The West Virginia State Senate has started work on what may turn out to be the most controversial legislation this session—the effort to get rid of the property tax on manufacturing inventory, machinery and equipment.
This is a burdensome anti-business tax that punishes investment in new equipment and discourages companies from maintaining inventory in the state. The tax makes West Virginia an outlier among the states, but eliminating it won’t be easy.
The tax is in the state Constitution so removing it would require an amendment. Two-thirds of the Senate and House would have to approve the amendment and then voters would have the final say.
The Senate’s 20 Republicans may be able to convince three Democrats to join them, but the House is a heavier lift. The majority GOP would need at least eight Democrats to join their ranks.
And then there’s the issue of lost revenue.
The tax generates about $100 million a year for county governments and public education. Schools get about one-third of the money and they would be made whole through the state school aid formula, but counties would have to depend on the legislature to back-fill their lost dollars.
Additionally, some Republican Senators want to eliminate the property tax on vehicles as well. That would make the budget hole closer to $250 million annually.
For those reasons and more, the Constitutional Amendment approach is a long shot. However, there is another way.
The Justice administration and legislative leaders are talking about an alternative plan which would change the way inventory, machinery and equipment are taxed. Under the proposal, the tax rate would be reduced from 100 percent of appraised value to just five percent, or “salvage value.”
For example, currently a company with $1 million in inventory would probably pay about $15,000 in taxes on that property. Under the salvage rate, the amount would be closer to $750.
Under the proposal, the tax on inventory would phase out over three years beginning July 1, 2021. The estimated $30 million in lost revenue would be made up from the General Revenue Fund and through the school aid formula.
The salvage rate on manufacturing machinery would take effect upon passage of the bill and would be applied only to new equipment, so there would be no lost revenue to make up.
Appraising at salvage rate has been used in West Virginia since the 1970s. The state has applied it to windmills, airplanes, some broadband infrastructure, molds, jigs, templates and patterns used in manufacturing, to give a few examples. But this would be the broadest application to date.
For years, West Virginia has jumped through legal hoops for every major business locating in the state to help it avoid this punitive tax by taking ownership of the property and leasing it back to the operator.
It’s time to end this fiction which, by the way, also discriminates against manufacturers that are trying to make it on their own without the states’ convoluted accounting.
The Constitutional Amendment eliminating the tax would be best, but the political realities being what they are, the salvage rate proposal might be the most practical way to get this done.