West Virginia Gross Receipts Tax Proposals Just Won’t Die

May 31, 2017

In West Virginia, a past tax is never dead. It’s not even past.

Never mind that the legislature showed scant interest in Governor Jim Justice’s three previous proposals to reintroduce a gross receipts tax. Never mind that, after years of trying, the state abolished its previous gross receipts tax thirty years ago. Never mind that the tax in question was adopted in 1921, before the state had income or sales taxes. Never mind that, in the near-century since the old tax was adopted, nearly every state repealed its gross receipts tax.

With the revival of the governor’s commercial activity tax proposal, West Virginia’s course runs against the current, borne ceaselessly into the past.

But what’s truly amazing is that the whole fight is over $11 million to $12 million.

When Governor Justice (D) first proposed a commercial activity tax, it was supposed to raise $214 million. A later, scaled-back plan would have raised $45 million. The latest proposal, an 0.015 percent tax on gross receipts, would raise a mere $11 million to $12 million, ostensibly dedicated to highway funding.

The same amount could be generated by increasing the gas tax rate by one cent per gallon, from 33.2 to 34.2 cents per gallon. Not only would this make more sense—the cost of highway improvements should be borne by those using the highways—but it would avoid the need to create and administer a brand-new tax.

Even if the tax never grew, this would be a significant burden. All tax administration comes at a cost, but building out the infrastructure to collect and audit a tax that raises a mere $11 million or so is highly inefficient. More likely, though, is that the tax would increase with time; few taxes remain that modest forever. It would be the easiest tax rate to adjust every time the state wanted some additional revenue. And once the rates rose—perhaps to the 0.2 percent rate the governor had proposed originally—West Virginia businesses would be at a significant disadvantage, faced with a tax that is imposed without regard to profitability. (More on the implications here.)

It’s not for nothing that economists widely see gross receipts taxes as among the most economically destructive sources of state tax revenue. Our State Business Tax Climate Index, which is a measure of tax structure, looks on them with disfavor as well: West Virginia would slide seven places on the Index if it enacted such a tax. (Raising the gas tax by one cent wouldn’t move the needle.)

West Virginia is looking to some very old ideas about taxation. But might I suggest an even older one? In 614, the Edict of Paris prohibited the adoption of any new or “unheard-of tax,” and pledged that everywhere a new tax had been “wickedly introduced,” the matter would be investigated and the tax “mercifully abolished.” This might have been something of an overreaction, but West Virginia’s state-level gross receipts tax having been mercifully abolished in 1987, it would be a shame to bring the idea back now.

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