Sustained Outrage

The good folks at the West Virginia Center for Budget and Policy have a fascinating report out this morning that examines the potential costs — in revenues lost to local governments and school systems — because of the Legislature’s big rush to pass Gov. Earl Ray Tomblin’s tax break to try to lure a natural gas “cracker” plant to our state.

The bottom line?

Over the course of 25 years the facility will have paid $32.6 million with the tax incentive in place, compared to $335.8 million under a normal assessment. The amount of revenue forgone over 25 years totals $303.9 million, an average of approximately $12.1 million per year.

In an “Issue Brief”, the center’s Sean O’Leary dissects H.B. 4086, with a special emphasis on examining the Legislature’s “fiscal note” about potential costs of the governor’s tax break legislation. Incredibly, the fiscal note projected the costs of the legislation at $0 — that’s right, nothing. But O’Leary explains:

… There are several problems with the reasoning behind the $0 fiscal impact, and it is likely that there will be a significant fiscal impact if a facility is built, and takes advantage of the tax incentive.

He continues:

While legislators debated and ultimately passed H.B. 4086, the fiscal note, which informed them that there would be no fiscal impact, did not include:

— An estimate of the revenue forgone

—  An estimate of the costs of increases in demand for government services

— A model to estimate the economic impact and corresponding increases in revenue

— An explanation for how state revenue increases offset forgone local revenue

The fiscal note also assumes that a cracker facility would not locate in West Virginia without the tax incentive, due to the state’s uncompetitive property taxes. This assumption relies on misconception about the state’s property tax system and ignores many factors more influential to business location decisions.

How does the tax break legislation work? O’Leary explains:

The tax incentive would allow the cracker facility to be assessed at 60 percent of its salvage value. Salvage value is defined as five percent of a property’s original cost. The cracker facility would enjoy the special tax treatment for 25 years. The special assessment valuation for the cracker facility would dramatically lower its assessed value, greatly reducing its property tax burden. Under a normal assessment and State Tax Department depreciation guidelines, the assessed value of a $2 billion cracker facility would fall from $1.14 billion to $362 million over the course of 25 years, as the value of the facility depreciates. Under salvage value treatment, the facility would be assessed at $60 million for the entire 25 year period, between $1 billion and $300 million below a normal assessment.

O’Leary modeled three different counties that are potential locations for a “cracker” plant — Kanawha, Marshall and Wetzel — and found that each could miss out on $3 million to $4 million a year in county levies, while local school districts could forgo between $8 million and $10 million per year due to the tax incentive.

But won’t other tax revenues that a “cracker” helps create make up for this? O’Leary explains:

If revenue increases from new job creation occur, it would mainly increase for state revenues, like personal income, corporate income, and sales tax revenue.  he forgone revenue from the tax incentive is all property tax revenue, which is the main source of tax revenue for local governments. The amount of property tax revenue collected by the state is insignificant. If the assumption is true, increases in state revenue do not offset forgone local revenues, with the limited exception of the school aid formula. Reductions in revenues collected through school excess and bond levies have no state revenue replacement. The assumption in the fiscal note did not account for these differing revenue streams.

Was the tax break needed to try to land the cracker?

… There is very little evidence to suggest that West Virginia’s property taxes are a deterrent, or that the tax incentive will be the reason why West Virginia would be chosen. While West Virginia does have a higher tax rate on business personal property, its rate on real property is far below both Pennsylvania and Ohio, according to the Council on State Taxation. Taken together, West Virginia’s business property tax rates are close to the national average. On average over the past three years, business property taxes nationally have totaled 1.8 percent of private sector GDP. In West Virginia, businesses have paid 2.1 percent in private GDP, while in Ohio and Pennsylvania, businesses have paid 1.9 and 1.7 percent respectively. The difference between the three states is not small enough to be offset by any number of other business taxes or costs.

O’Leary concludes:

While the location of a new cracker facility in West Virginia would be a great asset for the state, generating hundreds of jobs and boosting manufacturing, it is imperative that state and local officials understand the fiscal impact of tax incentives contained in H.B. 4086.

In this regard, the fiscal note prepared for H.B. 4086 failed. The fiscal note provided no estimate of the tax revenue forgone, had no analysis to justify the assumption that forgone revenue would be offset by economic activity, did not address the infrastructure and other costs created by a cracker facility, did not account for the differences between state and local tax revenue, did not account for existing tax incentives, and assumed that a cracker facility’s location decision is driven by property taxes. The $0 price tag attached to H.B. 4086 was based on an incomplete analysis. As it stands, the fiscal impact of H.B. 4086 is undetermined, but to say it is $0 is highly misleading.