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High Cost of Low Corporate Taxes

Written by Ted Boettner on February 8, 2019

Beckley Register-Herald – While education reform is the big topic at the legislature this year, the governor and GOP leadership are moving forward with more big tax cuts that will mostly benefit wealthy out-of-state corporations. This would make it harder for the state to invest in the important public services that provide a foundation for our economy and wellbeing, such as good schools, a skilled workforce, safe and stable communities, state-of-the art infrastructure, and quality health care. ¶ Cutting corporate taxes could also shift taxes onto small businesses and state residents while doing nothing to grow our economy. Link to op-ed.

The governor and GOP leadership are proposing to eliminate most or all property taxes on machinery, equipment and inventory in the state. The governor’s proposal (SJR 11) would ask voters in May 2020 to approve a constitutional amendment to exempt inventory, machinery and equipment property taxes for industrial business activity, including manufacturing, coal mining, natural gas extraction, processing and storage, and oil extraction, a reduction of $130 million to $209 million.

Meanwhile, GOP House leadership is proposing a constitutional amendment (HJR 17) to give the Legislature the authority to exempt all business (commercial/industrial) inventory, machinery and equipment property taxes. In 2016, local governments in West Virginia collected $209 million from these taxes, including $73 million in inventory taxes and $136 million in machinery and equipment taxes.

Supporters of these corporate tax cuts say West Virginia is only one of several states that taxes business “inventory.” According to the Lincoln Land Institute, however, 35 states tax business personal property, with 11 states taxing inventory, machinery and equipment, and 24 states taxing just machinery and equipment.

Taxes on industrial property such as natural gas, manufacturing and coal mining are mostly paid by non-West Virginia residents. This is because most of the goods produced in West Virginia are consumed out-of-state (chemicals, coal, automobiles, etc.) and most of the owners (e.g. stockholders) do not live here. Minnesota estimates that 76 percent of its industrial property taxes are paid by non-residents.
West Virginia’s business property tax rates, according to a recent Lincoln Land Institute survey of 50 states, are in the middle of the pack. According to the conservative Tax Foundation, West Virginia has the 18th best business property tax climate in the nation.

Despite the WV Chamber of Commerce claim that “states with robust economies do not impose property taxes on business tangible personal property,” Texas and South Carolina both have higher taxes on industrial property than West Virginia and much faster-growing economies. In fact, manufacturing employment growth over the last seven years was slightly higher in states with higher property taxes on industrial property than states with lower industrial property taxes.

Promising more jobs by eliminating this tax should be met with caution. A 2017 peer-reviewed study in Economic Development Quarterly found that when Ohio eliminated its business personal property tax it reduced manufacturing jobs by 19,300, presumably because it incentivized the purchase of machines (e.g. robots) that replaced labor and reduced employment.

Something similar happened in West Virginia back in the late 1980s when coal companies got “super tax credits” for purchasing machines to replace coal miners, and the number of coal jobs sank.

The need for more special tax cut carveouts for big corporations is also contradicted by the fact that the WV Department of Commerce says “West Virginia’s cost of doing business is among the lowest in the country.” That’s because when you examine all business costs – labor, transportation, electricity, occupancy, etc. – West Virginia is already a cheap place to do business. The big problem is that we are not a good place to do business because we refuse to make the much-needed investments in each other and in our communities that build shared prosperity. Too many single moms can’t afford child care, too many people work for low wages and too many students can’t afford to go to college because we have cut higher-education funding by 26 percent since 2008.

If eliminating the “inventory tax” is the real issue, lawmakers could replace this lost revenue ($76 million) by increasing taxes on other business property. Instead it is more likely that these tax responsibilities will be shifted onto homeowners or paid for by cutting investments in schools or other important public services or goods. If the goal is to help small businesses, we could follow the lead of several states and set a minimum threshold of personal property (e.g. $50,000) that a business must have to file property taxes.

If West Virginia lawmakers want to boost manufacturing, they can enact policy to help small- and medium-sized manufacturers such as customized jobs training, extension services, enhanced skills development, and by making land more developable through better amenities, infrastructure, and environmental cleanup – all of which are more cost effective than business tax cuts.

West Virginia has paid the high cost of cutting corporate taxes in the past. Instead of more jobs, we got a weaker economy with fewer jobs and less money to invest in our schools and communities. Let’s not make this mistake again.

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