Breaking It Down
Over the course of his career , Laffer has worked with 20 state governments and U . S . territories , including Maryland , Washington , California and Puerto Rico , on tax reform , and he is currently working with eight gubernatorial candidates across the country .
According to Laffer , repealing West Virginia ’ s personal income tax is not impossible or irresponsible . However , the key to driving economic growth in any state by reforming the tax code is looking at it in its entirety , rationalizing each individual tax and then deciding which ones to keep and which ones to expand .
For example , in 2018 , Laffer created a detailed analysis of the spending , taxes and outcomes of the state of Missouri .
“ Five years ago in Missouri , there were 2,339 separate sales tax jurisdictions with rates ranging from 4.5 % to 12.5 %,” he says . “ With a population of 6 million , the average sales tax jurisdiction covered approximately 3,000 people , which showed no relationship between the population of the jurisdiction and its sales tax rate .”
Within each of these sales tax jurisdictions , there were as many as eight separate authorized entities empowered to impose a sales tax , each of which would be stacked on top of each other .
“ Within each of these jurisdictions , there were also upward of 20 categories of goods that had separate sales tax schedules — think groceries , restaurant fees , diesel fuel — and among purchasers , the people who pay the sales tax , there were six separate categories with separate sales tax schedules . Think 501 ( c )( 3 ) s , developers , producers — some of these people pay some sales taxes but not others ,” Laffer explains . “ I say all that to say , West Virginia ’ s tax system is riddled with this too , and you know who knows about it ? Nobody .”
Rationalizing the Tax Code
According to the West Virginia State Tax Department , there are currently 139 local tax jurisdictions . While the state sales tax rate is 6 %, local jurisdictions are collecting an additional 0.246 % on average , making it as high as 7 % in some areas . The state is also made up of 234 municipalities , and of those , 117 impose a business and occupation tax in some form . Taking an inventory of a state ’ s entire tax code across jurisdictions typically reveals hundreds of different taxes being implemented , most of which are producing a very small percentage of the state ’ s overall tax revenue and yet are ignoring significant burdens on income earners in the state .
While an immediate repeal or phase out of the state ’ s personal income tax , sales tax or property tax might seem like a win for the people , Laffer says the first step in reform must be rationalizing existing taxes — not cutting them .
“ What does that mean ? It does not mean you cut the taxes or raise the taxes . You rationalize them ,” he says . “ You take rate reductions and get rid of all deductions , exemptions and exclusions to make the tax code as rationalized as possible so that everyone pays the same tax rates , and they all have the same taxable income base .”
Laffer says the first step to rationalizing West Virginia ’ s tax code would be to fix the state sales tax so there is one rate for everything .
“ Sales tax should not be a revenue loser or revenue gainer . It should be static revenue neutral ,” he says . “ I would eliminate all the different authorities and their ability to raise taxes in all these special little districts and then implement a formula for allocating the revenues back to cities , counties and local districts so no one is advantaged or disadvantaged . Have one sales tax and an allocation formula for where the revenues go , and that is it . That is what I mean by rationalization .”
After each tax has been examined and rationalized , the next step under Laffer ’ s plan would be to dramatically reduce the number of taxes being implemented .
“ Someone needs to look through all the different taxes and find the ones that don ’ t do anything but clog the arteries of the state of West Virginia ,” he says .
When referencing a 2012 study on Louisville , KY , Laffer pointed out that manufactured goods in transit were subject to taxation across multiple tax jurisdictions , including 776 authorities with the power to implement a tax and 81 city-level districts with the authority to tax merchants ’ inventory under the state ’ s property tax code .
“ This is true in West Virginia , too ,” he says . “ You have to take those taxes , put them all together and ask , ‘ How do we not raise or lower tax rates but instead , rationalize the tax codes so they are not so arduous ?’ You do the same thing with the income tax . Then the corporate income tax . Then severance taxes . You rationalize all your major taxes by getting rid of the small , inconsequential things that have no place in West Virginia . For each major tax , there should be one tax rate and one tax base for everyone .”
" The key to driving economic growth in any state by reforming the tax code is looking at it in its entirety , rationalizing each individual tax and then deciding which ones to keep and which ones to expand ."
Getting to the Good Part
“ Once a state has a rationalized tax system , then and only then will you see miracles occur from these changes ,” Laffer says .
So how does a state raise revenues once it has rationalized its sales , personal and corporate income , property , severance and sin taxes ? How do leaders decide which taxes should be eliminated , if any , and which should be expanded ?
“ You need to look at your major sources of revenue and ask , ‘ How do we best collect the revenues here and do the least damage to the state ?’” says Laffer . “ You need to ask which taxes work best for the state of West Virginia . The sales tax ? The corporate income tax ? The personal income tax ? Look at all these taxes and ask which are the worst for the state and which do the least damage .”
Once the fat has been trimmed and the tax code is made simpler , then is the time to repeal the taxes that are the
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