Now is the time to make bold economic changes

by Patrick Morrisey

Recently, U.S. News and World Report published an article about the worst states in the country to start a business.  Not surprisingly, West Virginia leads this infamous list.  The article states that “West Virginia has not been known for economic prosperity in recent years.  It consistently ranks last as one of the states with the lowest per capita income.”  The article further cites the Kauffman Foundation, which rates the State “49th out of 50 states in preparation for the economic trends that will propel entrepreneurs in the 21st century.”

While these statistics may not surprise West Virginians, nevertheless, they are disturbing.  As such, it is critical for lawmakers to focus their energies on how to reverse some of the fundamental causes of the State’s weak business climate.  Many of the problems may not be resolved quickly, but with the right mix of economic and tax policies, the State could improve its competitive position and economic potential, especially as it compares to neighboring states.

Admittedly, there are myriad reasons why West Virginia’s economic statistics remain some of the lowest in the country and lag well behind border states: for example, analysts on both sides of the political spectrum acknowledge that educational levels need to be dramatically improved; excessive regulations on businesses reduced; the judicial system reformed; and, the aggregate tax burden on corporations and individuals lowered. 

U.S. News and World Report argues, among other factors, that “…West Virginia’s low level of entrepreneurial activity might [be related to] its high level of taxation.” Not shocking.  But how many times have you examined the marginal tax rates in all states touching West Virginia’s border? The results are stunning.

West Virginia shares a border with five other states: Maryland, Virginia, Pennsylvania, Ohio and Kentucky.  Of these six states, West Virginia maintains the single highest combination of marginal individual and corporate income tax rates.  In 2009, West Virginia’s highest individual marginal tax rate is 6.5%.  By contrast, Maryland’s highest marginal rate is 6.25%; Ohio’s -- 5.93%; Virginia’s -- 5.75%; Kentucky’s -- 6%; and Pennsylvania’s -- 3.07%. 

A comparison in corporate income tax rates between those same states presents a slightly better, but still dismal story.  West Virginia imposes an 8.5% corporate income tax rate in 2009, a marginal rate higher than every other border state except Pennsylvania, at 9.99% and Ohio, also at 8.5%.  When marginal corporate income taxes and individual income taxes dramatically outpace those of every neighboring state, it serves as a major financial disincentive to start or to maintain a business in the Mountain State.  For many businesses, an additional reduction of corporate income taxes of several percentage points may be the difference between a company’s willingness to hire extra employees or to lay someone off. 

In fairness to the Governor and the State Legislature, some steps have been taken in recent years to improve the State’s competitive position.  By 2014, the corporate income tax will decrease to 6.5%, while the business franchise tax should be phased out entirely by 2015.  Both of these measures will help improve future economic prosperity in West Virginia, but in these uncertain economic times, can we afford to wait?  In addition, if the State Legislature and the Governor really want to accelerate economic growth, why wouldn’t they lower our marginal tax rates now so that we will be more competitive with our neighboring states in 2009 and 2010?

Some skeptics will claim the State is in no position to further reduce taxes because revenues will decline as the recession impacts West Virginia.  Fortunately, such skepticism does not hold up to scrutiny.  By becoming more competitive on tax rates and taking other steps to make the state business friendly, West Virginia may be able to draw more companies and entrepreneurs to come here (or more importantly, to keep the businesses which are here now from leaving). The marginal corporate tax rate may decline, but the aggregate number of businesses paying corporate taxes will increase and serve to offset some of the lost state revenues. 

Equally relevant, from a fiscal perspective, West Virginia is now the beneficiary of over $1 billion in windfall monies from the new federal stimulus bill.  As problematic as it will be for future generations to pay off this so-called stimulus bill, West Virginia lawmakers could, at least mitigate some of the harm by effectively directing some of the largesse back to individuals and businesses to spur on economic growth. If the State dedicates the equivalent of just 20 percent of its new found monies to the reduction of corporate income taxes, West Virginia could slice the corporate income tax rate by one-third for the next few years and still reduce the business franchise tax.  All of this would be accomplished while still limiting the potential for a crippling budget shortfall in the future.

Aggressively lowering the tax burden for individuals and businesses in the Mountain State is not a cure to all that ails West Virginia’s economy.  Rome was not built in a day -- West Virginia’s business climate won’t be immediately resuscitated either.  But the U.S. News and World Report article has provided lawmakers with additional motivation to improve the State’s poor economic position.  The opportunity to advance a transformational economic agenda for the State is here; the time to act is now.

Patrick Morrisey is a resident of Harpers Ferry and a member of the Jefferson County Republican Executive Committee.