CHARLESTON, W.Va. — The latest version of a tax reform proposal by a state Senate committee would put a broad-based, 8-percent consumption tax in place by next October and then change the state personal income tax to a flat tax of 2.65 percent.
The proposal would also reduce the state severance tax rates, with the greatest effect anticipated for coal.
One bright spot for the short term is an estimated $8 million surplus for the coming fiscal year, produced largely by an overlap of the institution of the consumption tax three months prior to the switch to the flat income tax.
An earlier proposal by the Select Committee on Tax reform would have eliminated the income tax, but a fiscal note assessing the proposal concluded it would result in a revenue decline of $870 million over four years.
The new proposal also aims to eliminate the income tax, but that would only be triggered by positive economic activity until a scheduled phase-out process begins in 2023.
During a meeting of the committee Saturday afternoon, deputy revenue director Mark Muchow provided an assessment of the proposal.
Muchow calculated the latest proposal would result in an additional $344 million in state revenue for fiscal 2018, $152 million for fiscal 2019, $135 million for 2020, $127 million for 2022 and $69 million for 2023.
As the phase-out of the state income tax begins at that point, the forecast goes into the red, starting with a negative change of $50 million in 2024.
Muchow said the Legislature should be cautious about adopting major tax reform on a short time-table.
“This is a massive tax reform effort, the full impact of which has not been addressed,” Muchow said. “A whole lot more needs to be put into it.”
But Senate President Mitch Carmichael, who is not a member of the committee but who attended Saturday’s meeting, said he hopes the full Senate can consider the bill in short order.
“I think this is a big improvement for those who have a concern about the phase-in of the changes,” said Carmichael, R-Jackson. “It is a monumental change to do this overnight, to completely eliminate the income tax.
“This puts us on path to eliminate the income tax and to incent growth and progress in our state. I think it’s a world-class step in the right direction for West Virginia.”
Carmichael added, “People in government think quick is six, seven years. In the business world and in people’s lives, quick is six, seven months. We can’t wait.
“Frankly, I hope this passes this committee on Monday, we send it to the full finance committee and we really get the momentum behind this program to provide jobs, opportunity and growth for our citizens.”
Tax reform efforts in the Legislature are on two tracks.
Bills introduced Friday in the House of Delegates could make major changes to West Virginia’s tax code, establishing a flat income tax rate of 5.1 percent and dropping the sales tax to 5.5 percent while also broadening what is taxed.
Both of the House’s proposed changes would go into effect Jan. 1, 2018. Fiscal notes are requested on both bills to help determine the financial impact to the state.
The Senate’s 8-percent consumer sales tax would remove exemptions for:
- food for home consumption;
- public utilities such as electricity, natural gas, water, sewer, telecommunications, solid waste and intra-state transportation;
- personal services including hair, nail and skin care and non-medical personal home care;
- contracting services;
- smaller areas such as sales of farm products, health fitness services, newspaper sales by route carriers and mobile homes at full rate.
The bill would remove exemptions for professional services, including legal, architectural, accounting and engineering. Advertising would also be exempt.
Muchow noted that the effects of sales leakages to surrounding states can’t be accurately estimated at this point.
The 2.65 percent flat tax on personal income would be into effect Jan. 1, 2018.
The tax then would decrease by .1 percent for every $50 million of general consumption tax collections in excess of $2.5 billion for the prior fiscal year — under the condition that the state’s Rainy Day Fund is at a level of at least 15 percent of the general revenue budget for that fiscal year.
Muchow’s analysis estimates the consumption tax would reach its benchmark by the end of 2021, but he doubts the Rainy Day Fund requirement will be met and so doubts the reduction would kick in.
Starting on Jan. 1, 2023, the personal income tax would begin a structured phase-out. The rate would be reduced to 2.38 percent and would be lowered each year until it finally is repealed on Jan. 1, 2032.
“Beyond FY2023, the proposed bill would begin a phase-out of the personal income tax over the next decade, resulting in the need for either additional revenue enhancements or a major restructuring of state and local government services to mitigate the inevitable budget gaps,” Muchow wrote.
Once the personal income tax hits zero, the corporate net income tax rate would be reduced by 1 percent a year, as long as the Rainy Day Fund is at a level of at least 10 percent of the general revenue fund. The earliest year anticipated for that is 2032.
The severance tax rate on natural gas would start to be reduced by one percent for two years in a row, coming to 3 percent — once the corporate net income tax has hit zero.
The proposal would change the severance tax rate on coal starting this July 1.
It would increase the rate on thin seam coal to 2.5 percent, and the rate on all other coal production would decrease to 3.75 percent. Then, on July 1, 2018, the rate on all other coal production would 2.5 percent.
Muchow noted the biggest impact to that change would be to local governments that have depended on a portion of severance tax revenue.
Muchow’s assessment concludes, “The Tax Department maintains that the allotted time for analyzing these impacts is extraordinarily inadequate. Due to the restricted timeframe the Department is unable to provide a thorough analysis and thus cautions that actual results could deviate significantly as the economy reacts to the proposed changes.
“The Department continues to anticipate some leakages in association with the increased consumption tax rate for goods and services and strongly recommends further independent analysis be completed before a reform of this magnitude is pursued.”