This week the Senate introduced SJR 9, or the Just Cut Taxes and Win Amendment. SJR 9 would call for a constitutional amendment to eliminate the business personal property tax for certain industries. As you might tell from the title of the resolution, this is the state’s latest effort to spur job and economic growth through business tax cuts, and the latest in a long line of attempts to eliminate the business personal property tax.
In order for the amendment to be placed on the ballot, it would require the approval of two-thirds of legislators in the Senate (23 out of 34 members) and House (66 out of 100 members). To be ratified, a simple majority of voters is needed.
In FY 2016, the property tax on business personal property (which includes business machinery and equipment, inventory, and other business personal property like computers and fixtures, as well as the working interest in oil and natural gas property) totaled $388.4 million, which accounts for 23 percent of total property tax revenue in the state. The business community has long decried the business personal property tax as the consummate “job-killer,” and that eliminating the tax is a sure-fire way to boost job growth and investment, but as is typical for these sort of claims, there is little evidence to support them.
SJR 9 would phase out the personal property tax on machinery, equipment, and inventory for industrial businesses, including manufacturing, coal mining, and natural gas extraction. Industrial business personal property accounts for roughly 40 percent of the total $388.4 million of business personal property tax revenue, or $150 million in FY 2016. The phase out would begin in 2020 and be finished in 2026. Industries other than manufacturing, coal, and natural gas would continue to pay property taxes on their equipment and inventories.
As we’ve noted before, simply eliminating the business personal property tax without replacing the revenue would be a fiscal disaster for local governments and schools, which rely heavily on property taxes. SJR 9 gets around this problem by requiring the state to distribute replacement revenue to counties, municipalities, and schools. The replacement revenue would start out at $20 million in the first year of the phase out and reach $140 million per year once the tax is fully phased out.
Notably, it SJR 9 does not say where this additional $140 million per year will come from in order to replace the lost local revenue. To put it into context, $140 million is roughly equal to the combined FY19 General Revenue funding for WVU and Marshall, is equal to general revenue funding of the Judiciary, four times bigger than general revenue funding for the Department of Education and the Arts, three times larger than FY18’s general revenue funding for the Department of Commerce, and roughly equal to general revenue funding for Social Services.
So while paying for the replacement revenue due to the tax cut will likely result in tax increases or program cuts at the state level, it is unlikely that the tax cut will do much to generate economic growth.
Academic research largely does not support the claim that state and local business taxes significantly affect economic growth. Even studies that examined state-level inventory and other personal property taxes concluded they rarely impact business location decisions or have a significant effect on employment in manufacturing, wholesale, and retail industries (see here, here, and here). In fact, in the past 5 years, more manufacturing jobs have been added in states with the “job-killing” business inventory and equipment tax than in states without it.
A recent study looking at Ohio’s elimination of their personal property tax found no impact on manufacturing employment. In fact, the study suggest that by eliminating the tax on machinery and equipment created an incentive to automate, and manufacturing employment in Ohio ended up lower than it would have been had the tax not been eliminated.
One reason the job-killer label for the business personal property tax doesn’t hold water is that fact that it is highly exportable. According to the state of Minnesota’s tax incidence model, 75 percent of their industrial property tax burden is exported out of state. The benefits of cutting or eliminating the tax would be felt elsewhere, not in West Virginia.
In addition, most businesses in West Virginia already enjoy below average property taxes, while our industrial property taxes are comparable to the national average. According to the Lincoln Land Institute, the effective urban industrial property tax rate in West Virginia is 1.581%, ranking 22nd and slightly above the national average of 1.497%. Overall, West Virginians state taxpayers pay less in property taxes than people in almost any other state, largely because of low rates on real property for both individuals and businesses, made possible by including business personal property in our property tax base.
SJR 9 would also introduce inequity in our property tax system. Under the current system, all business machinery, equipment, fixtures, and inventory is assessed and taxed at the same rate. SJR 9 would change that, giving preferential tax treatment to the manufacturing, coal, and natural gas industries.
For example, under West Virginia’s current property tax structure, both a commercial business with $1 million in real property and $200,000 in personal property, and an industrial business with $1 million in real property and $1 million in personal property pay roughly the same effective property tax rate, even though they have different mixes of real and personal property.
West Virginia Property Taxes Owed, Current Law
| Commercial Business ($1 million real, $200,000 fixtures) | Industrial Business ($1 million real, $500,000 machinery & equipment, $400,000 inventories, $100,000 fixtures) | |
| Real | $15,630 | $15,810 |
| Personal | $3,126 | $15,810 |
| Total | $18,756 | $31,620 |
| Effective Rate | 1.56% | 1.58% |
Source: Lincoln Land Institute
Under the system proposed in SJR 9 if West Virginia, the industrial business would have its personal property taxes eliminated, while the commercial business would continue to pay. The effective property tax for the industrial business would be cut if half, while the effective rate for the commercial business would be unchanged.
West Virginia Property Taxes Owed, SJR 9 fully phased in
| Commercial Business ($1 million real, $200,000 fixtures) | Industrial Business ($1 million real, $500,000 machinery & equipment, $400,000 inventories, $100,000 fixtures) | |
| Real | $15,630 | $15,810 |
| Personal | $3,126 | $0 |
| Total | $18,756 | $15,810 |
| Effective Rate | 1.56% | 0.79% |
Source: Lincoln Land Institute
West Virginia has a broad property base, with low and equal rates, that result in tax burden directly proportional to a business’s property value. SJR 9 would create a narrower property tax base, with unequal rates, and a burden more influenced by what type of property a business owned and what industry it is in, rather than its value.
The state’s ability to generate revenue and invest in its many needs has been already been compromised by hundreds of millions in business tax cuts and that have not delivered on their promise. Further eroding state and local revenues can only have more detrimental effects.
