CHARLESTON, W.Va. — While the state Senate’s Select Committee on Tax Reform goes back to the drawing board for its proposal to eliminate the state income tax in favor of a broad-based consumption tax, the House of Delegates is preparing its own tax reform bill to pop out this week.
The House’s proposal is envisioned as close to revenue-neutral so it might not be a factor in budgeting efforts to close the estimated half-billion-dollar gap for the coming fiscal year.
Rather than repealing the income tax, the House’s version would tinker with it, potentially simplifying its tiers. It also would broaden the consumer sales tax and attempt to eliminate exemptions.
For those keeping track at home, the House’s tax reform plan will now join the Senate’s proposal, which is still in flux. Gov. Jim Justice has proposed two variations on his budget, relying heavily on tax increases to fill the budget gap. And the two houses of the Legislature are each working on the budget, focusing on cuts.
The House and Senate plan to present an outline of their budget proposal later this week, although they’ll likely be ironing out the details until late in the 60-day session.
So the House’s impending tax reform proposal is the latest entrant into a bubbling budget stew.
There’s no select committee currently involved, House Finance Chairman Eric Nelson said during a Monday afternoon interview in his office. Instead, the House’s version of tax reform will largely be an outgrowth of the two years of work and research by the Joint Committee on Tax Reform that met in 2015 and 2016.
“We do not have a select committee here in the House. We did have a joint committee. We’ve talked about a number of these issues as it relates to the consumer sales tax and personal income tax. So I can’t specifically speak to what has gone on with the select committee,” said Nelson, R-Kanawha.
“I will say that last year we introduced a bill here in the House late in the session — with not enough time given to truly vet it out — of broadening the base and potentially lowering the rate. We are prepared and I think you will soon see us introduce such a piece of legislation, broadening the consumer sales tax base.”
The Senate’s Select Committee on Tax Reform has been widely watched as it proposed doing away with the state income tax and moving to a broad-based, 8-percent consumption tax.
After a fiscal note issued last week concluded that the proposal would likely result in a revenue decline of $870 million over four years, the committee will have to go back to the drawing board.
After the committee’s meeting Monday morning, chairman Robert Karnes, R-Upshur, said changes could be made in short order, potentially using a triggered step-down system to repeal the income tax.
Both houses have been talking about broadening West Virginia’s sales tax, particularly focusing on eliminating loopholes for services, since before this year’s legislative session began.
In the House, Nelson suggested a bill will be ready by midweek, at least Wednesday. That would be before the session’s midpoint, which is Thursday, and will provide enough time to debate the details.
“Through that vetting process, we can see where our rate may ultimately need to be and what categories may need to be included,” Nelson said.
He emphasized that much of the heavy lifting has already been done through the work of the Joint Committee on Tax Reform over the past two years.
“A year or so ago, the Joint Tax Committee received a report from West Virginia University’s John Deskins on ways that we can reduce the categories of our personal income tax, if not go to a single bracket,” Nelson said Monday afternoon.
“I believe you’ll see legislation on that this week as a potential alternative, so we can have plenty of debate on where the state of West Virginia needs to go moving forward with both the consumer sales tax and personal income tax.”
The report Nelson referenced was presented by John Deskins, director of the Bureau of Business and Economic Research at West Virginia University. It is available here.
In his report, Deskins laid out three alternatives that legislators could consider.
One was a flat rate of 5.1 percent applied to all taxable income. That rate generates $1.637 billion a year in state revenues, up about 1.1 percent from current, according to Deskins.
Another provided two income tax tiers. Those with no income up to those making $30,000 would pay 3.8 percent. Those making above $30,000 would pay 6 percent. That scenario generates $1.626 billion a year in state revenue, up .4 percent from current, according to Deskins.
The third option provided a larger number of tiers: those making less than $30,000 would pay 4 percent, those making between $30,000 and $60,000 would pay 5 percent, those making between $60,000 and $80,000 would pay 6 percent, those making $80,000 to $100,000 would pay $6.5 percent and those making more than $100,000 would pay 7 percent.
That scenario gains the state $1.624 billion, an increase of about .3 percent from current, according to Deskins.
To compare, the state’s general fund is right around $4 billion.
With the House now getting in, all three major players including the Senate and the governor, will have presented their visions for reforming the state’s tax system.
Governor Justice has said he wants to do away with the state income tax but only after the state’s budget, and its economy more generally, are healthy enough to sustain the change.
As the Senate’s Select Committee on Tax Reform discussed its potential changes Monday morning, Karnes, the committee’s chairman, asked about how many tax reform plans West Virginia has considered over the years.
“How many tax studies have we done in the last 30 years?” asked Karnes, R-Upshur.
After the meeting, Karnes lamented how much study had occurred and so few decisions made.
He said his committee would plow forward and at least provide a template to focus debate.
“In the last 30 years, we’ve had four major tax studies that never produced anything since the one in the mid ’80s. So there’s a point at which you can study and study and study, but then you have to actually get to work and do something.
“We’ve spent the last two years study on the Tax Reform Committee. If two years worth of study isn’t enough to get going, I guess we can never change anything.”