With big deficit looming, Manchin unsure if tax cuts were right move

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With big deficit looming, Manchin unsure if tax cuts were right move
By David Gutman, The Charleston Gazette-Mail

With West Virginia facing a $353 million budget shortfall, and with the benefit of hindsight, Sen. Joe Manchin, D-W.Va., said he’s not sure if the business tax cuts he pushed through as governor were a good idea or not.

“I don’t know if you say they’re the right or wrong move, but you’ve got to be competitive,” Manchin said Thursday. “I couldn’t be at 9 percent corporate tax and expect corporations to stay here if they didn’t have to.”

Beginning in 2006, the Legislature, at Manchin’s behest, embarked on a series of tax cuts that, combined with low energy prices and the flailing coal industry, have left the state in a budget crisis.

Manchin and the Legislature cut the corporate net income tax gradually from 9 percent to 6.5 percent, where it landed in 2014.

They gradually eliminated the business franchise tax from 0.7 percent in 2007 to zero in 2015.

And they gradually cut the tax on groceries from 6 percent to 3 percent, before Gov. Earl Ray Tomblin moved to eliminate it entirely, which happened in 2013.

Republicans in the Legislature objected to some of these tax cuts at the time, but only to protest that they were too gradual and too small — they would have preferred larger and faster tax cuts.

It’s tough to measure exactly how much money these changes have cost state revenue but, any way you slice it, it’s a lot.

It’s certainly in the hundreds of millions of dollars annually, and it’s probably about on par with the size of the current budget deficit.

In 2008, the year legislation was passed to eliminate the business franchise tax and lower the corporate net income tax, the state collected more than $388 million from those two taxes.

In 2014, the state collected about $204 million from those two taxes, a decrease of $184 million. The loss is certainly even greater than that, because those figures don’t take into account inflation or the growth of the economy.

Repealing the food tax cost the state $170 million in foregone revenue this year, according to the West Virginia Department of Revenue.

Combine those two numbers, and you get $354 million in foregone revenue, which would cover this year’s expected deficit, with $1 million to spare.

Add in the foregone revenue from other smaller tax cuts in recent years — the low-income-family tax credit, an exemption for hospitals to buy prescription drugs — and the reduction in revenue rises to well over $400 million.

It is, of course, difficult to know how much those lower taxes might have boosted economic activity, which would negate the lost revenue.

Manchin noted Procter & Gamble’s recent decision to build a $500 million plant near Martinsburg, and he credited the state’s lower taxes.

“We were able to attract new corporations,” he said. “We’ve got different people coming to the state of West Virginia. We had to be competitive, [or] they wouldn’t come.”

He also said a lot of the corporate tax money was coming from big coal companies, many of which have declared bankruptcy in recent years.

“You have corporations that are bankrupt,” he said, “so where we’re getting taxes, if we had the higher corporate tax, they wouldn’t be paying it.”

And yet it’s hard to conclude that the promised benefits of the cuts — faster growth and more jobs — have materialized, whatever the reason.

West Virginia has the nation’s second-highest unemployment rate. We have the nation’s lowest percentage of residents who are working — a decades-long distinction but one that has not improved in recent years. The Mountain State is one of only two (along with energy-rich North Dakota) that have lost jobs over the past year.

When the tax cuts were passed, West Virginia had a higher corporate net income tax than all of its surrounding states, except for Pennsylvania. It now has a significantly lower rate than Maryland and Pennsylvania, but a slightly higher rate than Virginia and Kentucky. (Ohio is excluded from these comparisons because it taxes a company’s gross revenues, not net income.)

With West Virginia now in its third straight year of nearly across-the-board budget cuts, Tomblin will announce next week whether he will seek further cuts to balance the budget, tax increases or some combination thereof.

Manchin said he would advise continuing to evaluate West Virginia’s tax rates based on other states.

“If you can show me other states that we have to compete with, that’s the world we’re in,” he said. “Do we have lower taxes than them? We should put taxes back on that they don’t have? Then we should be looking at all of that, I say make the adjustments based on competitiveness.”