CHARLESTON, W.Va. — The latest tax reform is definitely different from the old tax reform.
At least that was Sen. Mike Hall’s thought as he watched the rollout of the latest version of legislative tax reform during a Saturday afternoon meeting of the House Finance Committee.
Versions of a tax reform bill were shepherded by Sen. Robert Karnes through that body’s Select Committee on Tax Reform. There were three versions but they all broadened what is taxed, raised the sales tax and lowered the income tax.
The version the House considered Saturday — just a week before the end of the legislative session — kept the income tax as-is and lowered the sales tax.
“This bill is the exact opposite of the tax reform bill that the tax reform committee proposed in the Senate,” said Hall, the Senate Finance Committee chairman.
“The economic theory that Senator Karnes proposes says that if you raise consumption taxes and reduce income taxes you get growth. This one says the opposite, that if you reduce sales taxes, particularly with competitive surrounding states you get more activity. So they’re actually opposite each other.”
Both houses of the Legislature have been tinkering with tax reform for weeks. Each version, in some way, has also been cast as a piece of the broader budget puzzle.
The House Finance Committee on Saturday actually received a substantially rewritten committee substitute for a bill originally proposed by Gov. Jim Justice raising about $450 million for the coming fiscal year, mostly through new taxes. That was stripped way down by the Senate to reroute about $12 million in annual sales tax revenue generated from some road construction purchases and then passed.
The tax reform bill that gained attention in the Senate over the course of the legislative session — actually a whole new bill after two previous versions were floated and then scrapped — was also passed by the Senate and assigned to House Finance, but as of Saturday it was still on the shelf.
The House Finance staff amended the entire Justice-introduced tax bill to be the latest, latest, latest version of tax reform bill. The House Finance Committee is looking at right around the fifth version of tax reform overall for the Legislature this session.
The committee was expecting to vote Monday morning on whether to pass the bill to the full House.
This version is in some ways simpler than all the previous incarnations.
It doesn’t bring back the food tax, which was under consideration in the Senate bills and the most recent version of the House bill. It continues to exempt professional services such as legal or accounting services — exemptions that would have been discontinued under the earlier House bill.
It leaves the income tax right as it is. The earlier House bill would have established a 5.1 percent flat tax. The most recent Senate bill would have reduced West Virginia’s five tax tiers to three and then eliminated the income tax over time.
But the bill does tax areas of West Virginia’s economy that had not been taxed before. In particular, telecommunications services and personal services become subject to taxation.
Starting this July 1, salon services, contracting services, and cell phone bills would be subject to the sales tax. On October 1, the exemptions for gym memberships, electronic data services, primary opinion research, and some end-use services would end.
The end-use tax has been described as a sales tax for some businesses involved with transportation and communications.
“All you’re doing here is reaching out into traditional exemptions,” said Hall, R-Putnam. “I think there’s more economic impact to some of those than they may realize initially. You’re still raising taxes in the sense that though you’re lowering a rate you’re taxing more things.”
This July 1, the bill would reduce West Virginia’s 6 percent sales tax to 5.5 percent. The following year it would drop to 5 percent and then 4.75 percent by July 1, 2020.
The finance committee’s analysis showed the bill would result in a $137 million increase in revenue for the 2018 fiscal year, a $56 million reduction in 2019, a $66 million reduction in 2020, and a $125 million reduction when the sales tax dropped to its lowest level for the 2021 fiscal year.
Fred Lewis, a House Finance policy analyst, told the committee Saturday the reductions in revenue do not account for any potential growth in spending the state could see as a result of a lower sales tax rate.
When fully implemented, the rate would give West Virginia a lower sales tax than any of the surrounding states. Kentucky, Maryland and Pennsylvania have a 6 percent consumer sales tax. Ohio’s is 5.75 percent and Virginia’s 5.3 percent.
“The theory is that we’re 70 percent a border state, so I guess the thinking is that if you lower the consumption taxes to lower than your surrounding states that may, on the margin, attract people or at least not leave your state and go buy things across state lines,” Hall said Saturday.
“And their theory is to do that and then step this rate down with hard dates I thought was interesting because I predict the fiscal note on that will be severely reduced on the out years, although there may be some gain this year.”
— Brad McElhinny (@BradMcElhinny) April 1, 2017
Gov. Justice put out a release on Sunday, objecting to the House tax proposal: “GOP IS HIDING BEHIND A BACKDOOR TAX ON BUSINESS.”
Justice’s release touted his proposed commercial activities tax as a less-painful alternative for businesses.
“Why come with such a bizarre and incomplete proposal with only five days left in the session?” Justice asked in the release.
Justice continued, “This Republican tax on businesses is just lipstick on a pig. It isn’t pretty and whacks West Virginia businesses unnecessarily.”
Just this past Thursday, the Justice administration had praised Republicans for suggesting the end-use tax as a possibility. Asked about the possibility during a press conference on the budget, Justice administration chief of staff Nick Casey credited the Republicans with pushing the idea forward as a component of how business might contribute to the state’s budget picture.
“I applaud the Republican leadership,” Casey said Thursday. “The governor had come up with what he called the CAT tax, and in lieu of that the recommendation that came out of the leadership of the House was eliminate that but instead take away some of the exemptions on business to business transactions.”
On Friday afternoon, the administration sent out an announcement that the state Chamber of Commerce had gotten on board with the commercial activities tax.
The administration says the proposal in the House would raise taxes on businesses by about $94 million. The .045 percent commercial activities tax would raise about $45 million, according to the administration.
“This $94 million tax scheme the House Republicans are cooking up is a Trojan horse that will be very painful and burdensome for businesses,” Justice said. “I want it to be as painless as possible for the people, business, the wealthy, and government to do their part to fix the budget crisis.”