CHARLESTON, W.Va. — A fiscal note assessing the impact of the proposed switch from an income tax to a broad, 8-percent consumer sales tax estimates a revenue decline of $870 million over four years, but the senator leading the state Senate’s Select Committee on Tax Reform says that doesn’t spell doom for the bill.
Senator Robert Karnes said the revenue estimate provided by the state Department of Revenue isn’t as high as supporters of tax reform might have wished, but it’s not a deal breaker.
“My initial takeaway was that it fell within the range of what we expected,” Karnes, R-Upshur, said Friday after a state Senate floor session. “Obviously without having a pre-prepared fiscal note, we had to sort of guess what we might seen in terms of revenue. It’s on the lower end but within the range of what we’d expected.”
Karnes continued, “Some adjustments will need to be made in the bill to affect that, but we sort of shot for a middle ground when we wrote the bill. So it could have gone either way. It went this way. We believe there’s plenty of room in the bill to work with the numbers that have been provided.
“So, straight up, I would say sure I wish it would have been a little higher but we can work with what we’ve got.”
The Senate’s Select Committee on Tax Reform put off its usual Friday afternoon meeting to absorb the conclusions of the fiscal note. At 9 a.m. Monday, the committee will hear from the author of the note, Mark Muchow, deputy secretary of the state Department of Revenue.
Karnes says he is looking forward to hearing Muchow’s perspective.
“Obviously there’s a lot of different line items part of that fiscal note. Hearing some of that detail, I think, will be good for the committee because it helps us understand not just the overall what the number equals but where those numbers land,” Karnes said.
“All along, we’ve said there may be some exemptions that need to stay, some exemptions that need to go as part of this process. That’s part of the discussion I would assume we need to have on Monday, related to the details behind the fiscal note.”
The bill, as it is currently written, would establish a new 8-percent consumer sales tax on purchases including:
- direct use purchases by businesses engaged in transportation, communications, public utility service, gas storage, transmission, and research and development
- professional services including a range of items such as legal services, accounting, engineering, advertising
- non-medical professional services such as legal services, accounting services, engineering services, architecture services, real estate services, brokerage services, advertising services, and funeral services, among others
- personal services such as hair, nail, and skin care and non-medical personal home care
- public utility services such as electricity, natural gas, water, sewer, telecommunications, solid waste, and intra-state transportation
- contracting services with an added exemption for material purchases used by contractors in fulfilling their contracts
- taxes on smaller items or services that had been exempt like electronic data processing, sales of farm products by the producer, health fitness services, newspaper sales by route carriers, mobile homes at full rate, and numerous miscellaneous business input purchases
The higher tax level of 8 percent plus the broadening of the tax base would result in additional revenue of $1.30 billion to $1.35 billion a year, according to the estimate by the state Department of Revenue.
But other West Virginia taxes, particularly the corporate net income tax and the personal income tax, would be eliminated or phased out.
The state Department of Revenue predicts a financial bump the first year as the new consumer sales tax goes into effect but as the other taxes haven’t yet been phased out.
But that’s followed by increasing revenue losses. The fiscal note shows gains in revenue from the consumer sales tax being swamped by losses from phasing out the corporate net income tax:
FY2018 — +$1.20 billion – $650 million =+$550 million
FY2019 — +$1.33 billion – $1.70 billion= -$370 million
FY2020 — +$1.36 billion – $1.80 billion = -$440 million
FY2021 — +$1.39 billion – $2.00 billion = -$610 million
Over the four-year period that was examined, gain from the first year followed by three years of losses results in an $870 million total revenue decline, according to the fiscal note.
“The proposed bill represents the most massive tax reform effort of any state in recent memory,” Muchow wrote in the fiscal note.
“Most states commit significant resources toward adequate measurement of tax reform impact on businesses and residents prior to adoption of a significant change. The resources and timeframe for the preparation of this fiscal note are woefully inadequate to properly measure the cumulative extent of all consequences associated with proposed changes.”
