Updated August 9, 2024.
Much of the hype around personal income tax cuts has centered on West Virginia’s competitiveness to attract people and businesses to the state. Because most interstate migration happens among border states, it’s worth taking a look at West Virginia’s competitiveness compared to our neighboring states. The data shows that while West Virginia’s tax environment is equal to or better than our neighbors’ even prior to 2023’s personal income tax cuts, our spending on public investments that families and businesses prioritize is where we fall short in regional competitiveness.
Each of West Virginia’s neighboring states levy a tax on personal income, as do the vast majority of states nationwide. Virginia, Ohio, Maryland, and West Virginia all have a graduated, marginal personal income tax, meaning that the rate of tax increases as income increases. All taxpayers get the lower rates on earnings below each marginal threshold, which means that all taxpayers–even those above $200,000–pay an effective tax rate below the state’s top tax rate of 5.12 percent.
Examining effective tax rates instead of marginal tax rates offers the best cross-state comparison. Even prior to 2023’s personal income tax cuts, West Virginia had equal to or below the average effective income tax rate of its neighboring states. Because Ohio and Pennsylvania have not enacted personal income tax cuts and West Virginia has reduced our rates since this comparison of the most recent available data, we likely now have an average effective income tax rate that is lower than the rate in those states.
Looking at the personal income tax alone does not tell us much about the full impact of taxes on families. In addition to the personal income tax, households contribute via property taxes and sales taxes. States without personal income taxes tend to have much higher rates on both of those taxes–and by extension, much higher taxes on low- and middle-income households. West Virginia has among the lowest property taxes of any state, including those with personal income taxes. In fact, Pennsylvania and Ohio, the two states that are closest to West Virginia in terms of effective personal income tax rates in the comparison above, have effective property tax rates that are nearly three times higher than West Virginia’s.
Where West Virginia stands out negatively in terms of border state competitiveness is our spending on public services. While policymakers have spent much time discussing the importance of investments in child care and public education in recent years, few new investments have actually been made.
According to FY 2023 state budget data from around the region, West Virginia’s state spending on child care lags behind its neighbors and has declined in nominal dollars over the last decade, even before adjusting for inflation
Research shows that access to high-quality child care boosts employment and earnings, reduces absenteeism and turnover, and increases productivity, all of which would positively impact our state’s economy. As such, underinvestment in child care in West Virginia is holding back our economic growth.
Similarly, West Virginia spends less per pupil on public education than our neighboring states (again, with the exception of Kentucky). The next closest state, Virginia, spends $1,200 more per student in state and local education spending.
Research also shows that increased per-pupil spending on public education increases graduation rates, boosts income in adulthood, and lowers the likelihood of future poverty. Failing to adequately invest in our public education system–which serves more than 90 percent of our state’s children–limits their future economic prospects and, by extension, that of the state.
With the exception of Alaska, which struck oil and was uniquely able to do so, no state with a personal income tax has been able to eliminate it entirely. Kansas came the closest in recent years, but had to quickly roll back efforts after tax cuts failed to boost business formation or job creation and resulted in deep cuts to state spending.
While anti-government organizations and advocates repeatedly point to tax cuts as a way to grow the state’s economy and population, that has not borne out historically, particularly in states where deep tax cuts led to the erosion of public services like in Kansas. That’s why West Virginia must focus on the quality of investments in public services that do attract people and businesses. If the state fails to invest adequately in schools, early childhood education, first responders, and infrastructure, we will be a less desirable place for businesses and families to locate, thus undermining the premise and goals of tax cuts as a magnet. Unfortunately, that is essentially what we are currently seeing in West Virginia, where the prioritization of tax cuts is keeping lawmakers from enacting broadly popular investments in public services that could make us more competitive with our neighboring states and more attractive to families and businesses–both those who are already here and those who might one day want to locate here.
