| In other words, compared to the old rate, it's already scheduled for a reduction of over 70 percent at a cost of $84 million a year to state revenues. Totally eliminating it would cost the state around an additional $36 to $43 million a year. We don't know the exact amount yet.
I hope that some people are asking the same question in this case. How are we going to pay for it? Is anyone looking at alternative sources of revenue if this is done?
Any spending decision involves what economists call "opportunity costs." Doing one thing means not doing something else. Here's an example. For $40 million, a decent estimate of what would be left of the business franchise tax by 2012, we could:
· Cover around 76,000 low-income uninsured adults through Medicaid. Aside from saving lives, this would reduce costs due to uncompensated care to families and employers.
· Pay for a year's in-state college tuition for 8,000 students at $5,000 a pop.
· At least make a start on dealing with the 27 percent of major roads, 37 percent of bridges and 38 percent of dams that the American Society of Civil Engineers reported to be deficient in 2005.
· Hire 1,000 qualified teachers at $40,000 a year.
I imagine if there were a serious effort to promote any of these initiatives in the Legislature, many people would call for fiscal responsibility. That works both ways, especially considering the state's unfunded liabilities and a looming structural deficit.
Since most discretionary state spending goes to public education, health and human resources and higher education, a likely scenario is that these tax cuts will result in cuts to these services in the future. A further effect may be to make our overall tax system more regressive, meaning that relatively more state taxes would be paid by people with lower incomes than those who benefit by these reductions.
One rationale for cutting business taxes is that it will attract new businesses. However, according to a survey by business location expert Robert Ady, taxes rank at the bottom as factors in site locations, behind labor, transportation, utilities and occupancy. These days, energy costs are a major concern for businesses as well as consumers, and West Virginia's energy costs are among the lowest in the nation.
As Greg LeRoy of Good Jobs First said, "Internal Revenue Service statistics show that all state and local taxes make up only 1.2 percent of the typical company's cost of doing business, far less than labor, materials, marketing, overhead, transportation - the business basics. And then companies get to deduct those state and local taxes when they file their federal tax returns, so Uncle Sam actually foots up to 35 percent of the bill. The bottom line: after federal deductibility, state and local taxes make up only 0.8 percent of the average company's costs."
Further, if cuts in corporate taxes are paid for by a deteriorating infrastructure, educational and workforce development system, the gains to business would be small indeed.
Finally, although it has become an article of faith that tax cuts magically generate revenues, this is not the case. In 2006, Edward Lazear, chairman of President Bush's Council of Economic Advisors, said in testimony to Congress, "I certainly would not claim that tax cuts pay for themselves."
N. Gregory Mankiw, former chairman of President Bush's Council of Economic Advisors and a Harvard economics professor, once compared people who made such claims to a "snake oil salesman trying to sell a miracle cure."
President Bush's Council of Economic Advisors wrote in the Economic Report of the President, 2003, that "although the economy grows in response to tax reductions (because of the higher consumption in the short run and improved incentives in the long run) it is unlikely to grow so much that lost revenue is completely recovered by the higher level of economic activity."
At the national level, the last seven years have shown that tax cuts are not the answer to every question.
Not every tax cut is a good idea; nor is every kind of public spending a bad one - and vice versa. These things need to be evaluated on a case-by-case basis. Before more major cuts are made to state revenue sources, we need to evaluate the effects of the ones that have only begun and weigh their effects against economic forecasts, revenue projections and public needs.
Time will tell.
(Note: this appeared as an op-ed of mine in Sunday's Gazette-Mail. And Goat Rope is celebrating Black History this week and it's connection to WV. Drop on by.) |
