Opinion

January 26, 2018 - Volume 38 Issue 3

Commentary

  Opinion

“He that would make his own liberty secure,  must guard even his enemy from oppression; for if he violates this duty, he establishes a precedent that will reach to himself.”   -   Thomas Paine  (1737- 1809), English-born American political activist, philosopher, political theorist, and revolutionary.

ballengee
(Ballengee)

Bachman
(Bachman)

By Garrett Ballengee and Paul Bachman

Tax policy has the regrettable property of being simultaneously important yet unforgivingly boring.

Unfortunately, this can lead to suboptimal tax regimes that stifle job-creation and raise revenue in an inefficient manner.

With that in mind, it would be wise to turn the collective gaze toward the business tangible personal property tax — commonly known as the “inventory tax” — that was mentioned during West Virginia Gov. Jim Justice’s 2018 State of the State Address.

Recently, the Cardinal Institute for West Virginia Policy and the Beacon Hill Institute ran a computer simulation that attempted to model the effects on West Virginia’s economy of eliminating the inventory tax over a period of five years. The modeling software used was BHI’s proprietary State Tax Analysis Modeling Program for West Virginia (WV-STAMP).

WV-STAMP is a state-of-the-art computer methodology that permits its users to evaluate the economic impact of various tax changes. WV-STAMP allows us to provide estimates of the effects of changes in state tax law on job creation, investment, real disposable income and state tax revenues.

WV-STAMP produces dynamic revenue estimates that capture the effect of the change in economic activity on changes in tax revenues, unlike static revenue estimates that do not. WV-STAMP is similar to models the Beacon Hill Institute has built for some 30 states and cities, and several municipalities.

The results were very interesting.

First, a brief explanation: The inventory tax is a tax levied on property owned by a business that can be moved and touched — e.g., machinery, equipment, furniture, paper clips. The tax is fully levied in 10 states, while four additional states impose partial inventory taxes.

Though it raises significant revenue for West Virginia (several hundred million dollars), the inventory tax violates many principles of sound tax policy.

For example, the inventory tax violates neutrality (businesses with more inventory carry a greater burden of the tax) and transparency — few people are even aware of its existence. Moreover, the inventory tax incentivizes business owners to manage their inventory and equipment levels toward minimizing the tax.

Now, on to the simulation’s results.

The elimination of the inventory tax would boost business investment by increasing the after-tax return on said investment. Investment would increase by $68 million under the elimination simulation. The higher investment would spur businesses to hire more employees to run the new machinery and equipment, and thus West Virginia employment would increase by more than 1,000 jobs.

The combination of more workers using productivity-enhancing machines and equipment would boost real (price adjusted) incomes by almost $70 million in West Virginia. The economic boost due to the tax elimination would reduce the dynamic loss in state tax revenue to only $89 million.

To be clear, the effects of a hypothetical inventory tax repeal were simulated over a period of five years — two fewer than what has been discussed. As such, the numbers that were used in the simulation were also slightly different; however, the impact on the simulation’s results would be minimal.

There are no perfect modeling systems. Economies are extremely complex things with literally millions of inputs and interactions that no computer could perfectly model and predict. That said, models do give its users a guide — an educated guess, if you will — of what could result from a given change in tax policy.

Luckily, tax theory reinforces what the model is telling us — the business inventory tax stifles job creation and is a suboptimal way of raising revenue.

Garrett Ballengee is the executive director of the Cardinal Institute for West Virginia Policy. Paul Bachman is the director of research for the Beacon Hill Institute.

 

Editor’s Note: This Op-ed was first printed in the Daily Mail Opinion page of the Charleston Gazette-Mail January 26, 2018.