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Tax reform panel urged to move with caution

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Tax reform panel urged to move with caution
By Phil Kabler, The Charleston Gazette

CHARLESTON, W.Va. — Administration officials Monday urged a legislative Select Committee on Tax Reform to act cautiously and deliberatively in revamping a tax system they said is competitive with surrounding states and national averages.

“Do not divorce the budget from your deliberations on tax policy,” state Revenue Secretary Bob Kiss told the 16-member legislative interim committee. “You can sow the seeds for disaster. I would suggest you don’t need to look further than the state of Kansas.”

Kansas enacted major corporate and income tax cuts in 2012 and 2013, which according to news reports have resulted in a budget deficit approaching $800 million that has forced cutbacks in funding for highways, Medicaid and welfare benefits, and forced some school systems to end the school year early this spring for lack of funds.

Likewise, Deputy Revenue Secretary Mark Muchow provided a summary of state tax cuts and tax hikes dating back to 1914, and said the current tax burden for individuals and businesses is comparable, and often favorable, to neighboring states and the national average.

“For most sectors of the economy, the system that’s there right now looks pretty good,” he said.

He cited a Tax Foundation report that ranked combined state and local sales tax rates for West Virginia as 15th lowest in the U.S.

He also noted a U.S. Census Bureau report that found West Virginia’s corporate taxes as a percent of private-sector gross domestic product is 0.3 percent — equal to the national average and lower than all surrounding states but Virginia, and said that with the elimination of the business franchise tax, that rate will drop to 0.2 percent.

Also Monday, Tax Division general counsel Mark Morton said tax rates are “fairly far down the list” of factors that influence where companies locate, well behind location, availability of a educated labor force and marketplace demand.

Morton said companies, particularly foreign companies, want stability in state government.

“One of the things that really concerns these people is stability. They don’t mind paying a little more tax if they know that doggone tax rate isn’t going to change for the next five or 10 years,” he said.

That West Virginia was one of three states that did not run budget deficits during the Great Recession is an important selling point to potential investors, he said.

However, economist Calvin Kent, who participated in tax reform studies commissioned by Govs. Cecil Underwood and Joe Manchin, said the total tax burden on businesses is higher in West Virginia than in surrounding states.

“If you look at our total business tax bill, we are above average,” he said.

Kent cited personal property taxes on business inventories and on equipment and machinery as being particularly uncompetitive.

“Most surrounding states don’t tax inventories, and if they do tax machinery and equipment, it’s at a much lower rate,” he said.

However, he said it is difficult to cut property taxes, which are a major funding source for counties and school systems.

Kent also urged the panel to act deliberatively, citing the 1987 elimination of the state business and occupation tax, which was sold on the premise that economic growth would quickly make up for the lost tax revenue.

Two years later, the Legislature was forced to enact $400 million a year of tax increases to deal with the financial crisis that resulted, in large part, from that tax cut.

“You just have got to know what the results are going to be,” he said of any changes in tax law. “If you change one tax, there’s going to be ripples on other taxes that could be very negative.”

Meanwhile, Mike Caryl, who also served on Underwood’s Commission on Fair Taxation, said one of its goals was to simplify the state’s tax laws.

At the time, he noted, tax law filled one volume of the West Virginia Code and totaled 900 pages. Today, tax law fills two volumes of the state code, and weighs in at 1,629 pages.

“Simplicity is not something we can say we achieved,” he said.

Caryl said the reliance on tax exemptions and tax credits is an indictment of the current tax system. The 2015-16 state budget anticipates providing about $75 million of business tax credits.

House Finance Chairman Eric Nelson, R-Kanawha and co-chairman of the committee, said after the five-hour session that the consistent message Monday was to assure the state has a tax system that is fair, simple and promotes economic growth.

He said it is important for the Legislature to review the state tax system periodically, even if, at the end of the day, the conclusion is that the current system is working.

“We may come away from this with, ‘Hey, everything is fine,’” he said.

The interim committee will meet again on May 18, when it will hear from representatives of the national Tax Foundation, the National Council of State Legislatures and the Council on State Taxation.