Earlier this month, the West Virginia Manufacturers Association (WVMA) released a report in support of Amendment 2, which would give the state legislature the authority to exempt business machinery, equipment, and inventory from property taxes. While the WVMA claims the report bolsters the case for Amendment 2, it contains several flaws and misleading assumptions that call into question its conclusions. Here are five takeaways from the report.
Business tax cuts tend to fail to create jobs and grow the economy because states and localities must offset the lost revenue by reducing funding for schools, infrastructure, social services, and other building blocks of a strong economy. While the WVMA report talks about potential economic growth by modeling the impacts of a hypothetical business locating in the state due to the elimination of business personal property taxes, it completely ignores the negative impacts of losing $515 million in state and local revenue that funds public services.
To offset the loss of revenue, state and local communities would have to increase other taxes or cut public spending. Increased taxes reduce residents’ incomes overall, leaving them with less to spend in their communities. This can result in an overall decline in jobs in the area. If the revenue loss is offset by cuts to public services, that could directly lead to laying off public workers, which reduces jobs and also reduces the spending power in the community of those workers who were laid off. Spending cuts can also have supply-side effects on the productivity of the local economy. Cutting spending for public schools, health, and infrastructure will have larger impacts on the quality of the local labor supply, leading to fewer businesses choosing to locate in West Virginia.
A major flaw of the report is in the description of the tax itself. According to the report, West Virginia’s personal property tax is a “six percent tax on manufacturers’ inventory, machinery, and equipment.” In reality, West Virginia’s property tax rates vary by locality, with all capped at well below six percent in the state constitution. The maximum combined state, county, school, and municipal property tax rate on personal property allowed under the state constitution is $2.00 per $100 of assessed value. While counties, schools, and municipalities can exceed the maximum rates with voter-approved excess levies, the maximum combined excess levy rate on personal property is $1.45 per $100 of assessed value. And in West Virginia, property is assessed at 60 percent of its market value, meaning the effective tax rates are even lower.
Current property tax rates in West Virginia on business machinery, equipment, and inventory range from $1.35 per $100 of assessed value to $3.28 per $100 of assessed value. According the the Lincoln Institute of Land Policy, a typical manufacturer in West Virginia would pay an effective property tax rate of 1.86 percent in an urban area, and 1.10 percent in a rural area, far less than the six percent rate referred to in the WVMA report.
The report perpetuates a myth that West Virginia is unique in taxing business machinery and equipment, when the majority of states have machinery and equipment personal property taxes. It includes a table showing that, of West Virginia’s neighboring states, only Kentucky has a “state” tax comparable to West Virginia’s “six percent tax” on manufacturing equipment and machinery. However, the report’s own appendix shows that industrial machinery and equipment is subject to state and/or local property taxes in four of the six states it compares West Virginia to, including Kentucky, North Carolina, Tennessee, and Virginia. According to the Tax Foundation, 35 states apply their property tax to business machinery and equipment. In fact, the Tax Foundation already ranks West Virginia’s business property tax climate as ninth best in the nation–better than any of our neighboring states the WVMA report compares us to except for Ohio.
In addition to misrepresenting the actual tax rate and comparisons to other states, the report’s economic impact analysis simply assumes the tax is hurting growth, instead of actually analyzing its economic impact. The report notes that if one assumes the tax “represents a competitive disadvantage” then it is reasonable to conclude it has a major fiscal and economic impact if it resulted in businesses choosing not to locate in West Virginia. However, the report goes on to admit that it cannot actually state with certainty the economic and fiscal impact of the tax, but then uses circular logic to say if one were to assume the tax has a negative impact, then the impact of the tax is negative.
Actual data has shown that there is no clear evidence that property taxes on machinery and equipment are harmful to growth and that eliminating the tax can actually lead to manufacturing job losses.
Under the “Alternative Revenue Sources” section of the report, the authors highlight the importance of the revenue the taxes under consideration for exemption in Amendment 2 provide, as it funds schools and local public services. They go on to say that, in crafting replacement revenue, “what would be most desirable is to create one or more sources of revenue that can be controlled at the local level.” Currently, local governments are very limited in the taxes they can control, including real property taxes and sales taxes. While not explicitly stated, the report would seem to imply that the revenue losses under Amendment 2 should be made up via higher real residential and commercial property taxes and/or higher sales taxes–both of which fall much more heavily on West Virginia residents and local business owners than the potential tax cuts under Amendment 2.
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