Published On: Fri, Mar 7th, 2014

Analysis: Corporate and business tax cuts putting WV in a hole

By Dan Heyman

WVNS

State lawmakers are struggling to close a big budget hole, but a close look shows the legislature dug that pit with business tax cuts over the last eight years. Sean O’Leary with the West Virginia Center on Budget & Policy pointed out that state spending has been basically flat for some time, but the tax cuts made since 2006 are part of what is causing a budget gap of more than $200 million next year.

“We’re collecting less business tax revenue this year than we did nearly 20 years ago, even before you adjust that for inflation,” O’Leary said.

Revenue lost to cuts in the business franchise tax and the corporate income tax would just about equal next year’s shortfall, he noted.

O’Leary said the state created a structural problem in the tax and revenue system over the last eight years with big, permanent rate reductions and phase-outs that were unaffordable.

“It’s about $425 million for fiscal year 2015,” he said, “so that would be balancing the budget, plus some. But it was given away in tax cuts.”

Supporters of the cuts said they would spark economic activity, because more businesses would locate or expand here. There is no evidence to support that, O’Leary said, adding that taxes are only a tiny factor in a company’s decision – a much smaller part than consumer demand, the cost and quality of labor, or the access to markets or raw materials.

“There’s no natural gas industry coming into the state because we lowered the business franchise tax. They’re coming into the state because we have natural gas,” he pointed out.

The governor has asked to transfer more than $80 million from the state’s rainy-day fund, and suggested cuts of another $35 million in items such as race-track subsidies. However, O’Leary said, these are one-time solutions to a permanent problem: the amount of revenue the state takes in.

“If we have to take $80 million out of the rainy-day fund this year, and we expect no revenue growth next year, we’re just going to have to do it again. Until we address the structural revenue problem in the state budget, one-time fixes aren’t gonna cut it,” he said.

The center’s latest budget report is available at www.wvpolicy.org.