Thursday, September 2, 2010

Putting West Virginia Last (for publication 9/17/10)

One would think that a candidate for political office would sooner live on a diet of rat droppings than support a tax bill that does less for his or her state than it does for every other state in the union. Especially if that bill also put the state at a competitive disadvantage and harmed the nation as a whole by increasing the deficit while generating little economic growth.

Yet Representative Shelley Moore Capito and Republican senate candidate John Raese are doing just that. Both support renewal of the income tax cuts passed under the George W. Bush administration.

But, wait! It was a tax cut. That should be a good thing, right? Besides, how can a tax cut be worse for West Virginia than it is for other states?

Tax cuts aren’t good when they produce $2 trillion in deficits in their first six years and continue to do so today. They are worse when they largely fail to stimulate demand in the marketplace because they lavish more savings on the top 6% of taxpayers than they do on the remaining 94% who would actually spend the money on houses, cars, and other goods and services. And they are the worst when they begin to tear at the fabric of society by increasing income inequality not just between the super-wealthy and the rest of us, but between regions of the country.

Nationwide, the average taxpayer sees 50% more in savings from the Bush tax cuts than does the average West Virginian. For every dollar West Virginians save, the rest of America saves $1.50 and Connecticut taxpayers, the nation’s wealthiest, save $2.50.

That puts West Virginia dead last in benefits derived from the Bush tax cuts and we just keep falling farther behind. Meanwhile, as the federal deficit grows and the funds to pay for it are shifted to other taxes that West Virginians continue to pay at existing rates, our share of the national tax bill actually increases.

So, why would the aforementioned congressional candidates from West Virginia support such a policy?

They would argue that these inequities are inevitable, that because the rich, who by and large do not live in West Virginia, pay more in taxes, they’re also bound to see the greatest savings when taxes are cut. Thus, it’s unavoidable that individuals and regions of the country that are least in need of tax relief will get most of it and those most in need will get the least.

The good news is, it’s not true. In fact, it’s eminently possible to design tax policies that produce comparable savings, stimulate more economic activity, and do so more equitably and in a way that will benefit the country as a whole and West Virginia in particular.

First, income tax brackets should be made more progressive by allowing the Bush tax cuts to lapse for those making more than $250,000 per year and by reducing taxes on middle and lower income taxpayers by an equal amount. This will increase demand for goods and services and reward workers who have seen the least income growth in the past ten years. Put another way, the savings will be used to purchase groceries, homes, and cars in Martinsburg, Romney, and Huntington rather than to pad trust funds in Greenwich, Darien, and Westport.

Second, we should begin paying down the deficit by creating more tax brackets for the super- wealthy. As James Surowiecki recently pointed out in the “New Yorker” magazine, at present our top tax rate of 35% kicks in at an annual income of $375,000and even someone making $175,000 pays 33%. As a result, local businesspeople, doctors, dentists, and other professionals who earn $200,000 a year find themselves with nearly the same tax rate as Bill Gates, Tiger Woods, and Warren Buffett who can make a hundred million dollars a year. Absurd.

The addition of high-end tax brackets would bring in tens of billions of dollars per year much of which should be used to reduce the deficit, but some of which should be devoted to another initiative that could prove invaluable to West Virginia and other economically depressed regions of the country.

William Grimes, former CEO of ESPN, the sports network, and a native West Virginian, made a fascinating proposal a few years ago during a commencement speech at his alma mater, West Virginia Wesleyan College. Observing West Virginia’s withering private sector economy and the state’s comparative lack of venture capital and other assets that are necessary to attract entrepreneurs, Grimes proposed that the state establish a venture capital fund to provide necessary incentives and means for West Virginia entrepreneurs to start businesses and for out-of-state entrepreneurs to locate start-ups here.

Funds from the new tax brackets used in this way could reignite private sector entrepreneurial activity in West Virginia and in economically distressed places nationwide.

The combination of these policies would have the beneficial effect of reducing deficits, stimulating the private sector economy, and doing so for families and in places where stimulus is most needed. We can only hope that in the upcoming consideration of renewal of the Bush tax cuts and future tax bills our representatives will fight for these kinds of tax policies rather than those that literally put West Virginia last.