West Virginia Constitutional Amendment Would Roll Back Property Taxes on Machinery and Equipment
Localities in West Virginia have long relied heavily on business tangible personal property taxes. These are taxes on machinery, equipment, furniture, fixtures, inventory—really, any sort of property that can be touched and moved. Such taxes are not rare, despite a widespread recognition that such taxes stand in the way of economic growth. What’s unusual is just how important they are in West Virginia, where nearly a third of all property tax collections are derived from tangible personal property. This year, Governor Jim Justice (R) is pushing a constitutional amendment to chip away at that reliance. The resolutions are being carried by House Speaker Tim Armstead (R) and Senate President Mitch Carmichael (R) in their respective chambers.
Tangible personal property taxes reduce capital investment by making it costlier to invest and particularly to put new and more productive equipment into service. In addition to the actual tax burden, moreover, tangible personal property taxes impose substantial compliance and administration costs because the tax levy is “taxpayer active.” This means that businesses must fill out forms identifying all their personal property subject to taxation and detailing relevant attributes including, but not limited to, a physical description, the year of purchase, the purchase price, and any identifying information (e.g., serial numbers). The tax is to be remitted upon the depreciated value of each article of personal property.
All tangible personal property taxes impose considerable burdens, but one constituent element of West Virginia’s tax particularly stands out: the tax on business inventory. Inventory taxes are highly distortionary because they force companies to make decisions about production that are not entirely based on economic principles but rather on how to pay the least amount of tax on goods produced. They violate widely held principles of sound tax policy: they are not transparent, for instance, and they are highly nonneutral, falling much more heavily on select industries like manufacturers.
Inventory taxes can create strong incentives for companies to locate inventory in states where they can avoid these harmful taxes. They also impose high compliance costs for businesses, which are required to track and value their inventory for reporting and tax remittance purposes. West Virginia is one of only ten states which still taxes most inventory.
In 1999, the Commission on Fair Taxation proposed eliminating tangible personal property taxes and the business franchise tax, identifying both as barriers to the state’s economic growth. In 2006, the Tax Modernization Project made an identical recommendation. Little came of either proposal.
The difficulty in tackling the issue is obvious when observing the unequal reliance across the state. About 10.9 percent of property tax collections in Morgan County (in the northeast of the state) are derived from personal property; on the other hand, in Dodderidge County (toward the northwest), that percentage is 78.5 percent. Similarly wide variations are evident at the municipal level. Statewide, about 32.8 percent of all property tax collections are attributable to the personal property tax.
Clearly, a proposal that holds Morgan County harmless isn’t going to cut it for Dodderidge County, and a solution that preserves Dodderidge County’s revenue streams would likely result in anomalously high tax burdens in Morgan County. In nine counties, personal property taxes account for less than 20 percent of all property tax collections. In seven counties it’s more than 50 percent.
Because of this difficult reality, proposals to repeal tangible personal property taxes haven’t gone anywhere. This year, however, Gov. Justice and legislative leaders have a different proposal—more modest and, thus, more workable.
The Just Cut Taxes and Win (JCTAW) Amendment would phase down the assessed value of tangible industrial machinery, equipment, and inventory personal property between 2020 and 2026, from its current 60 percent assessment ratio to 0 percent by fiscal year 2027. The state would make up the difference to localities, maxing out at $140 million a year in transfers by fiscal year 2027.
Localities are made whole; the state is not. The constitutional amendment, if adopted, would represent a tax cut, beginning at $20 million a year and increasing by another $20 million each year until maxing out at $140 million, enough to cover the full elimination of property taxes on industrial machinery, equipment, and inventory.
The proposed amendment doesn’t eliminate tangible personal property taxes altogether, which ought to be the long-term goal. It does, however, take an important step in the right direction, phasing out these destructive taxes where they hit the hardest.
Past proposals have faltered over fears about local revenue streams, and because the state was unable to commit to making up the difference. The narrower scope of the JCTAW amendment makes state aid a viable solution to the problem, and though such an approach is imperfect—it locks in local revenue based on tax rates and economic activity as it existed at a certain moment in time—it’s also the best opportunity West Virginia lawmakers have had to improve the state’s outmoded property tax structure in a long time.