Blog Posts > Local Governments Should Be Cautious About Eliminating Their Own Sources of Revenue
September 29, 2021

Local Governments Should Be Cautious About Eliminating Their Own Sources of Revenue

The city of Huntington voted earlier this month to eliminate the city’s Business and Occupation (B&O) tax for restaurants and retailers, which is expected to result in an annual revenue loss of $2 million. The city is hopeful that the revenue loss will be offset by increased local sales tax revenue. However, this is a regressive and possibly short-sighted decision for numerous reasons. In addition to shifting tax responsibility away from businesses and onto consumers, current increased levels of sales tax revenue may not last and other threats to local revenue from the state legislature are on the horizon.

West Virginia’s municipal B&O tax is a gross income tax on all persons and entities doing business within a municipality. The tax base and rates vary by type of business and municipality. For the city of Huntington, rates range from 0.25 percent for retailers and restaurants, 0.5 percent for general businesses and services, one percent for banks and natural resource producers, and two to four percent for electric power companies and other utilities. In FY 2019, the city of Huntington collected $14.7 million in B&O tax revenue, or about 24 percent of the city’s general revenue. Eliminating the B&O tax for retailers and restaurants is estimated to cost the city $2 million annually, which would drop Huntington’s estimated FY 2022 B&O revenue collections from $13.5 million to $11.5 million.

Like the failure of the state’s business tax cuts, eliminating the B&O tax will likely do little to boost economic activity or job growth in Huntington. State and local taxes as a whole are a small share of business costs (typically around two percent) and are dwarfed by other costs, including labor, capital, materials, support services, energy, transportation, and occupancy. Huntington’s $14.7 million in B&O tax revenue represents just 0.3 percent of Cabell County’s annual $5.1 billion gross domestic product (GDP).

Counting on increased sales tax revenue to replace the lost revenue is not without risk. Sales tax revenue throughout the state is up over the last year and a half, due in large part to the billions in federal stimulus and other aid that has flowed into the state during the pandemic, which has boosted consumption and spending. However, with federal COVID relief measures already expired or soon expiring, that boost is temporary, and as such, should not be counted on when making future budget decisions.

Sales tax revenue did see a boost in Huntington over the past year, going from $6,650,242 in FY 2018 to $6,993,494 in FY 2020, but the city’s budget projections for FY 2022 show sales tax revenue falling back down to $6,500,000. And prior to the pandemic, the city’s B&O tax was a stronger, and more reliable source of revenue growth than the sales tax. From FY 2013 to FY 2019, Huntington’s B&O tax grew at an average annual rate of 2.3 percent, compared to only 1.4 percent for the city’s sales tax.

Of note, Huntington and other local governments throughout the state have another reason to be cautious about eliminating their own sources of revenue — the state legislature’s desire to do it for them. The legislature passed House Joint Resolution 3 last session, creating a ballot measure that would allow the legislature to eliminate up to $378 million in local property tax revenue. Municipal governments account for 6.7 percent of all property tax revenue collections in the state, meaning cities could lose over $25 million if the ballot measure is successful. This would create additional strains on local government finances just as they are recovering from the pandemic, even before these municipalities cut any taxes of their own.

As the state and all of its localities recover from the pandemic, now is the time to make the investments needed to truly move the state forward and improve the lives of all West Virginians, rather than pursuing the same failed strategies of the past.

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