By John Miller
The Exponent Telegram
As West Virginia faces an ongoing and unprecedented decline in state tax revenues, it is obvious that our elected leaders must explore ways to eliminate any expense considered waste by today’s standards and look for new revenue opportunities.
Taxes matter to business. They affect location decisions, job creation and retention, national and global competitiveness and the long-term health of a state’s economy.
The Tax Foundation’s annual State Business Tax Climate Index was designed to measure the “tax-friendliness”of each state’s tax system to business.
The most competitive tax systems are typically found in states that raise sufficient tax revenue with economically neutral and simple tax systems.
The least competitive are typically found in states with complex, multi-rate corporate and individual tax codes; above-average sales tax rates that exempt few business-to-business transactions; high state tax collections; and few institutional restraints on the level of taxation or spending.
The 13th annual State Business Tax Climate Index reports West Virginia has the 18th most competitive tax code in the nation.
The breakdown of West Virginia’s rankings this year is as follows (1st is best, 50th is worst): Overall tax climate: 18; corporate tax structure: 17; individual income tax structure: 26; sales tax structure: 15; property tax structure: 13; and unemployment insurance tax structure: 27.
The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers and taxpayers to gauge how their state’s tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the index is designed to show how well states structure their tax systems, and it provides a road map for improvement.
Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: The corporate income tax, the individual income tax or the sales tax.
After the most dramatic improvement in the index’s history— from 41st to 11th in one year — North Carolina has continued to improve its tax structure and now imposes the lowest corporate income tax rate in the country at 4 percent, down from 5 percent the previous year. This rate cut improves the state from 6th to 4th on the corporate income tax component, the second-best ranking (after Utah) for any state that imposes a major corporate tax. An individual income tax reduction, from 5.75 to 5.499 percent, is scheduled for 2017.
The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. However, taxes are but one factor in business decision-making.
Lawmakers often create lucrative tax incentives and subsidies under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is often due to offsetting an undesirable business tax climate.
A far more effective approach is the systematic improvement of the state’s business tax climate for the long term to improve the state’s competitiveness. When assessing which changes to make, lawmakers need to remember two rules:
Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system and the long-term health of a state’s economy.
Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices) or employees (through lower wages or fewer jobs).
Thus, a state with lower tax costs will be more attractive to business investment and more likely to experience economic growth.
This is precisely what West Virginia needs in a big way in order to diversify our economy and recover from decades of dependence on tax revenues generated by the coal industry.