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Economic experts offer solutions for state budget crisis


The State Journal

CHARLESTON, W.Va. — As the legislative session continues in Charleston, West Virginia’s budget concerns still remain a hot topic. While Gov. Jim Justicehas proposed two budgets, both with spending cuts and tax increases, experts think there are still many more factors to be considered.

John Deskins, executive director of West Virginia University‘s Bureau for Business and Economic Research, said the Legislatureis going to have to a strike a balance between revenue enhancements and spending cuts.

“Tax increases are bad — nobody wants tax increases,” Deskins said. “Raising taxes during tough economic times is not good, and it’s not something anybody wants to do.

“At the same time, we have to invest in the state. We cannot stop investing in things like education or roads. We have some vital public services that need to be funded. So we’re going to have to strike some balance between the bad things that go along with taxes and the necessary spending. And I do not envy anybody who’s having to make those tough decisions.”

West Virginia will not be able to tax its way out of the current fiscal crisis; part of the solution must be finding ways to make better use of existing resources, Deskins said.

“I would point to, not state government, but all the other government units that we have in the state,” Deskins said. “The city and county governments — all of these units are very static. The economy, the population distribution and technology has changed a lot over time, but the way that these governments are structured does not change very much at all.”

Deskins said he would advise the state’s leaders in Charleston “to step back and take a really big-picture approach and ask what would be the best way to deliver local public goods and services in West Virginia.

“If they were to do that, I think they could probably find some ways to make better use of the resources we have,” he said.

When it comes to taxation, Deskins said there were two models the state government could use: Taxation with a broad base or taxation with a more narrow base.

“The preferred model is to have a broad base where you tax everything,” Deskins said. “If you tax everything, you can use a lower rate to get a certain amount of revenue. The alternative to that is a narrower base where you have lots of exemptions.

“If you have a narrower base with holes in it, that’s going to require higher rates to generate a given amount of revenue. I would argue for a broader base and lower rates.”

Deskins said there are forms of taxation that are good, such as taxes on things that have negative costs to society.

“For example, smoking,” Deskins said. “We have very high smoking rates, and we all know that smoking causes negative health outcomes. If you tax something, you get less of it. So in the case of smoking, that’s actually a good thing.

“That’s an example where the tax is efficiency-enhancing rather than the reverse. We did raise the cigarette tax by 70 cents last year, but maybe could they raise it another 25 cents.

“We also like taxes where the tax paid is tied directly to the benefit received, like a tax on gasoline,” Deskins added. “It’s a relatively efficient form of taxation because the gasoline you use is a pretty good proxy of how much you use the road. Right now, we have it structured in West Virginia so that the gas tax is tied to the price of gas, and it’s set up so that if the price of gas goes down, then the price of the tax goes down.”

Deskins said that’s the opposite of what the state should be doing.

“When gas taxes are falling, that’s when it would be easier to raise the rate and consumers wouldn’t notice much of a difference,” he said. “Right now, if gas prices rise, that’s when we jack up the gas tax rate, making gas even more expensive. I think that would be another small change that would be wise and it would help a little bit.”

While some taxation can be good, and some cuts can help improve efficiency, Deskins said sweeping, across-the-board cuts can be harmful for the economy.

“If we’re spending less money on something like transportation infrastructure, then that hurts the economy,” Deskins said. “Poor transportation infrastructure itself hurts the economy, but then if we take those construction sector jobs out of the economy by cutting spending, then that hurts the economy even more.

“Politicians, to a large extent, are between a rock and a hard place. Cutting spending in certain areas hurts the economy; raising taxes also hurts the economy, so it’s a balance that they’re trying to strike. I would really urge them to look hard at ways to eliminate waste, rather than just simply using across the board cuts.”

Ted Boettner, executive director of the West Virginia Center on Budget and Policy, said he thinks Justice has shown leadership and the desire to fix the structural problem in the state’s budget with his proposals.

“The revenue enhancements he put forth are greatly needed,” Boettner said. “However, many of those tax increases tend to fall more on low- and moderate-income West Virginians instead of those at the top that have gained the most in income over the last 30 years.”

Boettner said he is concerned that House and Senate leadership have not made any counter proposals to the governor’s budget.

“They kept saying they were waiting for the governor’s budget,” Boettner said. “But they still haven’t come up with their own budget. They kept saying no tax increases, but they have not put out what they’re going to cut.

“There’s things floating around like redoing the state’s pensions — reamortizing them, which would cost a lot more in the long run, but I don’t see a lot of bills. We’re a quarter of the way through the session, and there’s no indication that leadership in the House and Senate have an alternative budget to the governor’s proposal.”

Boettner said despite the $500 million deficit, the state Senate wants to completely change the state’s tax system from an income tax to a sales tax.

“Doing that would exacerbate income inequality and increase taxes on most West Virginians,” Boettner said, “while giving a big tax break to the wealthiest West Virginians.

“I think instead of talking about giving tax breaks to the rich and increasing tax on the middle class, they need to be focused on closing our state’s structural budget gap.”

Boettner said he would support a broader sales tax base as long as the rate is much lower.

“I think you shouldn’t broaden the sales tax to get rid of the income tax, which is the only tax based on the ability to pay,” Boettner said. “When you use one tax to get rid of others, you create a lot of instability in your revenue system, because sales taxes tend to grow slower than income taxes, so you’re creating a structural deficit in the future.

“In the last five years, we’ve cut $600 million from the budget; there’s no more left to really be cut. There’s little things, but for the most part, if we don’t want to turn into a third-world country, we’re going to need to address this budget gap with revenue enhancements,” Boettner added. “The only thing I would differ with the governor is I think we should be looking at reinstating some of the business tax cuts that have been made over the last decade, and I think we should be looking at the severance tax. It’s a very exportable tax, which means we don’t pay that. Most of our oil and gas is going outside of the state.”

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