A proposal to begin to phase out the state’s income tax is a key element in the ongoing budget talks at the State Capitol.  The plan agreed to by Governor Jim Justice and Senate Republican leaders would cut the state’s income tax rates by 20 percent over two years, and allow for future reductions if certain economic growth benchmarks are met.

Senate President Mitch Carmichael (R-Jackson) and Senator Robert Karnes (R-Upshur) have been leading the charge for the lower marginal rates.  Karnes in particular is wedded to the idea of lower personal income taxes as a way of igniting the state’s economy.

“I strongly believe the data out there shows that the income tax—taxing capital and capital formation—hinders job growth and economic growth,” Karnes said during a recent appearance on Talkline. “When we look at the states that don’t have an income tax there is above average growth.”

Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no income tax. WalletHub’s analysis of all 50 states had only Texas ranked in the top ten (at number 9) for economic performance in 2015. Next was Alaska at 25th.  But that’s just one ranking for one year. What would the impact be in West Virginia of an income tax reduction?

The easiest part to predict is how much money will not be collected. Deputy Revenue Secretary Mark Muchow analyzed the numbers of the initial proposal of a 20 percent reduction in one year and determined revenue would drop by $380 million.

That’s a big number, considering the entire General Revenue portion of the budget this fiscal year is just under $4.2 billion. The plan put forth by the Senate and the Governor does include a rise in the consumer sales tax, from six percent to 6.95 percent, and that is supposed to bring in enough money to offset the lost revenue.

The harder part is predicting with any accuracy whether a state income tax break will generate any significant economic benefit. A review of the research by Brookings concluded, “Rate-reducing income tax reforms may raise economic growth, but it’s not a given.”

Kansas cut its top income tax rate from six percent to 4.5 percent in 2012, but the predicted economic growth has not occurred and the state faces a serious budget shortfall now.

Economist Stephen Moore, one of the leading proponents of the tax cuts, has said, “It’s a little early to tell about Kansas.  A 1.5 percentage point drop isn’t going to turn this Midwestern state into Beverly Hills or Boca Raton.  If Kansas can continue to get the rate close to zero, we would expect to see some strong growth effects.”

That’s important for West Virginia to consider in the midst of this debate.  We don’t have 1,300 miles of ocean front property or Disney World, and a rapid elimination of the state’s income tax would wipe out nearly half of the General Revenue budget.

Taxing capital does hinder personal savings and investment, and West Virginia’s per capita tax liabilities run high because, among other things, we are a poor state.  According to the Tax Foundation, West Virginia ranks 18th highest in state-local per capita tax burden as a percentage of income.

But trimming the state’s tax rates now seems like tampering around the margins rather than comprehensive tax reform. It’s understandable that supporters want to start somewhere, and they have some momentum.  However, a more reasonable approach would be to get all the research together and have a special session just on tax reform.

 

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