Adjustments ahead for tax reform bill, committee chairman says

CHARLESTON, W.Va. — The chairman of the state Senate’s Select Committee on Tax Reform says a bill that would eliminate the state income tax and establish a broad, 8-percent consumer sales tax is probably going to undergo an overhaul.

Robert Karnes

Senator Robert Karnes, R-Upshur, said that after a fiscal note issued last week concluded that the proposal would likely result in a revenue decline of $870 million over four years, the committee will have to go back to the drawing board.

“This is about doing this in a way that’s conservative, fiscally, so that a year from now we have extra money, not less money,” Karnes said after this morning’s meeting of his committee.

One likely switch is to make the income tax repeal be triggered over a period of years by economic milestones. Karnes didn’t specify exactly how those would be defined. The existing bill had a scheduled phase-out without triggers.

“If we automatically step down without regard to revenue, that creates an issue out, on the one hand,” Karnes said. “I suspect what we’ll do is we’ll then come back with an income tax rate that fills the hole that we’re concerned with, still providing for a triggered stepdown.”

He did say, though, that the committee anticipated this kind of change might be necessary and already has been working on alternatives. Karnes said a revised committee substitute for the original bill could be ready as soon as this week.

Karnes said the committee will want to hear again from Mark Muchow, deputy director of the state Department of Revenue, who made the original conclusions reflected in the fiscal note.

“We’ll have to make sure our adjustments match the concerns,” Karnes said.

He also said West Virginia University or Marshall University might be able to study particular aspects of the bill such as whether West Virginia could lose significant sales to border states. Karnes noted that a Joint Committee on Tax Reform has met for the past two years.

“There’s a point where you can study and study and study, but at a certain point you have to get to work and do something,” Karnes said. “It’s time to be prudent and do something.”

With about half the 60-day regular session remaining, Karnes said enough time remains to come up with a workable bill.

“This is not entirely unanticipated,” Karnes said. “So we’ve already given extensive thought to how we would address this type of situation. The trigger language has already been under development. I suspect you’ll probably see a revised committee substitute maybe as soon as this week.”

Ed Gaunch

Senator Ed Gaunch, a member of the Select Committee on Tax Reform, said he was glad the fiscal note took an unvarnished view of the current bill. Gaunch, R-Kanawha, said he believes there is still a path forward for tax reform.

“I’m optimistic,” Gaunch said after today’s meeting. “I think Mr. Muchow’s report gives us a basis to start, where we can still do some revolutionary tax reform and do it within the scope he points out and maybe point us in a different direction away from some of the things that we’ve done in Senate Bill 335.”

Gaunch said the aim should be “something that doesn’t just plug holes in the budget but gets us on the path to prosperity. I’m optimistic that we can get there.”

The likely outcome is a hybrid approach, Gaunch said.

“What we’ve been on paper with is just a starting point. We always knew we were going to change that. We’ll start now looking at how we can change it and make it work.How can we fit it in the budget proposal we have before us, and see if we can sell it.”

Gaunch added, “My goal is to do the right thing for the people of West Virginia, I think comprehensive tax reform is the way to do that.”

The bill, as it is currently written, would establish a new 8-percent consumer sales tax on purchases including:

  • food
  • direct use purchases by businesses engaged in transportation, communications, public utility service, gas storage, transmission, and research and development
  • professional services including a range of items such as legal services, accounting, engineering, advertising
  • non-medical professional services such as legal services, accounting services, engineering services, architecture services, real estate services, brokerage services, advertising services, and funeral services, among others
  • personal services such as hair, nail, and skin care and non-medical personal home care
  • public utility services such as electricity, natural gas, water, sewer, telecommunications, solid waste, and intra-state transportation
  • contracting services with an added exemption for material purchases used by contractors in fulfilling their contracts
  • taxes on smaller items or services that had been exempt like electronic data processing, sales of farm products by the producer, health fitness services, newspaper sales by route carriers, mobile homes at full rate, and numerous miscellaneous business input purchases

The higher tax level of 8 percent plus the broadening of the tax base would result in additional revenue of $1.30 billion to $1.35 billion a year, according to the estimate by the state Department of Revenue.

