Corporate Tax Cuts to Stimulate Job Creation: They Never Work

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We should be open to any legislation or tax policy that stimulates job creation. But we should also be on guard against legislation or policy that merely sounds good, without subjecting it to a rigorous evaluation of its costs and benefits. Among the West Virginia Legislature’s new Republican majority, it is fashionable to call for corporate tax cuts as a way to unleash job creation. Unfortunately, this thinking is more the product of ideology than of solid analysis. The idea of corporate tax cuts to stimulate job growth has one main problem – it never works.

New Senate President Mitch Carmichael (R-Jackson, 04) recently formed a Select Tax Reform Committee in the Senate, saying

We must examine every method to improve the West Virginia economy, and that certainly will include         comprehensive tax reform. Our focus is to create private sector jobs and opportunities for our citizens… Other states have achieved significant growth as a result of fundamentally overhauling their tax code. Why wouldn’t the West Virginia Senate pursue tax strategies that have a proven record of success in other states?

West Virginia is now facing a $400 million budget deficit. If the tax reform Sen. Carmichael describes will raise revenue now, he and his colleagues can be political heroes. On the other hand, if he intends to cut taxes – losing present revenue – in exchange for uncertain future job growth, he is on a fool’s errand.

West Virginia has relentlessly cut corporate taxes in the past decade. In the period 2007 to 2014, the Legislature reduced the business franchise tax from .7% to zero and reduced the corporate net income tax rate from 9% to 6.5%. Yet West Virginia is still a laggard in job creation and there are many of our fellow citizens unable to find work. It is regrettable that our leaders do not demand a thorough evaluation of the effectiveness of these earlier tax cuts before embarking on new ones. But West Virginia is not alone in this.

Our neighbor Ohio has shot itself in the foot over the last decade by cutting corporate taxes almost to zero in the hopes of stimulating job growth with no real success. Between 2005 and 2010, Ohio sharply reduced income tax rates and eliminated Ohio’s corporate income tax. While the country as a whole has gained jobs since then, Ohio has lost jobs. More recently, Ohio passed a tax-cut package that included income tax reductions and business-owner tax breaks. Yet Ohio job growth continues to lag the country as a whole.

Then there is the Kansas experience.  Led by Republican Governor Brownback in 2013, the Kansas Legislature passed a series of tax cuts on owners of “passthrough” businesses that opened up a $420 million budget deficit.  The Topeka Capital Journal later reported the rueful comments of one Republican legislator, who said that the evidence didn’t exist that the tax cuts led to meaningful growth and probably never would.

Why don’t corporate tax cuts work to stimulate job growth? There are several reasons.

  • tax cuts are like handing corporations a big check with no requirement that they spend the money on creating more jobs;
  • often the tax cuts go directly to a corporation’s bottom line to be distributed to out-of-state shareholders and other owners;
  • if the tax cuts are actually spent by corporations they can easily be spent in other states, or in ways that do not create jobs, such as part of bloated CEO pay;
  • corporate income taxes are such a small part of the cost of doing business in a particular state that cutting taxes will not be an inducement to locate new business in West Virginia versus other states; and
  • corporate tax cuts increase the likelihood of budget deficits that will result in spending cuts on public services that corporations value in locating new business, such as police, fire protection, good schools and recreation.

Of course, we expect our Legislature to adopt a workable budget, filling the deficit hole while generating enough to sustain and expand the important work that only government can do. None of us should criticize the Legislature for action and innovation. But corporate tax cuts are not the answer if we simply hope they will stimulate job creation.

If tax reduction is so important, why not link it to job creation in some accountable way? Why couldn’t we offer a tax credit to small business that would be eliminated for that business the next year if it has not created a certain number of new jobs? This scheme is familiar to state and county development authorities because it is sometimes used in the arrangements with corporations that receive tax inducements to open a new factory. And it would be similar to the “pay for performance” that corporations love. But in this case if corporations don’t perform by creating new jobs, they don’t get paid with state tax revenues.

More Corporate Welfare In the Midst of a West Virginia Budget Crisis

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Several committees met December 5, 2016, as part of the Interim Session of the West Virginia Legislature. The pall of a significant revenue shortfall hung over everything.

