November 21, 2006

For Growth, West Virginia Needs Real Tax Relief

(The following article originally appeared in the November 9, 2006 edition of the Charleston Daily Mail.)

It is no secret that despite a booming economy nationwide, West Virginia lags in economic development. Only Mississippi and Louisiana have lower per capita incomes.

How can high-income jobs be retained, or better yet, attracted?

The only quick fix is the state’s tax system.

The governor called the Legislature to a special session this week and submitted recommendations based on the Tax Modernization Project’s lengthy report. The governor’s recommendations fall well short of providing meaningful tax relief.

This is too bad, because taxes matter desperately to businesses and individuals.

Businesses always consider taxes when deciding where to expand. And those comparisons hurt West Virginia no matter how they’re done.

West Virginia has the 21st highest tax burden in the country — meaning West Virginians pay a higher portion of their income for state and local taxes than residents in 29 other states. Among border states, Pennsylvania’s tax burden is lower and Virginia’s is much lower.

State tax laws can be also be compared on rates, brackets, special tax breaks, etc., and when ranked on that basis, West Virginia ranks 34th — even worse than on the burden measure.

That was the finding in the Tax Foundation’s 2007 State Business Tax Climate Index. All but one border state ranked higher: Virginia 13th, Pennsylvania 22nd, and Maryland 29th.

West Virginia can take some solace that Kentucky ranked 39th because its so-called tax reform has hurt the state’s competitiveness.

In fact, West Virginia should learn from Kentucky and nearby Ohio to beware of “tax reforms” promoted as turnaround plans if they neither lower nor simplify taxes. What those states have done is rearrange the deck chairs on the Titanic.

West Virginia’s neighboring states have larger, more diverse economies, you say. So what about states that depend heavily on mining like Montana, South Dakota and Wyoming?

All three are growing rapidly with exemplary business tax climates and low tax burdens.

To close the gap in the race for jobs, the governor has proposed cutting the corporate tax rate, but only by a timid quarter of a point, from 9.0 to 8.75 percent.

That won’t do it. Better to undercut a neighboring competitor, say Kentucky and Maryland, with their 7 percent rates.

The only way a hefty rate cut will be possible is if West Virginia legislators can stop listening to the siren song of tax credits. The governor does propose to close corporate loopholes, and here he is on the right track.

On the individual income tax, the governor’s proposal to raise the minimum taxable threshold won’t do much for job creation.

The top tax rate of 6.5 percent is more than double Pennsylvania’s, so that’s not within reach, but West Virginia could try to match or beat Virginia’s 5.75 percent rate and consolidate its five brackets.

In sales taxes, a little-noticed but damaging tax policy is what economists call “tax pyramiding.” This happens when business-to-business sales are taxed, which causes several layers of sales tax to build up in the final price.

Instead of attacking tax pyramiding, the governor has offered a populist proposal to reduce the sales tax on groceries.

This bad idea is sweeping the nation, masquerading as a help to the poor even though food stamps aren’t taxed. In reality, this special rate for groceries will force up the rate on everything else.

Lastly, the governor proposes to reduce the business franchise tax and property taxes for seniors. Both good ideas, but they don’t go far enough.

Business franchise taxes are going the way of the dinosaurs as state after state repeals theirs. West Virginia should do the same.

And if property tax relief is needed for seniors, why not for everyone? Lower property taxes will help West Virginia’s competitiveness.

Some will say forget about tax cuts. Why not spend more on education instead?

Employers certainly like good schools, but it would take a decade or more to make a noticeable dent in that problem. Tax changes can be legislated now, and business will quickly take the opportunity to expand.

What about paying companies with special tax breaks to re-locate to West Virginia?

Special tax breaks are just tax giveaways for big companies that foist the tax burden on smaller companies and are an economic slap in the face to resident companies.

From 2000 to 2005, Virginia’s employment grew at a rate of 8 percent and Pennsylvania 3 percent while West Virginia’s fell.

The time is now for West Virginia to stop hurting its own economy, and the tax code is the place to start.

Encourage the governor to expand his plan, so that it’s bold enough to spur economic growth.

Taxpayers and the newly employed will be grateful.

Curtis Dubay is an economist at the Tax Foundation and co-author of the 2007 State Business Tax Climate Index, which can be found at