Not content with the recent $425 million in tax cuts passed in recent years, the legislature’s attention has once again turned to the state’s business personal property tax. The business personal property tax (sometimes short handedly referred to as the inventory tax) was the topic of the most recent Joint Select Committee on Tax Reform subcommittee meeting, and committee member Delegate Eric Householder recently called for the tax to be eliminated. If the tax is fully eliminated and nothing is done to replace the lost revenue, the state would have to raise taxes by $111.7 million due to the school aid formula, while local governments would lose $276 million.
As we’ve shown before, there is little evidence to support claims that eliminating taxes on business personal property would significantly boost investment and job growth. Instead, the massive tax cut would have a profound impact on state and local government finances, straining the ability of municipalities, county governments, and school districts to provide needed services and would likely lead to cuts in services or a dramatic tax shift, such as higher property taxes on homeowners or higher taxes on real property owned by small businesses. The tax cut would also add tens of millions to the state’s already $400+ million budget gap.
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.
Since property taxes are levied by the state, counties, school districts, and municipalities, the impact of the tax cut would be felt at every level of government in West Virginia.
If the business personal property tax were to be fully eliminated, counties and municipalities would lose an estimated $130.5 million in annual property tax revenue.
The state would lose an estimated $1.6 million in revenue, but would also have to pay out an additional $110.1 million through the school aid formula due to the loss of revenue by school districts, for a total annual fiscal impact of $111.7 million for state government.
School districts would be the hardest hit by the elimination of the business personal property tax. Schools would lose $256.2 million in annual property tax revenue. While $110.1 million would be replaced through the school aid formula, schools in West Virginia would still lose a total of $146.2 million annually. Since school levy rates are set by the legislature, and since most school excess levies are at or near the max rate, local school districts would be unable to fill this deficit, and the state would need to provide additional revenue to maintain the current educational system.
One of the biggest priorities for businesses looking to locate in or expand in a state is an educated workforce. Cutting property taxes in an effort to encourage job growth and investment is self-defeating, as that tax revenue largely funds the school systems that educate the state’s future workforce. Without an educated workforce, created through a well-funded public education system, West Virginia will continue to experience its economic decline.
By including both real and personal property, West Virginia maintains a broad property tax base. This in turn keeps rates low, and ensures property tax payments are directly proportional to the amount of property a taxpayer owns. Eliminating the tax on business personal property would dramatically narrow the state’s property tax base, likely leading to higher rates and introducing more inequity into the system. The state’s ability to generate revenue has been compromised by tax cuts, low energy prices, and a slow growing economy, resulting in multiple rounds of budget cuts. Further eroding state and local revenues can only have more detrimental effects.
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