Blog Posts > Not All Tax Incentives are Tax Credits *Update*
December 17, 2012

Not All Tax Incentives are Tax Credits *Update*

This month’s New York Times article on business tax subsidies has attracted plenty of attention in West Virginia, as our state was listed as second in the nation with $857 per resident given out to attract businesses in the state. While state officials defended the state’s use of tax incentives, Phil Kabler in Sunday’s Gazette-Mail created some confusion, claiming that the New York Times “seriously over-inflated tax credits provided by the state.”

Mr. Kabler reported that the state only gave out $81.87 million in tax credits, citing the 2007 Tax Credit Disclosure List, not the $1.5 billion as reported in the New York Times. But the New York Times article did not report that West Virginia gave out $1.5 billion in tax credits, it reported that West Virginia gave out $1.5 billion in tax incentives. Tax incentives (or expenditures), as defined in West Virginia code, are ” exclusions, deductions, tax preferences, credits and deferrals designed to encourage certain kinds of activities or to aid taxpayers in special circumstances,” while tax credits are simply one type of tax incentive. And if you look at the West Virginia page in the New York Times article, you can see that the article breaks down the incentives by type, and West Virginia’s tax credits total $80.7 million, actually underestimating the state’s total.

Further confusion was created earlier in a previous article, which claims the estimate for the state’s direct use sales tax exemption is inaccurate. At a interim committee meeting, Commerce Secretary Keith Burdette defended the state’s business tax incentives. The article reported that Mr. Burdette claimed that the $1.2 billion price tag on the sales tax exemption “failed to note that the vast majority of that amount was in federal tax credits to utility companies to upgrade power plants under the Clean Power Plant and Modernization Act.”

But that is not what Mr. Burdette stated at the hearing. Mr. Burdette said that the upgrades required by the Clean Power Plant and Modernization Act resulted in more equipment purchases than usual, all of which qualified for the sales tax exemption, and those extra purchases inflated the value of the exemption that year. The $1.2 billion was all forgone state sales tax revenue, none of it was federal credits. That number is reflected in the state’s 2010 Tax Expenditure Study, which valued the sales tax exemption at $1.173 billion.

That being said, it is debatable whether or not the direct use exemption should be considered a business tax incentive. State officials note that most states offer a direct use exemption to eliminate double taxation on intermediate goods and services and again on the final goods and services.

But the direct use exemption does not apply to every business, instead it applies to sales of services, machinery, supplies and materials directly used or consumed in the activities of manufacturing, transportation, transmission, communication, production of natural resources, gas storage, generation or production or selling electric power, provision of a public utility service or the operation of a utility business, and to sales of tangible personal property and services directly used or consumed in the activity of research and development.

And, according the the 2010 Tax Expenditure Study, its purpose is not only to eliminate double taxation, but also “encourage investment in equipment and facilities by qualified industries.”

There are also notable states without a direct sales tax exemption, including Wyoming. While coal and natural gas companies in West Virginia do not pay sales tax on the machinery and equipment they purchase in order to mine coal or drill for gas, they do in Wyoming. That is why Wyoming’s effective sales tax rate on coal and gas companies is nearly twenty times higher than West Virginia’s rate.

The direct use exemption meets all the definition of a tax incentive: it is a tax preference for certain taxpayers engaged in certain activities, it is designed to encourage those activities, it saves businesses money compared to other states, and it deprives the state of a substantial amount of revenue. And, like other tax incentives, we do little to evaluate its effectiveness.


The 2010 Tax Expenditure study valued the direct use sales tax exemption at $1.1738 billion dollars, the same figure arrived at by the NY Times. According to the Commerce Secretary, this figure is inflated due to federal requirements in the Clean Power Plant and Modernization Act.

The sales tax exemption is examined every three years, and the 2007 Tax Expenditure Study valued the direct use sales tax exemption at $1.1185 billion, with only a 4.9% increase from 2007 to 2010, which suggests that the 2010 figure was not excessively inflated. The next Tax Expenditure Study is due in early 2013, and is scheduled to examine sales tax expenditures.

The 2007 Tax Expenditure report can be found at and can be downloaded here – exp2007.

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