Among the most challenging fiscal issues facing the 2007 West Virginia Legislature are how to fund: (a) adequate pay raises for teachers and other public employees; (b) much-needed highway maintenance; and (c) broader health care coverage for uninsured citizens.

These immediate needs arise against a backdrop of the state's crushing burden of debt incurred, in large part, through promises of retirement pay and health care for its public employees. Although, in his State of the State address, the governor vaguely referred to significant government cost savings that have been identified, unless the state's tax base is expanded, satisfaction of these funding needs will require a highly contentious, zero-sum competition whereby there will be winners and losers.

Lost in the gritty in-fighting among the members of the pubic expenditure community that has already ensued is the role of fundamental tax reform. That is the case, in part, because many view tax reform as simply tax relief and, as a result, see its advocates as nothing more than another competing interest in the zero-sum struggle over a fixed pool of tax revenues. There is another view, and the clues to its importance can be found in the rhetoric of public policy planners.

To emphasize their interdependence, three of the factors cited as essential to a healthy, prosperous society often are referred to by such planners as "capital." Specifically, they speak of human capital and public capital, along with private invested capital, when discussing how good public schools, quality health care services and well-developed public infrastructure, such as roads and water and sewer systems, along with private capital, are critical societal building blocks.

In advocating the expenditure of public funds on human capital and public capital, the point is frequently made that such capital is vital to attracting private capital investments. A corollary point that seems less frequently made -- much less acted upon -- is how entirely dependent are investments in human and public capital on the taxes generated by private capital.

Thus, it would appear that we are faced with the classic "chicken-or-egg" dilemma of needing taxes from private capital to pay for the human and public capital that is necessary to attract the private capital in the first place. However, those confounded by such a dilemma overlook the genius of the free enterprise system. In it is the critically important distinction between what motivates private investment and what investments in human and public capital require.

Simply put, investments in human and public capital depend almost entirely on taxes generated by private investment capital. Conversely, while human capital and public capital are important elements to attracting private capital, they are not the exclusive basis of it. Aside from market demand, the most critical factor in attracting private investment to meet that demand is a stable, low-cost environment that is conducive to private investment.

Explained in the negative, circumstances not conducive to private investment are those where the rules are unpredictable and the prospects for a profitable return on private investment are hampered by heavy costs. An unfair civil justice system is one example of such circumstances. A tax structure that punishes capital investment is another.

Thus, while we can debate the merits of maintaining the current level of gasoline taxation to fund investments in our roads, or the adequacy of the proposed increases in the pay of public school teachers to improve our education system or the need to extend health care coverage to more of our citizens, we will be struggling with winners and losers among those needs, if we do not, concurrently, have the will to stop punishing private capital investment through our tax structure.

However much we see a need to improve our public school system, we know from the make-up of our exiting population that it already produces more well-educated graduates than we have good jobs to employ them. However much we need to extend health care insurance coverage, we know we do not have enough private employers to provide it or pay taxes to the government to provide it. However much we see a need to maintain and upgrade our public highways, we don't have enough traffic to generate the tax dollars to fund those expenditures.

Thus, expanding the tax base of the state is critical to the long-term resolution of these major challenges we face. That expansion will not be achieved by heavier taxation of the working poor of whom we have an inordinate share. Fortunately, the Manchin Administration and the Legislature acted in the recent special session to ease, somewhat, the unconscionable burden this state had long imposed on low-income workers and families. Those relatively few income tax dollars thus relinquished by the government will, instead, be spent on goods and services that will, via a multiplier effect, generate many more sales tax dollars.

Likewise, tax base expansion will not be achieved by heavier taxation of capital-intensive businesses. As the Manchin Tax Modernization report recognized, we already impose far heavier tax burdens on private capital than do most other states. The worst offenders in terms of taxes that punish job-creating private capital investment are the business franchise tax and the corporation net income tax. Indeed, those taxes seem to be designed to discourage capital investment in the manner they generate tax dollars.

Specifically, by heavily taxing invested capital and reinvested earnings, the franchise tax discourages both. By heavily taxing the annual profits of only typically larger companies that are organized in a manner necessary to attract significant amounts of capital, the corporation net income tax discourages the investment of that capital and the earning of those profits here.

Thus, to increase the amount of tax revenues needed to invest in human and public capital, we cannot impose more taxes. Instead, we need more taxpayers making and spending more income. In seeking more taxpayers, we also must recognize that to gain that added dollar we extract from a business in taxation, we give up many more tax dollars from the pay and benefits to its employees that the business will not be able to incur or increase because the added tax dollar is a cost that competes with those expenditures and displaces its profit.

Capitalists invest in labor by paying salaries and benefits and in goods based on a plan to use those resources to make a profit. For each dollar invested, the capitalist is anticipating that he or she will receive more than a dollar in return. As that capitalist's dollar is so expended, due to an even more powerful multiplier effect than applies to consumer purchases, the income and sales taxes generated far exceed the amount of taxes generated if those expenditures were not made. However, for each dollar the capitalist has to pay in taxes, he will not have a dollar to invest, and the multiplier effect will not be able to turn that dollar into more dollars either for the capitalist or the tax collector.

Therefore, to give West Virginia the best chance to raise public employees' pay, to extend health care coverage to all of its citizens and to maintain and upgrade its public roads, job one is reform of our private capital punishing business tax structure. Obvious places to start are the phase-out of the business franchise tax and the reduction, to a more competitive level, of the anachronistic corporation net income tax. Otherwise, we are doomed to a zero-sum game resulting in winners and losers among these crucial needs.

Michael E. Caryl is a partner with Bowles Rice McDavid Graff & Love LLC in Martinsburg. He was West Virginia tax commissioner from 1985 to 1988.