Taxes

West Virginia Voters Will Determine the Scope of Potential State Tax Reform

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Babydog would like you to vote against Amendment 2. Or at least that’s what the English Bulldog’s owner, West Virginia Gov. Jim Justice (R), claims, and absent the emergence of a Dr. Doolittle on the Kanawha, who is there to gainsay him?

The Republican governor’s opposition to the ballot measure pits him against Republicans in the legislature, with both House Speaker Roger Hanshaw (R) and Senate President Craig Blair (R) advocating for the amendment. At issue is whether the state constitution should be amended to give the legislature authority over—and potentially the ability to scale back or repeal—tangible personal property taxes. An inability to touch these taxes has bedeviled tax reformers in the state for years.

Most states tax tangible personal property—essentially, property that can be touched or moved—to some degree, but West Virginia is unusual in its heavy taxation of machinery, equipment, inventory, and even personal automobiles. Notably, it is one of only nine states to fully tax business inventory.

Tangible personal property (TPP) taxes reduce capital investment by making it costlier to invest and particularly to put new and more productive equipment into service. In addition to the actual tax burden, tangible personal property taxes impose substantial compliance and administration costs because the tax levy is “taxpayer active.” This means that businesses must fill out forms identifying all their personal property subject to taxation and detailing relevant attributes including, but not limited to, a physical description, the year of purchase, the purchase price, and any identifying information (e.g., serial numbers). The tax is to be remitted upon the depreciated value of each article of personal property.

All tangible personal property taxes impose considerable burdens, but the tax on business inventory is uniquely burdensome. Inventory taxes are highly distortionary because they force companies to make decisions about production that are not entirely based on economic principles but rather on how to pay the least amount of tax on goods produced. Inventory taxes can create strong incentives for companies to locate inventory in states where they can avoid these harmful taxes. They also impose high compliance costs for businesses, which are required to track and value their inventory for reporting and tax remittance purposes. They discourage in-state production, induce businesses to keep inventory out-of-state even when this is otherwise inefficient, and penalize certain industries that are unavoidably inventory-heavy.

Repealing tangible personal property taxes was a recommendation of both the 1999 Governor’s Commission on Fair Taxation and the 2006 Tax Modernization Project, convened by Govs. Cecil Underwood (D) and Joe Manchin (D), respectively. And those are not the only governors with whom such ideas have had purchase. Because while today Gov. Justice is Bringing up Babydog to oppose changes to tangible personal property taxes, a little paleontology unearths Justice’s 2018 Just Cut Taxes and Win Amendment, which would have phased out taxes on machinery, equipment, and inventory between 2020 and 2026.

West Virginia Amendment 2 would not directly reduce tangible personal property taxes—on cars, inventory, or machinery and equipment. It would, however, empower the legislature to consider such reforms. Governor Justice, meanwhile, has turned his attention to income tax rate reductions, and even to the idea of eventual income tax repeal. But that is a heavy lift, and his 2021 proposal to do so involved carveouts (pass-through business owners were still taxed) and a litany of pay-fors, including sales taxes on business inputs, expanded excise taxes, and a “luxury tax,” all adding up to significantly higher tax burdens on small business owners.

Income and property tax relief are not incompatible with each other, but the governor has arrived at the view that empowering the legislature to tackle tangible property tax reform distracts from his income tax-cutting focus, while legislative Republicans want the authority to do comprehensive tax reform with an eye to broader tax competitiveness, potentially including both income and tangible personal property tax relief.

West Virginia has long struggled to attract business investment, and the state’s unusually burdensome taxes on investment and business property are not helping. West Virginia Amendment 2 does not reduce those taxes, but legislative leaders have made clear that they want to reduce them, with lawmakers discussing ways to use the state’s growing revenues to backfill losses to localities. It will be up to voters to decide whether to give them that authority.

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