CHARLESTON, W.Va. — The chief architect for the state Senate’s tax reform proposal says one of its attributes is a bit of budget magic it could perform for the coming fiscal year.
The latest proposal from the Senate’s Select Committee on Tax Reform, outlined during a Saturday meeting, would establish a broad, 8-percent consumer sales tax while also introducing a flat 2.65 percent personal income tax. The committee was scheduled to take up the bill again at 9 a.m. today.
The consumption tax would be put in place by this coming Oct. 1, while the income tax wouldn’t change until Jan. 1, 2018.
The three-month overlap would create a period when the consumption tax is generating more than the old sales tax but the income tax hasn’t yet gone down.
An analysis by the state Department of Revenue calculates the result for the coming fiscal year would be an $8 million surplus.
That’s one way to deal with an estimated half-billion dollar gap for the coming fiscal year — the reality under the current circumstances.
Senator Robert Karnes, the chairman of the Select Committee on Tax Reform, says that’s by design.
“We are, I believe, pretty well stuck on the idea that we’re not going to increase spending this year,” Karnes, R-Upshur, said after the Saturday afternoon meeting of his committee. “However, we’re short in revenue, so this helps fill the revenue gap we have without increasing the size of government at all.”
Karnes is among those on the committee who believes the tax reform prescribed by the bill will lead to long-term growth for West Virginia. But he said the tax reform bill’s utility as a potential salve for the current budget crisis could make it attractive for the short-term too.
“It helps our chairs at both ends of the building to be able to balance the budget in a way that is less draconian, perhaps.,” Karnes said. “We don’t see the education cuts, we don’t see the Medicaid cuts that may come in the absence of this.
“I don’t think there’s an appetite on either end of the building for tax increases just for the sake of tax increases. That would be the only way to fill that otherwise, so this offers a solution to the problems we’re having this year and again those out years.”
An earlier proposal by the Select Committee on Tax reform would have eliminated the income tax rather than establishing the flat tax, but a fiscal note assessing the proposal concluded the proposal 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.
The proposal also lowers state severance tax, particularly on coal.
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.
Karnes, speaking after the meeting, said the positive numbers in the early years of the timetable could give legislators an opportunity to feed money back into the state’s Rainy Day Fund after the past few years of borrowing to make budget.
“This gives us an opportunity to put $100 million back in the Rainy Day Fund this year,” Karnes said. “That gives us a little more of a cushion so that next year or five years from now if these revenue estimates aren’t hitting the targets we expected or if the growth isn’t what we expect, it gives us a little bit more of a cushion to operate from.
“So instead of constantly draining on the Rainy Day Fund, this gives us an opportunity to put money back in the Rainy Day Fund.”
After hearing the revised version of the tax reform proposal over the weekend, the Select Committee was expected to meet again today.
State Senate President Mitch Carmichael, who attended Saturday’s meeting even though he is not a member of it, 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 said he would like to see the bill be fast-tracked from here.
“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,” Carmichael said.
Muchow, a longtime employee of the revenue department in the executive branch, warned 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.”
Besides establishing the broader, higher consumer sales tax and a flat income tax, the proposal would change the severance tax.
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 other factors in the proposal have kicked into place years from now, probably not until at least 2032.
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 move to 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.
Karnes said the proposal deliberately attempts to help jumpstart the state’s coal economy immediately. He said other factors, like pipeline development, are more likely to help the state’s natural gas industry.
He also acknowledged the proposed changes to the severance tax would leave the state in need of revenue solutions to help local governments. But he said the severance tax fluctuates so much, it’s hard to consider it reliable in the first place.
“The best explanation I can offer is we’re seeing some movement in the coal industry,” Karnes said. “We also have seen where President Trump has taken some action. I think there’s good reason to believe we’re going to see some growth in the coal industry. However, our severance taxes are still higher than surrounding states.
“So the idea is to say if we’re going to start seeing some growth there, let’s start moving along. Let’s get our coal miners back to work.”
Karnes added, “In the long term the severance tax it’s so unstable. It relies on the demand for the product. It’s also heavily reliant on price fluctuations. We can go from one year to the next watching that number bounce up and down by hundreds of millions of dollars.
“Consumption taxes tend to be stable. People buy the same amount of stuff no matter what the economy is doing.”
He said the committee has built its bill to be flexible. He said that’s exemplified by how quickly the committee went back to the drawing board and put out a new version after the first showed the state quickly plunging into the red.
In the future, Karnes said, the bill’s percentages or step-down periods can be adjusted.
“We’ve got enough to say this isn’t as risky as what a lot of people would imply,” Karnes said. “If we get two or three years in and say the growth just isn’t happening, we can make adjustments.”
Of course, a crucial area of its flexibility could be in the ongoing debate over the state’s current budget mess.
“It means, I believe, you would find that we’re not going to raise taxes again absent something like this. And that’s going to mean cuts in areas that nobody wants to vote for,” Karnes said.
“I think I have three of the state’s largest fairs and festivals in my district. Do I want to see those cut? Absolutely not. But there’s no way to fund ‘em if we don’t do something like this. Those are one of the first items on the block, so to speak.”
He added, “We know we’re looking at potential cuts in higher education. The governor has proposed some radical cuts from his alternative budget, but there’s no way to balance the budget this year without those kinds of cuts absent something like this
“So this is the way we don’t have to do that. It provides a pretty good flow, even for the next five six years to say we don’t run into the same kind of problem next year.”
If the bill passes the committee, where most of the Republican majority already signed on as sponsors, it would be referred to the Senate Finance Committee. The chairman there, Senator Mike Hall, did not originally sponsor the bill.
Karnes said Hall and his counterpart in the House, Delegate Eric Nelson, could find the bill attractive as the 60-day session moves to crunch time.
“They have to figure out how to balance a budget this year. And not just our finance chairman, but the leaders of both ends of the building,” Karnes said.
“For them, this year is the most important part of the budget. My view has always been, I’m more worried about year 5 and year 10. Because if you have to constantly worry about this year, you never make the big fixes that need to be made to make everything more sound.
“Because of that, an effort like this has a better shot at seeing the light of day if it helps today and tomorrow.”
Muchow, for one, said he wishes the best for all those involved.
“You’ve got a tough job,” he said at the end of his Saturday presentation.