How to kill an economy

Sometimes a statistic seems obviously wrong and even absurd. It’s duly put on some back shelf of the mind where, if we had a choice, it would be forgotten. But, memories are not chosen and it’s a good thing because sometimes we begin to notice events occurring that the statistic would have predicted. And earlier events, which had previously baffled us, all of a sudden become understandable.

[cleeng_content id="882073179" description="Read it now!" price="0.15" t="article"]Such is the story with West Virginia’s “Rate of Absentee Land Ownership.” Chances are you’ve never heard of this obscure statistic, which quantifies the share of West Virginia land that is owned by out-of-state individuals and businesses. The last major study of property records done in 1981 showed that 60 percent of West Virginia was owned by out-of-state entities. Another 15 percent was owned by state and federal government, which left just 25 percent for residents of the state. There is little to suggest that the situation has changed significantly in the 32 years since.

The statistic’s obscurity owes partly to the fact that antiquated governmental record-keeping makes it difficult to research, but also because, as we’ll see in a moment, it is politically inconvenient for state policymakers.

An equally obscure statistic is the share of jobs in West Virginia that pay wages that fall below $22,314 per year, the federal poverty line for a family of four. By that standard, one-third of West Virginia jobs pay poverty wages – the highest rate in the nation in which the overall average is 21 percent.

When you put these two neglected statistics together you suddenly realize that, in an economy that offers two ways to make money – wages and return on capital – West Virginia residents don’t have much of either. This goes a long way toward explaining why West Virginia is by many measures the most impoverished state in the nation. What it doesn’t explain is why political leaders in the state pursue tax policies that magnify rather than mitigate these weaknesses.

Part of the reason that wages in West Virginia are so low is that the bulk of West Virginia commerce is done by companies that are based in other states, which is where most of the executive-level jobs are, where the profits from the business these companies do in West Virginia end up and where most of the gains from property ownership gravitate. In short, that giant sucking sound you hear is wealth, created by West Virginia resources and developed by West Virginia labor, being furiously drained from the state.

That is money lost to West Virginia residents and to the state’s economy. It reduces demand for goods and services thereby restraining economic growth and limiting the resources available to a state government that struggles to address chronic problems of inadequate services and infrastructure. The strange thing is that these effects could be mitigated and even reversed with some rather simple changes to state tax policy.

State and local governments are primarily funded by four types of taxes: those on sales, individual income, corporate income and property. West Virginia also generates a substantial amount of government revenue from severance and gambling taxes. But not all of these taxes are the same in terms of who pays them. Personal income taxes are paid almost exclusively by West Virginia residents. Sales taxes are also paid mostly by residents of the state. But, for the reasons cited above, corporate income taxes, property taxes, severance taxes and gambling taxes are largely paid by out-of-state entities.

Given the aforementioned evaporation of wealth from West Virginia due to out-of-state ownership and the prevalence of poverty-level jobs, you might think the state would be inclined to rely less heavily on taxes that mostly impact residents and more heavily on those that impact out-of-state players. You would be wrong.

Nationally state and local governments generate an average of 38 percent of their funding from property and corporate income taxes – taxes that in West Virginia are largely paid by out-of-state entities. But, in West Virginia only 25 percent of state and local government funding is derived from those sources. Meanwhile, personal income and sales taxes, which are primarily paid by residents, are taxed more heavily in West Virginia than in the rest of the nation. Even West Virginia’s severance tax on coal is much lower than that of the nation’s other major coal-producing state, Wyoming.

But, what would happen if West Virginia tax policies were altered to reflect the proportions that prevail nationally and which place more of the burden on out-of-state players while reducing the burden on state residents?

West Virginia residents would save between $250 million and $350 million every year on taxes without any change in the total amount collected by state and local government. To put that figure in context, it would be the largest single tax cut for West Virginia residents in the state’s history. It would put an additional $400 to $600 a year in the pocket of the average West Virginia family and significantly expand the state’s economy in the form of additional demand for products and services from West Virginia businesses.

Instead, even as budget shortfalls force cuts in education and reductions in services, the state continues to cut taxes that are heavily paid by out-of-state businesses and individuals while shifting more of the tax burden to West Virginians thereby draining wealth from the state. It is truly a lesson in how to kill an economy.

— Sean O’Leary can be contacted at seanholeary@gmail.com[/cleeng_content]

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