State and education officials hope to prevent loss of school funding while eliminating business tax burden (WV News)

January 27, 2020

CLARKSBURG — County boards of education could be at risk of losing some school funding if state legislators move forward with the elimination of the personal property tax on manufacturing inventory, machinery and equipment, so both state and education officials are working to find ways to eliminate the tax, but still provide critically needed school funding.

After years of discussion from West Virginia legislators regarding the repeal of the business personal property tax on machinery, equipment and inventory, state officials are weighing in on the positive impacts and potential implications that come with the removal of the tax.

According to Steve Roberts, president of the West Virginia Chamber of Commerce, the tax has been identified as a major impediment to the creation of jobs and in attracting capital to the state. The tax is paid by coal companies on equipment they might use to modernize mining techniques; it’s paid by those in the oil and gas industry on equipment, and it’s paid by wholesalers with inventory or “anyone who has inventory on their shelves” in West Virginia.

“I don’t think there is too much disagreement in West Virginia when it comes to wanting to attract investment and have good jobs in our state,” he said. “This tax has been identified as really a substantial challenge in that area, but there are other factors to consider when looking at removing the tax.”

The tax, which has been a part of the West Virginia Constitution since the 1930s, generates a great deal of revenue that goes directly to the counties that goes almost directly, in a large degree, to support public school systems, Roberts said. The revenue on manufacturers comes in at around $100 million each year, he added.

“According to information supplied by the West Virginia State Tax Department, county boards of educations’ gross tax collections for the 2018-19 year attributable to manufacturing machinery, equipment and inventory personal property taxes total $60,478,555,” said Christy Day, communications department coordinator with the West Virginia Department of Education. “This amount varies annually depending on the assessed values of the taxable property, as well as the levy rates in place.”

Currently, business inventory is included in the taxable assessed values on which county boards of education levy taxes, she said.

The county boards of education receive property tax revenue under their regular levy, as well as any excess levy, bond levy, or permanent improvement levy the county may have in place, Day added. All property tax revenues are collected through the county sheriffs and remitted to the county boards of education monthly.

“A county’s regular levy property tax collections are taken into consideration in the local share calculation of the Public School Support Plan, or PSSP, under which 85% of the county’s regular levy tax collections, including any collections on business inventory tax, reduce the amount of funding the state will contribute to the county in the form of basic state aid funding,” she said.

Regular levy tax dollars are generally used for the basic operations of the county school system, and any excess levy or bond levy taxes attributable to business inventory can only be spent by the county for the purposes outlined in the levy call that was approved by the voters of the county.

Common excess levy purposes are county salary supplements, vision and dental benefits for employees, additional positions above those funded through the state aid formula, instructional materials and more, Day said.

“If the business inventory tax is eliminated, the county boards of education will experience a reduction in property tax revenue for all of the different types of levies,” she said. “Under the local share calculation of the PSSP, the state would make up 85% of any loss in regular levy property tax dollars, but the county would lose any excess levy or bond levy funds attributable to the business inventory (tax).”

“However, under at least one of the proposed constitutional amendment scenarios being discussed by the Legislature that would eliminate manufacturing machinery, equipment and inventory personal property taxes, there would be some guaranteed replacement revenue for county boards of education and other levying bodies,” Day said.

Rebecca McPhail, president of the West Virginia Manufacturers Association, or WVMA, said West Virginia is one of only 14 states with a tax on manufacturing inventory, machinery and equipment. Of those 14 states, West Virginia is one of only two that doesn’t offer some sort of broad-based exemption for manufacturers.

The tax is a deterrent for businesses looking to set up shop in the state and a $100 million burden for manufacturing businesses that already operate in West Virginia, she said.

“Economists have talked about eliminating this job-killing tax for decades,” McPhail said. “We believe that starting with manufacturing provides the best chance for stimulating economic growth.”

McPhail said the state’s overall capital-intensive manufacturing tax burden ranks 43rd among all states, ranking worse than all neighboring states by a wide margin with a 15.9% effective rate. She further noted that when it comes to the ability to attract downstream manufacturing related to the shale gas industry, neither Ohio nor Pennsylvania applies this tax to manufacturers.

McPhail emphasized that manufacturing tax rates must be competitive regionally, nationally and globally. Maintaining and expanding a state’s existing manufacturing base is critical to economic growth, job creation and prosperity, and it’s a key target for the association’s advocacy efforts.

The tax is a barrier to manufacturers considering West Virginia for investment, she said, while those already operating here may deplete inventory or even hold inventory outside the state to meet operational cost demands.

The WVMA advocates for a narrowly focused effort to repeal the personal property tax on manufacturing inventory, machinery and equipment that includes constitutional protections for stakeholders, including schools, counties and municipalities, she said.

Personal property tax on manufacturing inventory, machinery, and equipment represents only 15% of tangible personal property collections statewide, but it offers the greatest potential for overall investment and job growth, McPhail said.

“For stakeholders, the Manufacturing Growth Amendment, or MGA, trades variability for security,” she said. “Carefully, and based on maximizing the potential for economic stimulus, the MGA carves out a repeal of the personal property tax specifically for manufacturing inventory, machinery and equipment. This portion of personal property taxes have ranged from $81 to $93 million in revenue annually over the past decade and is well recognized as a declining revenue source. But the MGA looks at the highest year of collections for each county and replaces revenue at that level — a total just shy of $100 million.”

Additionally, the MGA guarantees that the counties, schools and municipalities that receive these revenues are made whole by constitutionally creating future revenue security that allows for natural revenue growth and collections to fill the gaps.

“West Virginia’s general revenue collections grow, on average, at a rate of $100 million a year,” McPhail said. “Phasing out the tax on manufacturers over time allows natural growth to absorb the cost of repeal without cutting programs or raising taxes. And that’s before factoring in economic and job growth associated with increased investment in manufacturing.”

She said the Manufacturing Growth Amendment also provides the governor and the West Virginia Legislature with maximum flexibility to make our schools, counties and municipalities whole through the most appropriate revenue source each year, with the ability to have replacement revenue come from general revenue, lottery or rainy day funds, future new sources or other means.

The amendment also approaches the repeal in a fiscally responsible way by phasing out the tax over time, thus eliminating the need to raise taxes or cut programs, McPhail said.

Roberts said there are hurdles to overcome in amending the tax. In order for any changes to be made, it would take 67 votes in the House, 23 in the Senate and the voters of the state must approve as well.

“We’d like to see a way to allow a broad reduction in the tax that makes West Virginia more competitive in economic development and job creation, but we want to see a way that doesn’t defund public schools,” he said. “From what we are seeing, most people in West Virginia would like to see more jobs.”

Staff writer Kailee E. Gallahan can be reached at 304-626-1439 or [email protected] or on Twitter at @kgallahanNCWV.