes to local governments, for simplicity’s sake, I’m going to treat all revenue together, and assume distribution issues would be dealt with later (hey, it works for the Tax Department).

But let’s not stop there, let’s get serious about tax reform. The state with the most favorable business tax climate, Wyoming, doesn’t have a corporate income tax, so instead of reducing ours as planned, let’s assume the state scraps it altogether. This year, a down year for the tax, the corporate net income tax is expected to bring in about $173 million, along with the business franchise tax. Once the BFT is eliminated, the corporate net income tax is expected to bring in about $240 million a year in revenue.

So together, eliminating the business personal property tax and the corporate net income tax would cost about $490-500 million per year in lost state and local tax revenue. How could the state handle such a major loss of revenue? For the answer we could again turn to that #1 business tax friendly state, Wyoming.

What Wyoming lacks in general business taxes, they make up for in taxes on their natural resources, particularly coal and natural gas. And while rhetoric suggests that West Virginia levies a heavy tax burden on its natural resources, the reality is that our natural resource tax burden is far below a state like Wyoming.

How far below? Remembering that Wyoming has the #1 business tax climate according to the Tax Foundation, consider this. Using the governor’s projections in the executive budget and the same methods in our mineral taxation report, I estimate that together, coal and natural gas production will result in $828.5 million in state and local tax revenue in FY 2013.

If West Virginia taxed coal and natural gas at the same overall level as Wyoming, it would yield an estimated $1.3 billion in state and local revenue, an increase of $465.8 million.

By adopting Wyoming’s levels of taxation on the coal and natural gas industries, the state could nearly eliminate both the business personal property tax and the corporate net income and business franchise taxes, with less than $35 million in lost revenue.

While there is still $35 million missing from the plan, consider this, Wyoming has a job-killing property tax on business equipment, and they are still #1. We could keep a token tax on business personal property at a fraction of its current level, with little effect on our tax climate, and come out ahead.

So, does anybody think this tax proposal would fly in West Virginia? Are higher taxes on coal and natural gas good for business? Those who measure business tax climate seem to think so. But, would the coal and gas industries flee West Virginia to neighboring states? Don’t forget, in the 1990s Wyoming raised their natural resource taxes, while neighboring Montana lowered theirs, creating a large difference in taxation levels between the states. And guess who drilled more gas? Wyoming did, adding 5 times the production value that Montana did.

Now of course, there are risks to relying so heavily on one industry for revenue, particularly one as volatile as the mining industry. But it is worth pointing out that there is a reason why states like Wyoming have very low business taxes; they heavily tax their natural resources and have trust funds.

If this tax reform isn’t palatable to some, despite its results, maybe we should stop focusing on our business tax climate, and start focusing on improving our economy in other ways.