Delegate John Doyle
 
 

Corporate, Sales, and Personal Taxes

 Corporate Income Tax and Delaware Holding Companies

West Virginia has one of the highest corporate income tax rates in the nation, at 9%. The national average among the states that have corporate income taxes is 7%. However, a lot of money that is owed to West Virginia on this tax goes unpaid.

In our state, corporations and their subsidiaries are permitted to report income taxes as "separate entities." This makes us vulnerable to tax avoidance using a business entity called a "Delaware holding company".

Here is how it works. A Corporation sets up a wholly owned subsidiary in a state without a corporate income tax, such as Delaware or Nevada. It then claims that much of the business actually done by the West Virginia entity was done by the entity in the state without a corporate income tax. This is difficult and expensive to prove.

Some of you who follow Maryland politics in the Washington Post may recall that the Maryland legislature wrestled with this problem in its last session. Speaker of the Maryland House of Delegates Michael Busch and House Ways and Means Committee Chair Sheila Hixson led the unsuccessful fight to collect corporate income taxes from Delaware holding companies.

The Multi-State Tax Commission, a clearinghouse for tax information among the states, believes that West Virginia loses $40 million to $50 million per year because of its "separate entity" reporting rule. Now, I think that estimate might be too high. But, I'm convinced we lose somewhere around half that much.

States that require "unitary" or "combined" reporting do not lose nearly as much as "separate entity" states like West Virginia and Maryland. I think it's time we changed our reporting rules and required corporations and their subsidiaries to report as one.

Some will call this proposal a tax increase. As is the case with the Internet sales tax, they will be wrong — it is not. It is an attempt to more fairly and evenly collect a tax that is now being paid by only some of the people who actually owe it. It is an attempt to "level the playing field," so that all are treated equally.

If we collect a tax from only some of the people who owe it, we are not being fair to those who do pay their fair share. And, if we can collect the taxes already on the books from all who do, in fact, owe them, we might at some future date (when the economy has improved) be able to lower the rates on some taxes for all who owe them.

Sales Tax and Personal Income Tax

During the debate on increasing the tax on cigarettes from 17 cents per pack to 55 cents, several legislators raised the question of repealing, or at least reducing, the sales tax on food. I have long opposed the "food tax" as extremely regressive. While all sales taxes are regressive, few have the impact of the tax on basic foods.

I must say, though, that I found it curious that this issue would be raised at a time that we must find increased revenues, rather than at a time when we might have the luxury of reducing them. The proposal to increase the cigarette tax was intended to help fill a $250 million hole in the state budget. Next year, we will have to find an additional $150-$180 million in additional taxes or in budget cuts, beyond the money needed this year.

And, that will be required even if we do not provide any salary increases for public employees (teachers, social service workers, state troopers, etc.). Many of us want to try and find some money for salary increases next year. I think it's unrealistic to think about cutting any tax in the foreseeable future.

But, should the state find itself, at some future date, able to consider tax reductions, is the food tax one that should be reduced? On its face, I would answer the question "yes." I believe that a fair tax is one based on ability to pay. As I mentioned above, the sales tax fails this test, and it particularly fails if the item to be taxed is one we would all agree is a necessity.

A wealthy person needs as much food as a poor person. So the poor person must part with a much greater percentage of his or her income to be able to stay alive. The same is true of other necessities, like shelter and clothing.

So why would a poor state like West Virginia place a fairly heavy tax on such a necessity as food? Poor states tend to place a heavier share of the overall tax burden on poor people, because that's where a greater portion of the money in their economies is located. It's mostly wealthier states, like Maryland, that exempt food from taxation. They can afford to, because they have enough wealthy people living there to carry a greater share of the tax burden.

Moreover, West Virginia depends more heavily than most states on sales taxes, generally. Our income taxes are, collectively, at about the national average, and our property taxes are (again, collectively) well below the national average. We're in the bottom five states in our dependence on property taxes. Every tax falls into one of those three basic groups.

This actually makes some sense now, although it might not have until quite recently. Tourism is the fastest growing industry in West Virginia. By relying heavily on sales taxes (including the one on food) we transfer some of the burden of paying for public services from West Virginians to those very nice people who visit us. Tennessee,which also depends a great deal on tourism, is an extreme example of this. That state has an 8 per cent sales tax (on everything), and no income tax.

Now, I wouldn't advocate we go that far. This can cause serious problems during recessions. In fact, Tennessee is in much worse fiscal shape right now than most states, because of her tax structure.

The tax structure of a state should, I believe, reflect a pretty even balance between sales taxes, income taxes and property taxes. And I think there should also be a relatively equal distribution of each of those kinds of taxes between businesses and individual citizens. I use terms like "relatively" and "pretty even," because there should also be adjustments in all these distributions to reflect the particular state's economic potential.

Perhaps what we should consider (again, at whatever time in the future we can realistically consider tax cuts) lowering the income tax on lower income West Virginians, rather than lowering or eliminating the sale tax on food. This way, we give the same tax break to our lower income folks, but still collect the food tax from tourists.

Aha!, you say. Wouldn't we accomplish that by eliminating the tax on basic foods purchased in the store, but not on prepared foods (bought either in the store or in a restaurant)? Actually, no. For a long time I thought we could, but more and more tourists are staying in condominiums, rather than hotel rooms. They're cooking more of their own food, and buying some of it after they arrive at their destination.

Plus, eliminating or reducing the sales tax on food gives the tax break to wealthy persons as well as poor persons (though certainly not as great a break, in percentage of income). Lowering the income tax on only the lower brackets would not give such a break to wealthier folks.

The task force appointed a few years ago by then Governor Cecil Underwood in fact concluded that we should give an income tax credit to reflect the first several hundred dollars paid in taxes on food by each citizen each year, rather than eliminate or reduce the "food tax" itself. At the time I didn't think that was such a good idea, but I'm having second thoughts.

All this is intended as food for thought…………….. (that pause was to allow you to complete your no doubt uproarious laughter). Some day, we may be able to have a meaningful discussion about tax reduction. But that day is, I suspect, a few years off.