Muchow concludes that the overall desire to make West Virginia a more inviting place to do business would actually be undercut by the new tax structure.
“It is presumed that one of the possible objectives behind this proposed bill may be greater economic growth over time, he wrote. “However, the provisions of this bill effectively increase taxes on business inputs by an amount that is at least double the potential income tax savings on business profits.”
Critics of the proposal have called it regressive, meaning that it would disproportionately affect lower-income West Virginia residents.
Muchow concludes, “The greater tax savings would occur for a number of individuals with wage and salary income and those with retirement income.”.
In a brief interview Friday, Karnes singled out that statement as a positive.
“Another thing I would note — and this is something I’ve argued from early on – is even the tax department seems to agree that people that are most likely to see a reduction in taxes are wage earners and salary earners and retirees,” Karnes said.
“This has been a question that’s been raised by some of the people who are maybe not heavily supportive of this concept that this was going to land most heavily on wage earners, salary earners and retirees, and instead the tax department agrees with what my assessment was – that those people are the people most likely to see a benefit from this and see a lower tax burden.”
But the Department of Revenue says the state’s businesses could be hit in undesirable ways.
“Significantly higher business tax burdens could, in effect, produce undesired outcomes,” Muchow wrote. He concluded that businesses will pass on much of their new cost.
“All taxes are ultimately paid by individuals,” Muchow wrote. “However, higher indirect taxes on business purchases could be priced economically in terms of some combination of lower wage income, lower employment, and higher consumer prices.”
West Virginia businesses also could lose sales in border counties, Muchow concluded.
“The Tax Department anticipates significant leakages due to compliance and economic issues associated with the increased tax rate for goods and services,” Muchow wrote.
“It is plausible that individuals may take advantage of lower tax rates in surrounding states, particularly within border communities. Due to the difficulty in anticipating consumer behavior, and especially on a restricted timetable, the estimates enclosed in this brief analysis will not necessarily reflect the full extent of the impacts such consumption shifts will have on revenues.”
The coming week will be the halfway point of the 60-day legislative session. Muchow and the Department of Revenue urged a longer, deeper study before moving forward with the tax reform proposals being considered by the Select Committee on Tax Reform.
“A thorough independent analysis of the economic consequences associated with massive tax changes is strongly recommended,” Muchow wrote.
There are other challenges for the bill, as well.
Its inclusion of an 8-percent tax on food is likely to make it a tough sell in the House of Delegates, where Speaker Tim Armstead was one of those who pushed hardest to eliminate it. “We’ve always felt this was an immoral tax. It was the wrong thing to be taxing the essentials of life and it’s been a top priority of the Republicans in the House for more than 20 years,” Armstead said in 2013.
Governor Jim Justice has endorsed doing away with the state income tax — but only after the state has found its economic footing.
“We don’t think that’s possible at this time,” Justice’s chief of staff, Nick Casey, said while speaking on a budget panel late last month. “We think it should be studied.”
It’s not completely clear how broad support for the bill would be in the Senate, where it started. Senate President Mitch Carmichael has backed the effort.
One of the original Senate sponsors, Patricia Rucker, a Republican from Jefferson County, withdrew her sponsorship four days after the bill’s introduction. Senate Finance Chairman Mike Hall never did sign on as a sponsor.
Last week while appearing on MetroNews “Talkline” with Hoppy Kercheval, Hall said he remains interested in the findings of the Select Committee on Tax Reform.
Hall’s comments were made prior to the release of the fiscal note. At the time, he said, the committee’s work could be an outside-the-box way to resolve the state’s estimated half-billion budget gap for the coming fiscal year.
“It may be difficult to do. I recognize that. It’s got a lot of moving parts to it,” said Hall, R-Putnam. “But the anticipation is that maybe it has a little more revenue in it than the current tax code does. That’s the hope of the chairman of that committee.
“And at that point, that may be how you fill that gap. I’d say that’s a possibility, but I’m not counting on it right now.”