Will Tax Reform Work This Time?
Yesterday, the Joint Select Committee on Tax Reform met for the first time to start laying out the plan for comprehensive tax reform in West Virginia. Citing ALEC's dubious Rich States/Poor States report, Senate President Bill Cole and House Speaker Tim Armstead said that West Virginia's tax structure is broken and burdensome, and is holding back economic growth, and tax reform is just what the doctor ordered.
Now if all that sounds familiar, it should, because it all was said about less than ten years ago during West Virginia's last tax reform effort. Under then-Governor Joe Manchin, West Virginia underwent tax reform. And then, as it is now, the complaint was that West Virginia's tax system was too anti-growth, and put us at a competitive disadvantage. In particular, the Chamber of Commerce complained in 2006 that the tax responsibilities of business were too high, blaming our Corporate Net Income Tax rate and the Business Franchise Tax as the source of the state's uncompetitiveness.
Over the next two years, the Chamber got exactly what it asked for as the Corporate Net Income Tax rate was reduced from 9.0% to 6.5% while the Business Franchise Tax was phased out and eliminated entirely.
At the time, the tax cuts were widely praised by conservative anti-tax groups, who predicted great things for West Virginia. The Cato Institute called West Virginia's tax reform the "most pro-growth tax reform" in the country, giving Governor Manchin an "A" grade for fiscal policy, while the Tax Foundation said that the state's tax cuts would put West Virginia, "in a better position to compete regionally with Pennsylvania and Virginia and place itself in a better position nationally."
Not everybody was enamored, as Ted warned in 2008 that the tax cuts could prove costly, while doing little to grow the economy. The Center's warnings went unheeded, as Chamber of Commerce President Steve Roberts quipped that Ted's warning was his "opinion" and it, "doesn't mean the opinion has any resemblance to reality."
And as it turns out, Ted ended up being a whole lot closer to reality. The business tax cuts blew a huge hole in the budget, to the tune of $236 million this year alone. Business tax revenue will be lower in 2016 than it was in 1990, and the state has faced year after year of budget problems, problems that would have been worse if it weren't for the fortunate timing of the Marcellus Shale boom.
The 2006/2008 tax reform worked in one sense, in that it dramatically reduced the state's business tax burden while improving our state's "business tax climate." But it failed to actually improve the state where it matters most: jobs. The chart below tells the story. While West Virginia's business tax rate fell from 7.6% of gross state product in 2007 to 5.8% in 2014, and while the state's business tax climate rank improved from 37th to 21st, annual employment fell by 39,000.
Instead of competing better nationally, West Virginia has fallen further behind. While the rest of the country is setting records for job growth, there are not only 39,000 fewer West Virginians working than before the tax cuts began but also 11,000 fewer manufacturing jobs. To see the real impact of the tax cuts, just take a look at tuition at colleges and universities in West Virginia, which are on the rise as budget cuts to higher education, brought on by tax cuts, have taken hold.
Unfortunately, West Virginia's policymakers seem intent on doubling down on this failed policy that hasn't created jobs or made the economy stronger. The strategy couldn't be clearer than when Senate President Cole talked about improving West Virginia's ranking in ALEC's "Rich States, Poor States" report. The blueprint for reform from the ALEC report, which has consistently failed to predict any sort of economic growth, is simple: take from the poor and middle class and give to the rich. It's a recipe for economic inequality and declining middle-class incomes, all while depriving the state of the ability to invest in the future. Those policies have failed West Virginia already, and are failing elsewhere. We don't need to give them a second chance. What we need to do, is move from austerity to prosperity by strengthening the middle class.