But other West Virginia taxes, particularly the corporate net income tax and the personal income tax, would be eliminated or phased out.

The state Department of Revenue predicts a financial bump the first year as the new consumer sales tax goes into effect but as the other taxes haven’t yet been phased out.

But that’s followed by increasing revenue losses. The fiscal note shows gains in revenue from the consumer sales tax being swamped by losses from phasing out the corporate net income tax:

FY2018 — +$1.20 billion – $650 million =+$550 million
FY2019 — +$1.33 billion – $1.70 billion= -$370 million
FY2020 — +$1.36 billion – $1.80 billion = -$440 million
FY2021 — +$1.39 billion – $2.00 billion = -$610 million

Over the four-year period that was examined, gain from the first year followed by three years of losses results in an $870 million total revenue decline, according to the fiscal note.

“The proposed bill represents the most massive tax reform effort of any state in recent memory,” Muchow wrote in the fiscal note on behalf of the state Department of Revenue.

Deputy Revenue Secretary Mark Muchow discusses the potential impact of a tax reform bill before the Senate’s Select Committee on Tax Reform.

Much of the committee’s discussion with Muchow today involved the effect of the 8-percent consumer tax on the buying habits of people who live in border counties.

More discussion involved how much “pyramiding” might occur. That’s essentially double taxation. Muchow gave the example of a natural gas company that pays 8 percent on its supply of gas and then turns around and sells gas to a glassmaker, which absorbs the cost of the original tax and then pays its own tax.

A final big topic of discussion was West Virginia’s relatively low real estate tax rate, set in the state Constitution, which has caused state leaders to adjust other taxes accordingly. Muchow said that’s been a problem for almost a hundred years, causing adjustment upon adjustment to other taxes, and no one disagreed.

“We’ve never been able to change it and it makes it difficult on everyone else,” said Senator Craig Blair, the Republican vice-chairman of the committee. “We have been schizophrenic ever since.”

There are other challenges for the bill, as well.

Its inclusion of an 8-percent tax on food is likely to make it a tough sell in the House of Delegates, where Speaker Tim Armstead was one of those who pushed hardest to eliminate it. “We’ve always felt this was an immoral tax.  It was the wrong thing to be taxing the essentials of life and it’s been a top priority of the Republicans in the House for more than 20 years,” Armstead said in 2013.

Nick Casey

Governor Jim Justice has endorsed doing away with the state income tax — but only after the state has found its economic footing.

“We don’t think that’s possible at this time,” Justice’s chief of staff, Nick Casey, said while speaking on a budget panel late last month. “We think it should be studied.”

It’s not completely clear how broad support for the bill would be in the Senate, where it started. Senate President Mitch Carmichael has backed the effort.

One of the original Senate sponsors, Patricia Rucker, a Republican from Jefferson County, withdrew her sponsorship four days after the bill’s introduction. Senate Finance Chairman Mike Hall never did sign on as a sponsor.

Mike Hall

Last week while appearing on MetroNews “Talkline” with Hoppy Kercheval, Hall said he remains interested in the findings of the Select Committee on Tax Reform.

Hall’s comments were made prior to the release of the fiscal note. At the time, he said, the committee’s work could be an outside-the-box way to resolve the state’s estimated half-billion budget gap for the coming fiscal year.

“It may be difficult to do. I recognize that. It’s got a lot of moving parts to it,” said Hall, R-Putnam. “But the anticipation is that maybe it has a little more revenue in it than the current tax code does. That’s the hope of the chairman of that committee.

“And at that point, that may be how you fill that gap. I’d say that’s a possibility, but I’m not counting on it right now.”

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