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From Governing’s Supplemental information | Introduction
Not only was this supposed to solve specific problems in West Virginia, it looked like a model for states that wanted to keep up with the changing American economy. “We received an incredible amount of very positive feedback,” says Cal Kent, dean of the College of Business at Marshall University. “It was widely hailed as innovative and appropriate.” But fortune frowned on West Virginia’s tax reformers. Within weeks after the report was released, Michigan’s governor announced plans to seek repeal of its single business tax, insisting that it had been a failure. The decision in Michigan was based on circumstances specific to that state, but it was sufficient to doom the efforts in West Virginia. “The timing was awful,” says David Ellis, former policy analyst for the West Virginia House of Delegates. “Here you have folks saying this is the future of taxation to match the next century’s economy. And the purest example of it was in Michigan and boom — it’s being repealed.”
The commission’s ideas were set aside, ending West Virginia’s hopes of leading the nation in tax policy. Today, the state faces a $250 million budget gap — 7.4 percent of general fund revenues — and it’s still stuck with a tax system that is antiquated, complicated to administer, and uncompetitive. The current economic downturn hit West Virginia later than it did most other states; last year actually ended with a small surplus, thanks to surging lottery revenues and income tax receipts that didn’t bust because they had never boomed. But West Virginia has little revenue-boosting capacity, so even a modest shortfall is worrisome. The state is 50th in per capita retail sales, 49th in per-capita income and 47th in the value of its residential property. A big rate increase in West Virginia wouldn’t bring in much new money and would pressure the economy even more. Lack of capacity in individual taxes has led the state to rely on dozens of distinct revenue sources, many of which are flawed or ineffective. The severance tax on coal is high and doesn’t deliver the revenue it once did. A tax on the generation of electricity has been weakened by deregulation. The corporate income tax rate is one of the highest in the country, but is full of loopholes, as is the business franchise tax. The personal property tax on business equipment and inventories, abandoned by most other states, is a source of frustration for many companies. The state’s biggest revenue raiser, its individual income tax, kicks in at $10,000 and features few deductions, so it puts a heavy load on the working poor. Localities, meanwhile, are hungry for revenues. Local governments have limited revenue-raising powers and often try to squeeze money out of municipal fees. These, in turn, have been blocked by the courts, which consider them undercover taxes. The residential property tax is hobbled by a homestead exemption for the state’s sizable population of elderly residents, and low rates that are difficult to raise. Isn’t there any good news in West Virginia? Yes, some. The state’s sales tax is broader than most, and it does cover many non-professional services. Revenue estimating has been remarkably accurate, even as the economy shifts. In addition, West Virginia has streamlined its previously cumbersome tax incentive program. In the 2002 legislative session, more than a dozen wasteful or unproductive tax subsidies were replaced with new ones carefully targeted to the high-technology industries the state wants to attract. Among those to go was the infamous “Supertax Credit,” a clumsily drawn job-creation perk that allowed companies to claim credits while actually exporting jobs, and which ended up costing the state $180 million over 10 years. While modernizing the tax code itself, West Virginia could stand to spruce up its tax-collection processes. The technology is outdated, making it hard for field offices to get access to the data they need. Many functions that are automated elsewhere are done manually here. “We’ve failed to make the strategic investment in the correct technology,” says Brian Kastick, secretary of tax and revenue. “We’ve got great and knowledgeable people but don’t have the right systems in place.” Meanwhile the push for reform is beginning again. The West Virginia Public Policy Council, headed by Robin Capehart, former secretary of tax and revenue, released a new proposal in December and is hoping to move forward in the 2003 legislative session. The names of some of the proposals have changed — the single business tax is now called the “business activities and profits tax” — but the ideas are similar to those in the last round. One of the reasons the previous effort failed may have been the relatively robust state of the economy. Now, there’s a new concern. At a time of recession, Capehart worries, “you’re going to have people say you don’t want to fix it because things are going badly. I must have been asleep that one day that we struck the equilibrium to fix the tax system.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ack in the late 1990s, West Virginia’s Commission on Fair Taxation outlined a complete rewrite of the state’s overly complex tax code. The reforms included stretching the sales tax to include professional services, and creating a so-called “single business tax” that would keep rates low but apply them broadly to business purchases at every level where value is added — much like the European VAT tax.