Attorney General Patrick Morrisey misinformed business leaders and elected officials this week at the WV Chamber of Commerce’s Annual Business Summit when he said: “We know that if you look around to all the states West Virginia touches, we have the highest combined individual and corporate tax rate.”
There are several problems with this statement. First, looking at tax rates tells us very little. This is because states have all different kinds of exemptions, loopholes, deductions, credits, and other tax expenditures that drastically reduce tax rates making them somewhat meaningless. What matters is the effective tax rate.
While state tax rates tell us very little about business climates, there are two standard ways to evaluate a state’s tax burden. The first is by estimating the effective tax rate by looking at tax revenues as a share personal income and the other is by looking at tax revenues per capita. As the two charts below reveal, West Virginia does not rank last in either category. And the central reason why we rank higher in taxes as a percent of personal income is that we have low-paying jobs and higher rates of poverty. (It’s also important to note that the state has reduced its corporate net income and business franchise tax since 2011.)
Lastly, why would you combine the tax rates of corporate and personal income to make your point about a high business tax burden? In general, S corporations pay the personal income tax, while C corporations pay the corporate income tax. Rarely does the same business pay both. Therefore, it makes little sense to combine the two.
According the Gazette, Mr. Morrisey also cited Forbes Magazine saying that West Virginia ranked as the 45th best state for business. If you read the Forbes index for “Best States for Doing Business” you will notice that the reason West Virginia ranks 45th isn’t our tax burden. If fact, Forbes says we rank 13th best in the ‘cost of doing business’ category that includes taxes. As Sean has discussed on many occasions (see here, here, and here,), business climate indexes are very poor at predicting economic growth and tell us very little about what is actually good for working families or state economies.
The reason business taxes matter so little is that they are a very small part of the cost of doing business. As I explained in an earlier post:
the corporate net income and business franchise tax made up just 0.2 percent of the cost of doing business in West Virginia.* You would be hard pressed to make the case that reducing this amount from 0.2 to 0.1 percent would significantly impact economic growth. A much better case can be made that the real goal of reducing these two business taxes has to do with good ole fashion rent-seeking (aka lobbying), not economic evidence or theory.
While we should be doing all that we can to build a strong economy in West Virginia, more ineffective tax cuts are not going to get us there. We need policies that are going to build and strengthen the middle class so business have a stable source of demand for their goods and services. Through the promotion of human capital and education, and by nuturing entrepreneurs and encouraging participation in political and economic institutions, we can provide sustainable growth that will make us all stronger.
For ideas for how to strengthen the middle class in West Virginia, please see our 2013 State of Working West Virginia that will be released this Saturday.
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