The West Virginia Center on Budget and Policy is home to a fascinating group of policy wonks who do economic research in the public interest. Call them liberals, call them progressives, call them do-gooders, but by all means call them rigorous because, in an environment of often unsubstantiated rhetoric, the Center’s take on economic issues is relentlessly quantitative and evidence-based. And few analyses are more helpful in understanding West Virginia’s ongoing economic plight than one contained in a recent blog post by the Center’s executive director, Ted Boettner.
In his post, Boettner observes that in recent years, West Virginia has reduced its two main business taxes, the corporate net income tax and business franchise tax, with the objective of increasing revenue and jobs. He then points out that there’s “little evidence” the cuts have led to “significant job gains.”
Boettner’s measured conclusion reflects the Center’s standard that claims should be quantitatively demonstrable. But, because I’m not associated with the Center (despite sharing a name with one of its staffers), I can be more speculative and push Boettner’s findings to their logical and more compelling conclusion, which is that not only have the aforementioned tax cuts not led to significant job gains, they have very likely had the opposite effect and actually reduced the number of jobs in West Virginia. Here’s why.
Boettner observes that the corporate net income and business franchise taxes, which currently bring in between $180 million and $230 million in any given year, represent less than two-tenths of 1 percent of the cost of doing business in West Virginia. That’s $2 for every $1,000 that companies incur in operating costs – a number so small that, for most companies, the savings resulting from fractional cuts to these taxes are too insignificant to have any impact on decisions about hiring or expansion.
Consider this hypothetical scenario. Let’s imagine that the corporate net income and business franchise taxes were eliminated altogether. How much of a difference would complete repeal make? To state government, which is already being forced by prior cuts to slash budgets and spending, a $200 million loss of revenue would matter a great deal. But, how many jobs would be created?
Based on annual averages for wages and benefits, full-time jobs in West Virginia cost employers about $55,000 each. That means the $200 million dollars in savings from our hypothetical repeal is enough to fund a little over 3,600 jobs, which is a nice number, although it represents only about a half of 1 percent of jobs in the state – not much of an increase. But, the problem is that not all of the $200 million in savings would go toward creating jobs.
Companies spend only about a third of operating expenses on jobs. So, if they allocate the savings from our tax repeal in the same way they allocate other funds, the equivalent number of jobs drops from 3,600 to just over 1,200.
Also, most of the savings from our hypothetical repeal would flow to firms whose headquarters and shareholders are out of state.
According to Workforce West Virginia, only four of the state’s 30 top private sector, for-profit employers are West Virginia companies. And no West Virginia company is in the top 10. Assuming that out-of-state companies, such as our largest employer, Arkansas-based Walmart, invest their tax savings in the same places they invest their other funds, little is likely to return to West Virginia. Consequently, less than a third of the money that companies save from our repeal is likely to be spent here and, if the experience with similar tax cuts in North Carolina is any guide, the amount could be as little as 10 percent, which drops the equivalent number of jobs to just 300 and change.
Then we have to ask where the state would find savings to offset the revenue loss. Because state governments are more labor-intensive than private employers, a large portion of the savings would probably come from – you guessed it – job reductions. And the budget cuts that don’t come from job reductions would mostly come out of purchases of goods and services, much of it from West Virginia companies, which would depress private sector employment as well.
Even now, as the state implements its current 7.5 percent across-the-board budget cut, state hiring has been frozen. Officials emphasize that the freeze is not the same as layoffs. However, economically the difference is immaterial. We’re still talking about the loss of jobs that would otherwise be filled. Between those losses and the impact of reduced state purchasing from West Virginia businesses, the number of jobs lost would almost certainly exceed the number created — perhaps by a wide margin.
Of course, this scenario assumes a complete repeal of the corporate net income and business franchise taxes. In fact, West Virginia has only chipped away at these taxes, which lessens even further the job-creating potential. Meanwhile, the share of state revenue generated by the two taxes has declined from more than 13 percent in the 1990s to just 5 percent today with more reductions to come. You and I have had to make up that difference with our personal income and sales taxes, which have been growing as a share of state revenue.
So, why do we do it? Why do we continue a policy that may satisfy some peoples’ ideological vanity, but which is unsupported by data or analysis and which ships money and jobs out of state?
—Sean O’Leary can be contacted at