CHARLESTON, W.Va. — If there’s anything Gov. Jim Justice and state Senate President Mitch Carmichael agree on, it’s eliminating the state personal income tax.
While Justice has stated the tax’s elimination as one of his goals for the future, Carmichael and other Senate Republicans went ahead and introduced a bill Thursday that would upend the state’s current tax structure.
It would repeal the consumer sales tax, the use tax and the personal income tax and phase out the corporate net income tax and enact a general consumption tax.
The lead sponsor was Senator Robert Karnes, R-Upshur. The bill was referenced to the Select Committee on Tax Reform, which was created by Carmichael.
The bill states, “The Legislature further finds it to be imminently fair that, with few exceptions, the financial support which each vendor and each other person would provide for the functions of state government through such a tax should be measured by the extent to which they participate in the marketplaces or acquire such goods and services for use.”
The personal income tax represents 45 percent or $1.8 billion of the state’s estimated fiscal year 2018 General Revenue Fund budget.
In an appearance today on “Talkline” with Hoppy Kercheval, Carmichael said the proposal is an attempt to position West Virginia’s tax structure competitively with other states.
“What we’re finding are the states that have no income tax are the most prosperous and are prospering to a greater degree in many cases than their neighboring states that have a high income tax and no consumer sales tax,” said Carmichael, R-Jackson.
Critics of moving away from an income tax and toward consumption taxes argue that doing so is regressive — that those with the fewest resources bear comparatively heavy tax burdens.
Carmichael came at the same point from the opposite angle.
“What the states’ that have been the most prosperous have done is, they shift from taxing the most productive elements of our society, the income producers and job creators, to a voluntary tax scenario in which you’re taxing consumption.”
Carmichael described making the changes in an orderly manner while being cautious about the state budget and the state economy.
He acknowledged that Justice started mentioning a goal of eliminating the state income tax during his State of the State address.
“Our goal is to eliminate the income tax as Governor Justice has mentioned,” Carmichael said. “We’re on the same page with him on that. We’re just going to put the pieces in place to move us in that direction.”
Justice has described eliminating the income tax if West Virginia’s economy improves. He has touted a highways funding program that he says will produce thousands of jobs and increase the state’s tax base.
That, the governor says, will allow the state to reverse tax increases he proposed to get through the state’s half-billion dollar budget gap and, eventually eliminate the income tax.
“The second you do that, you can take the payroll tax on the 48,000 new jobs and sunset the half-penny on the consumer sales tax and the business commercial tax of two-tenths of a percent. Get rid of it. Then you’re on your way to getting rid of our state income tax,” Justice said today on “Talkline.”
The Legislature has been discussing and studying this move for a couple of years. It will still be under scrutiny by lawmakers, tax experts and those who would be affected by the change.
The chairmen of the Senate and House finance committees discussed the intricacies of repealing the income tax during an appearance Wednesday on “The Legislature Today” on West Virginia Public Broadcasting.
“The numbers, if they prove to be the case, you could eliminate the income tax. That’s the proposal,” said Senate Finance Chairman Mike Hall, R-Putnam.
“I’ve challenged that proposal to make sure the revenue estimates are solid. I mean, it’s a conversation that even the governor himself said he would like to look at. And down the road, that’s all you could do. You would move from the income tax to some sort of sales tax.”
Hall agreed that the proposal will receive scrutiny.
“There will be a lot of questions about it,” he said. “But it’s going to be out there for the public’s consideration. Obviously, if you don’t have to pay any income tax, like several states don’t, the theory is, you could attract some people here.”
His counterpart, House Finance Chairman Eric Nelson, used numbers showing the state’s current reliance on the taxes being affected to size up the proposal during his appearance on “The Legislature Today.”
“Personal income tax — $1.8 billion. Consumer sales tax — $1.3 billion,” said Nelson, R-Kanawha.
“Seven states do not have personal income tax. I think they’ve shown their economic growth is much greater than many of the other states. That is a bold move. And I think both of us through co-chairing the tax reform committee have had a lot of meetings on this. Let’s have some debate.”
Nelson said lawmakers representing a particular kind of district might be especially concerned.
“Fifty-seven members of the House — their district borders another state,” Nelson said. “And the biggest concern I would have would be border-jumping because our consumer sales tax may be too high relative to another state.”
The West Virginia Center on Budget and Policy, a nonprofit think tank that tends to lean left, is concerned about the tax proposal and issued a policy brief saying so Wednesday.
“It’s really terrible policy. It would exacerbate poverty,” said Ted Boettner, executive director of the West Virginia Center on Budget and Policy, in a telephone interview.
“People wonder why the white working class is suffering and has problems. This is something that exacerbates that problem.”
The center disagrees with the claim that states with no income tax are doing better economically.
“It’s a strategy that’s been tried over and over in other states with little or nothing to show for it, other than revenue losses,” Boettner said.
Kansas moved to cut its income tax in 2013, but today is moving to increase personal income taxes and reinstate taxes on some businesses to cope with its own budget shortfall of more than $500 million in the coming fiscal year.
States best equipped to make a move like this are those that have an influx of wealth, said Carl Davis, an analyst for the national Institute on Taxation and Economic Policy.
“Unless you’re in a situation like Alaska and you manage to stumble onto a huge pot of new tax revenue, income tax repeal involves very difficult tradeoffs,” Davis said.
“The tradeoffs involve, in all likelihood, most West Virginians would end up worse off under income tax repeal than they are right now.”
Davis and his organization contend that such a change to the tax code would be regressive.
“The states that don’t have income tax right now, they end up being higher taxed than average for low- and moderate-income families because they have to rely more heavily on consumption taxes or gross receipt taxes,” Davis said.
“Most taxpayers are actually paying more in consumption taxes than they are in income taxes. This is a change that would overwhelmingly benefit taxpayers with very large incomes.”
To make this change while West Virginia already faces an estimated $500 billion budget gap is unusual, Davis said.
“To be talking about income tax repeal at a time when the budget is already in bad shape, it’s unusual,” he said. “It’s out of step with what we’re seeing in other states.”