West Virginia's reliance on federal tax policy to operate its own system may end up costing it nearly $44 million thanks to the recently approved stimulus package, The Associated Press reports.
AP's Tom Breen focuses on a component of the legislation will allow businesses "to deduct up to 50 percent of the cost of new equipment from their taxes in 2008, a considerable savings."
As Breen explains, "When the federal code changes, the state tax changes with them, so businesses in West Virginia will get an additional tax break if the state follows past practice and amends its laws."
The West Virginia Center on Budget and Policy "wants the Legislature to refrain from ‘‘coupling’’ state tax laws to the federal changes, to preserve that revenue," the article said.
But state officials project that West Virginia could offset the losses -- if the stimulus package's June tax rebates and other factors help increase revenues sufficiently by 2009.
The West Virginia think tank and its national counterpart had previously warned of higher losses from the federal legislation.
18 February 2008
The Price of Economic Stimulus
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The early figures where wrong because the census data (State Finances) adds together the B&O Tax in it's definition of corporate income taxes.
The tax dept/admin assumption should be called into to question for two reasons:
1. Bird in Hand - $40 million today is worth more than $40 million in three to four yrs. Not decoupling gives corporations an interest free loan, in essence. While the short-term cost is higher than the long-term cost, not all of the lost revenue will be recouped.
2. Stimulating the Economy -
Mark Zandi, chief economist at Moody’s Economy.com, has calculated that the depreciation tax break will return only 27 cents to the economy for every dollar spent on the break.
Futher the Congressional Budget Office has also noted that the provision is not likely to be very effective. As reported in the Wall Street Journal, a “near-identical” tax cut in 2002 did not cause businesses to speed up equipment purchases significantly. Instead, studies show that “most of the tax breaks went to companies that were planning to make purchases anyway.”
Claims that the tax break will stimulate new investment are belied by its very structure. The tax break is retroactive to January 1, 2008, not a future date that would tie the tax break to new investment decisions. Thus, many of the qualifying investments were already in the decision pipeline before the legislation passed. Put another way, it is rewarding decisions already made, not stimulating only new investment decisions. And from studies of past experience with a similar tax break, economists have found little support for the claim that bonus depreciation boosts economic activity.
If stimulating West Virgini's economy is the goal, then avoiding a budget shortfall would be good start. According to Zandi, each dollar spent mitigating state budget shortfalls could yield $1.36 in increased economic growth. That’s why decoupling, which for now would keep Oregon in the plus column, is the smartest move legislators can make.
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