One of the points of consternation during the state budget debate has been the plan to lower the state’s income tax rates. Senate Republicans and Governor Justice have pushed hard to reduce the amount West Virginians pay to Charleston.
They argue state taxpayers need a break, and that lowering marginal rates will boost economic growth. The most recent proposal would lower tax rates by seven percent the first year, and then another seven percent the second year and six percent the third year if certain triggers are met.
On a purely philosophical level the tax cutters have the right idea, since lowering marginal rates has multiple benefits. People get to keep more of the money they earn, plus lower rates incentivize taxpayers to work, save and invest. Additionally, if the goal is to contain the size of government, one method is to give it less money.
However, there are practical matters that should give state leaders pause about their income tax reduction plan.
First, the supporters have failed to mount a convincing argument that the modest size of the cuts will have the kind of positive economic impact they predict. In the rush to get a budget, the tax reduction advocates have struggled to quantify the expected gain in growth from reducing rates.
Second, without the expected growth, the income tax reductions could punch a hole in the budget, possibly as soon as next year. Lawmakers would have to confront even more difficult decisions on taxes and cuts during an election year.
Third, a majority of the House Republicans, House Democrats and Senate Democrats are either against the cuts or wary of them. Without House support, there’s no avenue for the tax cuts to become law.
The income tax cutters have advocated doing something bold and different to get the state moving. As Senate President Mitch Carmichael has argued repeatedly, if not now, when? He and others, including Governor Justice, believe the fractional reductions are a start toward total elimination of the income tax.
Now that would be something, but it’s also a gamble considering nearly half of the state’s General Revenue collections come from the income tax.
A better idea is for the tax cutters to postpone their plan, get the budget done without shutting down government, and do comprehensive tax reform in a special session or during next year’s regular session.
Maybe the state should move to a more consumption-based tax system, but who really knows? The Republicans, who generally support lower taxes and smaller government, have the majorities in both chambers and a Democratic governor who says he’s willing to do big things.
Don’t waste that opportunity on a piddling tax cut that, if it backfires, may make it even harder to do meaningful tax reform.