Richard Pryor famously joked about a husband caught in bed with another woman by his wife. Rather than try to explain the inexplicable, the husband indignantly denies having an affair and even the existence of the woman beside him in bed. “Who you gonna believe, me or your lying eyes?” he demands.
That is also the approximate reaction of West Virginia Commerce Secretary Keith Burdette to a recent New York Times story that shows West Virginia hands out $1.57 billion annually in tax exemptions, credits, and other subsidies to businesses with the ostensible goal of stimulating economic growth and jobs.
The result? West Virginia has had no net job growth in more than a decade.
The Times report, written by Louise Story, Tiff Fehr and Derek Watkins, is important because, if it’s accurate, West Virginia gives away more than a third of its annual tax revenue even as the state cuts services for a population that is among the poorest, least educated, and least healthy in the nation.
That’s probably why Burdette felt compelled to respond to the Times story. As reported by the Associated Press and “Under the Dome” columnist Tom Miller, Burdette told the Legislature’s Joint Commission on Economic Development and the Joint Committee on Finance that the Times article was “poorly researched and reported” and presented a “woefully inadequate picture” of the state’s use of tax incentives.
Burdette went on to say that the state issued only $83 million in tax credits last year and that $1.12 billion in sales tax exemptions shouldn’t count as subsidies because the exemption is a standard piece of tax policy that exists in many states. The purpose is to avoid “double taxation” on intermediate goods and services that would otherwise be taxed again on sales to end-users. Moreover, he argued the $1.12 billion figure was exaggerated because the Times chose to report on a year, 2009, when power companies were making unusually large purchases of pollution control equipment. For these reasons, Burdette concluded, suggestions that West Virginia is second in the nation in the level of subsidies provided to business are misguided.
However, as impressive as Burdette’s argument sounds, it’s really nothing more than a complex if less funny variation on, “Who you gonna believe, me or your lying eyes?” Here’s why.
First, Burdette didn’t actually question the accuracy of the figures in the Times report. He was relegated to contextual objections because the Times supplemented its report with an online database that lists and quantifies each of the credits, grants, and other subsidies that comprise the $1.57 billion total. To address the question of whether the $1.12 billion sales tax exemption counts as an incentive, I’ll turn to another Sean O’Leary.
Sean O’Leary, the smarter, is a policy analyst at the West Virginia Center on Budget and Policy. In a recent blog post, he makes three points. First, the sales tax exemption, or “direct use exemption,” applies only to specified businesses and industries, not all. Second, the state’s 2010 Tax Expenditure Study explicitly says that, in addition to avoiding double taxation, the direct use exemption exists to “encourage investment in equipment and facilities by qualified industries.” Finally, while most states have comparable policies, not all do.
In summary, O’Leary writes, “The direct use exemption meets all the definition(s) of a tax incentive: it is a tax preference for certain taxpayers engaged in certain activities, it is designed to encourage those activities, it saves businesses money compared to other states, and it deprives the state of a substantial amount of revenue.”
O’Leary also addresses the question of whether the $1.12 billion in sales tax exemptions in 2009 was an aberration as Burdette claimed. He writes, “The sales tax exemption is examined every three years, and the 2007 Tax Expenditure Study valued the direct use sales tax exemption at $1.1185 billion, with only a 4.9 percent increase from 2007 to 2010, which suggests that the 2010 figure was not excessively inflated.”
In other words, The New York Times was right and, along with O’Leary, provides documentary evidence to prove it. West Virginia passes out $845 in business subsidies for every resident of the state and, if these incentives were listed as an expenditure in the state budget, they would constitute the single largest line item exceeding even education and health care.
Plus, there’s another aspect of the story that has gone largely unaddressed – the state’s unwillingness to share information about the business incentives it doles out and an associated absence of accountability.
In September the West Virginia Center on Budget and Policy prepared a presentation that concluded the state’s “Tax Credit Review and Accountability Report” fails to provide data or analysis to determine if tax credits lead to additional jobs or economic impact, is only published every three years, includes only four business tax credits out of dozens of programs and does not disclose the recipients of the credits.
Meanwhile, the New York Times database lists 19 incentive programs for which the Commerce department refuses to make spending information available. That means the $1.57 billion figure is a floor rather than a ceiling on how much West Virginia metes out to businesses.
When asked to provide information about the missing 19 programs and any information refuting data presented by the Times, Burdette and the state Development Office failed to respond.
Maybe they’re afraid we’ll believe our lying eyes.
— Sean O’Leary can be contacted at firstname.lastname@example.org. A version of this column containing links to references and statistical sources may be found at www.the-state-of-my-state.com.