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Tax credits are good only if they work

The idea behind state tax credits is to encourage investment in West Virginia. An effective tax credit program strengthens the state's economy by increasing economic activity in a particular industry, growing employment and enlarging the overall tax base.

It's a reasonable concept - if it works.

The key is knowing whether or not it works.

The West Virginia Legislature took the right step in the 2013 session by removing a two-year-old tax credit on flex-fueled vehicles.

The credit was originally intended to encourage investment in natural gas-fueled vehicles - promoting use of an abundant state resource.

It went sour when other types of fuel, primarily ethanol and gasoline mixtures, were added. Use of those additional fuels bring little or no additional economic benefit to West Virginia.

And the broad nature of the tax credit produced a shortfall in automobile sales tax revenues that may ultimately total as much as $100 million.

A state facing another possible $250 million budget gap doesn't need that.

The state has reviewed tax credit programs before, albeit on a spotty basis. According to the 2006 report of the West Virginia Tax Modernization Project, the state eliminated 10 ineffective tax credits, enacted three new ones, and updated three existing credit programs in 2002.

Still, tax credit programs need to be thoroughly evaluated and their results reported to the Legislature every year. Tax credit programs that work can be kept, and those that are ineffective should be terminated or revised.

Ideally, the state needs an effective and fair system of taxation that stimulates business investment while also bringing in adequate revenue without the need for specific credits that favor one industry or another. Such a system may bring the state's ranking on Forbes "Best States for Business" list up from its current 45th.

Tax credits can be effective, particularly when West Virginia is competing for business with other states, or when lawmakers see the need to support a fledgling industry or a new technology that holds much in-state promise.

Still, they should be used on a limited basis and should be terminated when they are not effective.

A tax credit needs to be a tool to spur investment and boost economic activity, not simply a tax giveaway.

 


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