In January 1999, the Center for Business and Economic Research at Marshall University submitted a report detailing the economic effects of the proposals put forth by the Commission on Fair Taxation. While the proposals were numerous, the two recommendations that had the most positive impact on West Virginia's economy were (1) the elimination of the state's personal property tax on inventory, machinery and equipment and (2) the elimination of the Business Franchise Tax (BFT).

The reason that the repeal of these two taxes has such a beneficial influence is that each taxes capital investment and, thus, removing that burden, helps to create jobs. Politicians love to talk about economic development and job creation. But the truth is that one thing -- and one thing only -- creates jobs, and that is a person taking a risk and making a capital investment.

Thus, in regard to West Virginia's tax system as a whole, the personal property tax on inventory, machinery and equipment and the Business Franchise Tax are truly job killers.

If the goal of real tax reform is the economic growth of the state, repealing the personal property tax on business assets and the Business Franchise Tax is essential.

A closer look at the two taxes reveals the detrimental impact of each.

The Business Franchise Tax is levied on a business' capital as measured by its net worth. No matter how a business is formed, this value represents the same thing - the amount of money a business has available to invest and reinvest to grow and create jobs.

Although it is the state's sixth largest revenue producer, the BFT is clearly an anti-growth, anti-capital formation tax especially for small firms. Furthermore, the relatively high rate decreases the state's competitive position, and the BFT has created extensive enforcement problems due to the ability of taxpayers to manipulate the tax base to avoid the tax.

Like the BFT, the personal property tax on business assets is a tax on capital investment. As Gov. Joe Manchin's tax modernization panel noted, most states have repealed, in total or in part, the tax on personal property. In West Virginia, the personal property tax falls predominantly on inventory, machinery and equipment and vehicles, and that creates a competitive disadvantage for West Virginia businesses.

The personal property tax has a very strong negative effect on business. The tax is correctly identified as a tax on jobs.

The tax on inventories discourages investment in retail and wholesale operations. It discriminates against in-state businesses that carry large inventories relative to sales and weighs in favor of firms that have little or no stock. Out-of-state mail order and Internet sellers also are favored because they do not pay the tax on their inventories.

The personal property tax on machinery and equipment discourages the investment of capital. This investment is needed to raise the productivity of West Virginia workers and to make the state's producers more competitive. With the vast majority of West Virginia's output being sold in other states or overseas, being competitive is essential.

For example, let's assume a company buys a piece of machinery for $100,000. For the purposes of this example, let's assume that we depreciate the machinery $10,000 per year for 10 years.

Theoretically, the amount of the machine that we use each year is $10,000. Yet, we pay taxes on $100,000 in value the first year; $90,000 the second year; $80,000 the third year and so on despite the fact that the economic consumption is only $10,000. After 10 years, we've paid taxes on a total value of $550,000 for a $100,000 piece of machinery.

More importantly, if a company wants to buy a new piece of machinery in the seventh year and the new machinery costs $150,000, the company's taxes will jump from a tax base of $30,000 to $150,000. That means the company's taxes will be five times higher than they would be if it used the old equipment.

The problem with this situation is that by not buying new equipment, the workers will be less productive and the company will be at a competitive disadvantage.

Both the state (for education) and local governments rely heavily upon personal property taxes. In 2005, municipalities and counties received $25 million and $88 million, respectively, from the tax on personal property. Moreover, our schools received more than $229 million from the personal property tax. In total, state and local governments collected more than $344 million, or nearly one-third of all property taxes, from the tax on personal property.

Even the most ardent tax cutter would concede that eliminating such a significant source of revenue would have a devastating effect on the ability of government to perform even necessary services. While affirming the destructive effects of the Business Enterprise Tax and the personal property tax on business assets, Gov. Manchin's tax reform group constantly warned of the need for replacement revenues.

In 1999, the Commission on Fair Taxation was, likewise, mindful of the need for fiscal responsibility. Consequently, the Center for Business and Economic Research at Marshall University and the state Tax Department offered a plan that would eliminate the two major job-killing taxes while maintaining revenue sufficiency.

In short, the plan called for the funding of schools through the broad-based business taxes; the redistribution of the most of the current school levy to local governments; and a "hold harmless fund" that used other state revenues such as the severance taxes.

This approach achieved four important objectives: (1) eliminating the job-killer taxes; (2) no increase in property taxes; (3) state and local governments were funded at the same level; and (4) local governments were not required to raise taxes.

I have heard critics say that "rearranging" revenue sources would have no economic effect. They're wrong. Eliminating the job killers can have a significant impact, and there are 1,046 pages of work completed in 1999 that prove that it can be done while maintaining fiscal responsibility. If we are to move forward with "real tax reform," we can't ignore the devastating economic impact of these two taxes, especially the personal property tax.

Rob Capehart is an associate professor at Marshall University and of counsel to the statewide law firm Steptoe & Johnson PLLC. He previously served as secretary of Tax and Revenue for West Virginia, where he chaired Gov. Cecil H. Underwood's Commission on Fair Taxation. He currently is a Fulbright Scholar, teaching and conducting research in Moldova.