Business tax cuts not working as planned

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Business tax cuts not working as planned
By Phil Kabler, Statehouse Beat, Charleston Gazette-Mail

Revenue Secretary Bob Kiss was being brutally frank recently. He conceded that business tax cuts enacted in 2008 have helped create a “structural imbalance” that is contributing to near-monthly revenue shortfalls that over the past two years have forced severe spending and program cuts just to balance the state budget.

With most agencies and programs at the breaking point where they can no longer absorb additional cuts, Kiss suggested that tax increases might be the only option: “At some point, once you cut to the bone, the only way to address the structural imbalance is to have a revenue increase.”

Looking back, no one sold the tax plan as a way to cripple the state’s budget. In 2008, legislators were convinced that making state business taxes competitive with neighboring states would pay off in new business investment and economic growth.

So, what went wrong?

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Brooks McCabe, who as a state senator was one of the strongest advocates of rolling back corporate net and repealing the business franchise tax, said he stands by those actions, while saying it would have been impossible in 2008 to foresee plunging natural gas prices and how rapidly the decline of the coal industry would accelerate.

McCabe said West Virginia — then and now — needed to put itself in a position to grow its economy.

“Part of that platform is the tax structure,” he said. “Those were proper decisions at the time.”

McCabe said he believes the state is taking steps to reposition itself into a manufacturing-driven economy — with the pending groundbreaking for a massive Procter & Gamble plant near Martinsburg an early glimmer of hope — but said West Virginia is in for tough times in the short-term.

“We are clearly in a tough situation right now,” McCabe said. “This is an excruciating time. If you’re in Southern West Virginia, the sky is falling, and you’re wondering what the future is going to bring.”

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Meanwhile, in 2008, many Republican legislators were pushing for an immediate repeal, rather than a phase-out, of the business franchise tax, and McCabe’s arguments against that proved prophetic:

“What if we hit the [economic] rough waters everyone’s reading about in the newspaper,” he said at the time. “What if coal severance decreases by 10 percent? What if we have a shortfall in the Lottery?”

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Commerce Secretary Keith Burdette said lowering the business taxes — to about the middle of the pack nationally — has helped the state recruit manufacturers and convince existing manufacturers to expand operations. He said practically every automotive-related manufacturing facility in the state has expanded since the cuts went into effect.

“The one part of the economy where we’re seeing growth is manufacturing,” Burdette said.

However, he said, “It’s not growing fast enough to offset what’s going on in the energy economy.”

He said an announcement of 100 new manufacturing jobs these days seems to get overshadowed by a coal company announcing 1,000 layoffs.

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Steve Roberts, who as executive director of the state Chamber of Commerce was a strong advocate for rolling back business taxes, shared Burdette and McCabe’s assessment, saying no one anticipated severely plummeting energy prices.

Had that not occurred, Roberts suggested, we’d be looking at the business tax cuts differently: “We’d be looking at ourselves and saying, this turned out pretty well.”

Roberts said he believes West Virginia needed to make its business tax structure more competitive, but said that is only one of multiple components needed to attract new business investment, with the most critical area currently being education and workforce readiness.

“We’ve long said economic development and job creation is a puzzle with many pieces,” he said.

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One of the few organizations critical of the tax cuts in 2008 was the West Virginia Center for Budget and Policy, which cited studies from California and Oregon showing that, for every $100 in corporate tax cuts, those states recouped only about $16 to $18 from resulting economic growth.

(At the time, Roberts scoffed at the criticism, telling the State Journal the WVCBP was entitled to its opinion, but that “doesn’t mean the opinion has any resemblance to reality.”)

“We’re always having to play the role of Cassandra,” WVCBP Executive Director Ted Boettner said, referring to the Greek goddess who had the power of prophecy, even though no one believed her predictions (including the destruction of Troy).

At the time, the WVCBP predicted that any growth in the economy would only make up about 15 percent of the lost revenue from the tax cuts.

The report warned that the tax cuts would “significantly undermine the ability of the state to provide quality public services. Some combination of a sharp drawing-down of the states reserves, reductions in state services, and increases in other taxes seems almost inevitable during the next decade.”

Meanwhile, the legislative Select Committee on Tax Reform seems to have a mandate to come up with additional tax cuts. As Boettner noted, the Select Committee, to date, has not seen fit to seek input from the WVCBP.