August 13, 2006

TED BOETTNER: Cutting business taxes won't help grow the state's economy

Last month, Gov. Joe Manchin and the state tax department hosted a tax summit to identify potential state and local tax reforms.

After receiving input from more than 200 stakeholders (the majority representing business), the summit yielded one unmistakable conclusion: We must reduce corporate taxes. The assumption behind these tax cuts is that it will be a boon to economic development and improve our business climate.

While these are laudable goals, it's important to recognize the link between tax cuts and economic performance is marginal.

One of the most popular arguments for cutting business taxes is that taxes significantly raise the cost of doing business, lower profits, reduce investment, and slowdown growth and job creation.

This argument sounds reasonable until you look closely at the data. According to IRS figures, state and local taxes paid by businesses in 2000 accounted for only eight-tenths of 1 percent of business costs. This makes clear that taxes are a small part of doing business, which means it has very little impact on investment decisions.

The most important factors affecting business investment and location are not a state's tax rate, but the availability and cost of skilled workers, the distance from suppliers and markets, and good public services.

Some CEOs and site-selection experts publicly acknowledge that taxes are not the deciding factor in site location decisions. Former U.S. Treasury Secretary and Alcoa CEO Paul O'Neill stated, "I never made a business decision based on the tax code. ... If you are giving money away, I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements."

Robert Ady, who claims to have assisted in more site locations than any other living person, argues that "the single most important factor in site selection today is the quality of available work force. ... In fact, a qualified work force may be the single most important determinant in the economic development success of any community."

The best way West Virginia could improve its business climate would be to create the conditions necessary for strong economic growth. Providing infrastructure that benefits as broad a segment of business as possible is a good idea. Universal broadband would rank high on this list. Good roads and bridges, a well-educated and trained workforce, along with other government services, are essential to business productivity and profitability.

However, providing businesses with a low-tax, low-service environment is not a winning strategy for attracting significant new investment.

If West Virginia wants to keep a balanced budget without sacrificing vital government services, we will have to offset any lost revenue. One easy way we could replace lost revenue would be to enact combined reporting. This would stop large multi-state companies from using separate accounting schemes that shift taxable profits to tax haven states like Delaware.

According to the Center for Budget and Policy Priorities, if combined reporting was enacted in West Virginia, the annual revenue gain would be between $60 million and $111 million based on similar state estimates and West Virginia's 2005 corporate income tax collections.

Combined reporting would also eliminate the unfair advantage major retail chains have on locally-owned businesses that pay state income tax on all of their earnings.

In the end, any changes to our tax system should be based on a balanced view that weighs the effects tax cuts and public services have on providing our state with an economy that works for all of us.