At a meeting of the Standing Committee on Education, Chancellor Sara Tucker of the Community & Technical College system did an admirable job explaining how the institutions in the system were adapting to the reduced revenue situation. Community colleges have begun a program of sharing personnel resources – not every college needs its own Human Resources Director or General Counsel. She was followed by Dr. Jerome Gilbert, President of Marshall University, who described the measures taken at his institutional to deal with the sharp decline in state funding.

Immediately following that meeting the Joint Committee on Tax Reform, Subcommittee A gathered to hear two presentations. It was almost as if this Subcommittee was functioning in an alternate universe. Here’s why.

Incoming Senate President Mitch Carmichael (R – Jackson, 04) has announced a goal for the upcoming session to make West Virginia’s tax structure “competitive” with surrounding states. In a statement reported in the State Journal on December 4, Carmichael said that cutting taxes on manufacturer’s equipment and inventory will be considered. This and other measures would serve the laudable goal of “creating an environment that the private sector can hire people and put them back to work.”

At the Subcommittee meeting, Mark Stowers, Vice President of Asset Management for Alpha Natural Resources made a presentation about corporate property tax on mining machinery. Alpha is one of the largest coal companies in the country and operates numerous mines in West Virginia. Stowers was plain spoken and direct about what Alpha wanted.

West Virginians pay personal property tax on vehicles they own on July 1 of each year. It’s the same for corporate equipment and machinery. Stowers explained that not all of Alpha’s mining machinery is in use at once. Of course, if a piece of equipment is in productive use at a West Virginia mine on July 1, Alpha pays the property tax on it. But if the equipment is idle, Alpha moves it out of state before July 1 to avoid the West Virginia property tax. Virginia and Kentucky have no such tax.

Stowers described a depot in Wise, Virginia with 900 pieces of equipment, most of which was moved there to avoid West Virginia property tax. This is not obsolete equipment. Stowers claimed simply that it was expensive to transport that equipment back to West Virginia, implying that Alpha might decline to move it back here to start up a new mine job.

One would expect an official of a large taxpayer to be reticent about admitting conduct that was undertaken for the sole purpose of tax avoidance. Under West Virginia law, a willful attempt to evade taxes in any manner is a felony, although it is unclear whether this provision applies to corporate personal property tax. But none of the legislators seemed concerned in the least that moving equipment out of state to avoid tax might be inappropriate. In fact they were generally sympathetic. The discussion focused on how the West Virginia Code could be amended to provide relief to Alpha and other similarly situated corporations.

For example, Sen. Mike Hall (R – Putnam, 04) mused aloud about whether the Code could be amended so that idle machinery could be valued at little or nothing, thereby producing tax revenue of little or nothing. Del. Rupert Phillips (D – Logan, 24) declared that the coal industry was “near and dear to my heart” because of the number of coal industry jobs in his district. The one Panhandle legislator present, Del. Eric Householder (R – Berkeley, 64), appeared to be busy with his cell phone and had nothing to say.

With the express intent to avoid corporate property tax Alpha is playing a shell game that ordinary citizens could never get away with. Imagine moving your automobile to a county just over the state border on June 30 and then claiming that no property tax was owed because it was not within a West Virginia county on tax day. This would be a non-starter because the law taxes “all personal property belonging to persons residing in this state, whether such property be in or out of the state.”

If providing Alpha and other coal companies with property tax relief had the effect of increasing employment or coal production upon which the state’s severance tax would apply, then maybe there would be some logic to the property tax relief. But shouldn’t that first require some hard evidence that the property tax is actually causing coal companies to decline mining opportunities in West Virginia? Are we simply going to take a coal company’s word for it? A real loss of severance tax, if there is one, could be compared with the amount of revenue to be lost from cutting corporate property tax and then a proper policy choice could be made. But there was certainly no inquiry of this sort from the Subcommittee.

Really, in a time of starkly reduced revenue for all the important things the West Virginia government does, why does our Legislature spend any time considering tax relief for coal companies? If West Virginia actually collected the property tax on machinery taken out of state to avoid tax, instead of letting coal companies get away with this shell game, imagine how useful the revenue would be for our universities and community colleges. Relief from property tax sounds like just another example of corporate welfare we simply cannot afford.