West Virginia falls in the middle of all 50 states in a recent study ranking business tax climates.
Earlier this month, the Tax Foundation released the 2014 State Business Tax Climate Index. The nonpartisan tax research organization, established in 1937 and headquartered in Washington, D.C., publishes this report annually, and this is the 10th edition.
Tax Foundation economist Scott Drenkard, who wrote the 2014 study with Joseph Henchman, said other tax indexes measure how much taxes are collected, but the State Business Tax Climate Index examines tax structures.
The Tax Foundation has more than 100 variables that ask questions related to tax bases and tax rates, and uses that information to compare the states. The organization reviews state tax laws, contacts state Departments of Revenue for information on tax rates, and goes to many different sources to gather data on tax bases, Drenkard said.
He said modifications to the tax structure can fix a lot of problems and help with economic growth in states. Every variable from the State Business Tax Climate Index equates to a tax policy that could possibly be altered, or could show areas where improvements have been made and no changes are needed.
This year, the following states have the top 10 business tax climates: Wyoming (No. 1), South Dakota, Nevada, Alaska, Florida, Washington, Montana, New Hampshire, Utah and Indiana. The states in the bottom of the rankings include: Maryland (No. 41), Connecticut, Wisconsin, North Carolina, Vermont, Rhode Island, Minnesota, California, New Jersey and New York (No. 50).
West Virginia came in at No. 23 in the 2014 rankings. For the individual tax components that were included in the study, the state was ranked 20th for corporate tax, 24th for individual income tax, 25th for sales tax, 26th for unemployment insurance tax, and 27th for property tax.
“It’s a middle of the pack score,” Drenkard said. “West Virginia doesn’t have anything in terms of the tax code that is entirely unique. West Virginia is moving in a positive direction with corporate tax reduction.”
He said West Virginia is in the process of phasing down the corporate income tax, which is a relatively inexpensive way for the state to become more competitive.
West Virginia dropped two spots from last year, when it was in the 21st place. This change is due to some shuffling among the middle states in the ranking this year, Drenkard said.
“West Virginia’s placement didn’t change because of poor policies, but rather because the state is standing still,” he said.
While the state is making positive strides with the corporate income tax reduction, other states are also making moves, which is affecting the overall ranking, Drenkard said.
Dr. Amy Godfrey, assistant professor of economics at Fairmont State University, explained that West Virginia dropped in the ranking because of the changes in tax code that other nearby states experienced. West Virginia falls in the middle of all the states in terms of taxes and the complexity of tax structures for businesses.
“States without individual income taxes tend to be the states that rank the highest in this index,” she said. “This ranking shows that West Virginia’s tax system is not that complex and hard on business.”
Godfrey said the ranking tries to compare tax structures across the states, which can be a difficult task.
“In the U.S., state tax structures vary tremendously,” she said. “This index can be helpful when business are just trying to get a sense of a state’s tax system. However, it needs to be examined with caution. This index does not include the tax structure found at the county or local levels, which in some states can be extremely more complex. This index also does not get into tax rates. It ranks states without individual income taxes at the top but not does indicate what the other taxes and tax rates those states use instead of the individual income tax.”
When the Tax Foundation started ranking states on their business tax climates in 2004, West Virginia was named 47th. In the last 10 years, the state has moved up in the ranking from No. 47 to 23 because of a number of changes, said Mark Muchow, deputy secretary of the West Virginia Department of Revenue.
He said significant efforts on the part of governors and the Legislature allowed West Virginia to reduce and eliminate a number of business taxes. West Virginia’s corporate charter tax and alternate minimum tax no longer exist, and its business franchise tax is in the process of being eliminated and will be totally gone in two more years.
Ten years ago, the corporate net income tax was 9 percent, and today it is 7 percent. As of Jan. 1, 2014, the tax will decrease to 6.5 percent, which will make West Virginia’s tax lower than about 30 other states, Muchow said.
He said West Virginia used to require businesses to re-register and pay a renewal fee every two years, but now the registration certificate is permanent. In terms of other tax changes, the state created low-income tax relief programs on personal income taxes.
Also, the state got rid of the food tax, and successfully privatized workers compensation and reduced premiums. These two examples weren’t components of the State Business Tax Climate Index, but were still major benefits for West Virginia businesses, Muchow said.
The overall ranking shows that West Virginia has a stable and fairly competitive business tax climate and has made significant improvements over the last decade, he said. The Tax Foundation didn’t give any state a perfect ranking, but provided a pretty favorable report on West Virginia’s tax system.
Of course, there are opportunities for business and employment growth in the future.
“Over time, it should mean a better business environment as well as greater levels of employment and economic activity,” Muchow said.
The West Virginia Chamber of Commerce is pleased that the state is in the top half of the nation for its tax climate, said president Steve Roberts.
“Our business tax climate we believe is very important when we try to keep jobs in West Virginia and attract new jobs,” he said.
The chamber worked closely with Sen. Joe Manchin, then governor, to reduce the corporate net income tax and to work toward the eventual elimination of the business franchise tax, Roberts said.
He said the business franchise tax is a tax that all businesses in West Virginia have to pay — whether they are active or inactive, or profitable or losing money — and companies with high values pay higher taxes. This tax can be somewhat challenging to calculate in certain cases, and is a disincentive to companies that provide the best jobs and the state wants to keep the most.
“I think it will help grow the economy as time goes on,” Roberts said of the Tax Foundation ranking. “Businesses want to go where they think they are welcome and wanted, and tax rates help to send a message about whether you want business or you are trying to discourage business.”
John Deskins, director of the West Virginia University College of Business and Economics’ Bureau of Business and Economic Research, said taxes are important as businesses are deciding where to locate their operations. A state with a tax burden that’s higher on businesses will see an impact on its economic activity and growth.
While taxes do matter, they are only one of the factors that policymakers should consider, he said. Economists often believe that a state’s wages, quality of workers, educational attainment, transportation costs and other factors rank above taxes in importance.
The ranking from the State Business Tax Climate Index shows that West Virginia could be worse, but is still a long way from being the state with the most business-friendly approach, Deskins said.
West Virginia, at No. 23, ranks more favorably than all of its neighboring states. Pennsylvania is No. 24, Virginia is No. 26, Kentucky is No. 27, Ohio is No. 39 and Maryland is No. 41. People should also remember that state-specific factors play a part in the rankings, he said.
“That ranking’s important, but there are so many things to consider,” Deskins said of what the ranking means for the economy overall. “You really have to analyze the whole picture to really say whether the economy is conducive to economic growth or not.”
Deskins would certainly like to see the state improve its standing in the index.
To access the full 2014 State Business Tax Climate Index, visit taxfoundation.org.
Email Jessica Borders at email@example.com or follow her on Twitter @JBordersTWV.
West Virginia falls in the middle of all 50 states in a recent study ranking business tax climates.
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