Desperate to attract jobs, West Virginia lawmakers made drastic tax cuts. The result was declining investment in education — and stagnant job growth.
That was more than a decade ago. Now, faced with the same problem, state lawmakers want to do it again. Amid a pandemic that has sent the nation into a recession and strained the state’s most basic functions, they want to eliminate West Virginia’s largest revenue source: the income tax.
This time is different, says Gov. Jim Justice, because eliminating the income tax has “sex appeal.”
“We’ve tried in West Virginia. We have cut taxes on a lot of different things throughout the years, but has it really brought people to West Virginia? The answer is no,” Justice said in an interview on the MetroNews radio show Talkline.
“But this will,” he said.
But according to economists interviewed by Mountain State Spotlight, it probably won’t — and could instead exacerbate the state’s problems.
“I wouldn’t feel it would be right to advise policymakers that the way to a stronger economy and job growth is to cut state taxes. The evidence is just too weak,” said Therese McGuire, a professor at the Kellogg School of Management at Northwestern University. She’s advised state governments from Oregon to New Mexico on tax policy, urging them to avoid the exact mistakes that West Virginia’s policymakers are now contemplating,
Story #1: Tax heaven
When people debate the latest changes to West Virginia’s tax policy, they tell one of two stories.
Both have the same ending — strong, sustainable economic growth for a state that has long struggled with the devastating booms and busts of an economy dependent on resource extraction.
But their roadmaps for getting there couldn’t be more different.
The first is a story about individual preferences. It is embodied by Elon Musk, the California tech titan and founder of Tesla who is frequently cited as the world’s richest man — and who no longer lives in California.
Late last year, Musk announced that he’d moved to Texas — and threatened to bring much of Tesla’s operations with him — after expressing his frustrations with California regulations, calling the state “complacent.” California’s income tax is one of the highest in the nation; Texas, and eight other states, have none.
If Justice and Republican lawmakers have their way, West Virginia could soon be the 10th. They believe income tax cuts will attract business and stem the state’s steady population decline as young people flee the state for better opportunities.
Senate Finance Committee Chairman Eric Tarr, R-Putnam, cited Tennessee as a lodestar, noting it was “the number one state in the country where those U-Haul moves went,” after the company released data on popular one-way destinations. The state has no income tax and has had one of the highest rates of job growth in the United States over the last decade. It’s also home to Nashville, which is routinely listed as one of the most desirable places to live in the country.
Senate President Craig Blair, R-Berkeley, said the tax changes would increase the state population by 400,000 over the next decade (which would require either stopping everyone from leaving over that period, or doubling the number of people who move to the state). The population growth, lawmakers argue, will help fill the new hole in the state budget.
The problem with this story — lowering income taxes will drive population growth and, in turn, economic prosperity — is that economists don’t think it’s true.
“The research on this is very incomplete and ambiguous,” said Dan Wilson, vice president of microeconomic research at the Federal Reserve Bank of San Francisco. There’s no strong evidence to connect higher income taxes with substantial outmigration and economic growth, he explained.
Tim Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Michigan, was more blunt.
“It will not create a lot of jobs,” he said. And those it does, he explained, will come at a high cost as the government makes cuts to replace lost funding.
It’s not tax policy that’s driving Tennessee’s growth, Bartik said, pointing to major cities like Nashville and other metropolises that have managed to attract a highly-educated workforce. Bartik lived in Nashville for years while working at Vanderbilt.
“It’s got a really high level of amenities. It’s a really, really neat place to live,” he said.
Story #2: Pay more, get less
The second story is much less rosy: the changes to the tax code will exacerbate the very problem they’re trying to solve.
The income tax makes up nearly half of the state’s budget. In order to pull off this disappearing act, the governor is proposing a 1.5 percentage point increase in the state’s sales tax, among other, smaller adjustments to the tax code.
In effect, Sean O’Leary with the West Virginia Center on Budget and Policy said, this will shift the tax burden from the rich to the poor. Low- and middle-income households already pay a greater proportion of their incomes in taxes, he explained. This new proposal “makes it a lot more on them.”
Unlike the income tax, which is tiered to make it more burdensome on the rich, sales tax applies to everyone equally.
In short, in states without income taxes, the poor pay more.
This story goes like this: the state’s previous efforts to reduce the tax burden on businesses have made West Virginia a less appealing place to live for most of its residents.
Tax cuts over the years have resulted in less spending on key services like higher education, or broadband internet. Tuition at the state’s universities has increased by a third over the last decade. The result is fewer reasons for young people to stay in West Virginia, instead of moving to, say, Nashville.
And although the state slashed corporate income taxes in 2008, business hasn’t boomed. While West Virginia’s neighbors have experienced substantial job growth in the last decade — West Virginia has not.
While Republican lawmakers point to Tennessee, O’Leary and Bartik point to Kansas.
In 2012, Kansas passed a sweeping tax cut that then-Gov. Sam Brownback called “a shot of adrenaline into the heart of the Kansas economy.”
Based on model legislation developed by the American Legislative Exchange Council, a conservative think tank, the law eliminated some business taxes and cut income taxes.
At the time, Brownback called it “an experiment” and promised it would bring new jobs.
The experiment failed. Five years later, the laws were repealed after the promised jobs failed to appear. Instead, the Kansas economy lagged behind both its neighbors and the nation as a whole, and the loss of revenue led lawmakers to contemplate deep cuts to the state’s education and infrastructure budgets.
Republican Don Hineman, the majority leader of the Kansas House of Representatives in 2017, gave a warning to West Virginia: “Do not expect that simply cutting taxes will magically produce economic prosperity. It did not happen in Kansas and it will not happen elsewhere. Things are never so simple,” he said earlier this month in an event organized by the West Virginia Center on Budget and Policy.
Despite the changes coming during a national public health crisis, Tarr has described the timing of eliminating the income tax as “opportune.” Workers, now free to work anywhere, might be lured into choosing West Virginia. Plus, Republicans won a supermajority in the state legislature in November.
The state also has a financial cushion, the governor has argued. Its surplus — $464 million — can be used to fund future shortfalls.
But this is a mirage. The state’s budget has been buoyed by federal pandemic assistance payments and state lawmakers have been robbing federal Medicaid dollars to shore up other holes in the budget — a strategy that will run its course by 2025 when the money dries up.
Past state budgets, O’Leary noted, have a six-year plan. This year’s does not. (The Department of Revenue did not return a request for comment.)
Instead of cutting taxes, O’Leary argues, the state should be looking for new sources of revenue, “so we can fund our schools, so we can keep Medicaid solvent, so we can bring down the cost of higher education, so we can give our state employees pay raises, to attract and keep them in the state.”