Senate’s tax reform bill moves on, and chairman now eyes constitutional amendments

CHARLESTON, W.Va. — A state Senate committee has passed its bill establishing a broad-based, 8-percent consumer sales tax and a flat 2.5 percent personal income tax on to be considered by the full Finance Committee, but its work on tax reform isn’t necessarily over.

The next step envisioned by the Senate’s Select Committee on Tax Reform would be to compose an amendment to the state Constitution reflecting the tax changes and to add more language reforming state property tax laws.

The measure was described this morning as the “Fair and Simple Tax Reform Amendment.”

Robert Karnes

“The next thing we’ll be looking at will be the amendment,” tax reform committee chairman Robert Karnes said after today’s meeting.

“The purpose of the amendment will be two-fold. It’ll be to, over a period of 10 years, transition away from the personal property tax more fully into the real property tax and to lock in what this committee does relating to the income tax.”

Karnes, R-Upshur, said the wording on the proposed constitutional amendment is nearly ready. He said he wants it to be close to complete before it is publicly introduced. That doesn’t mean it couldn’t be changed during the legislative process, he said today.

“I think the key to getting anything done legislatively is the flexibility to make adjustments when they’re needed,” Karnes said.

Lawmakers have long lamented constitutional changes, made in the 1930s, that set the state property tax rates. The result, they have said, has made West Virginia’s real property tax rate far lower than the national average.

The state Department of Tax and Revenue, including deputy director Mark Muchow, along with economists in the state, also have advised that to really fix West Virginia’s tax structure would mean changing the property tax rate in the state Constitution.

Meanwhile, some Republicans like Karnes say the personal property tax rate, also set in the Constitution, penalizes businesses through annual taxes on expensive equipment.

Karnes wants to bring down the personalproperty tax rates and raise the real property tax rates, while also setting a new income tax rate in the state Constitution.

“The idea with this amendment is take care of the personal property tax issue and lock in some of the changes that we’re discussing here because these are good changes that are going to make West Virginia grow,” Karnes said after a Saturday meeting of his committee.

“We can do this, but another Legislature two years from now or 10 years from now can undo this. So, in part, the amendment would be to say OK we’ve done this, now let’s lock it in. Of course it doesn’t meant it can never be changed because we’re amending the Constitution and another Legislature could amend it again, but it’s a higher hurdle. If this is worth doing, it’s worth making it difficult to undo.”

Karnes said potential changes to property tax rates could be a balancing act. That’s because local governments rely on property tax revenue to fund their school systems.

“What we’ll look at is a way to step that down out of existence while we step that down for the counties that rely on it. We can’t just run it out and not replace it with something,” Karnes said Saturday.

“It’s an iterative process. We start with the proposal. We see how it will affect things and then we come back and revise the proposal. So we’ve mostly got the framework ready for a proposal for that amendment to eliminate the personal property tax in a way that allows for the municipalities, the cities, the counties the school systems to be made whole.”

Before taking on the state Constitution, the committee had to wrap up work on its sales tax and income tax reform proposal.

It did that this morning, after a few weeks of making changes to the proposal.

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 2.5 percent personal income tax.

That flat tax rate was lowered from its originally-announced 2.65 percent on Saturday.

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.

Ed Gaunch

Senator Ed Gaunch this morning added some amendments, meant to be considered as a package.

Gaunch proposed increasing an existing soft drink tax from 1 cent to 5 cents, bumping a tax on alcoholic beverages from the current 28 percent up to 36 percent, moving the beer tax from $.5.50 a barrel to $11 and, finally, exempting Social Security from the income tax in West Virginia.

Karnes estimated the tax increases would result in $73 million in additional revenue and that the Social Security exemption would cost $90 million. The result, he said, wouldn’t dramatically alter the financial framework of the overall bill. The proposed amendments unanimously passed.

The committee also unanimously recommended passing the tax reform bill on to be examined by the Senate Finance Committee. Senate Finance Chairman Mike Hall, R-Putnam, was not one of the initial sponsors of the bill, although he has called it a worthy area of study.

Senator Robert Plymale, one of the Democrats on the tax reform committee, said the bill deserves a careful look by the Finance Committee, where he also serves.

“I don’t know that you know all the fiscal impacts of this,” said Plymale, D-Wayne.

“I think getting it to the full committee on finance is going to be able to review it now and look at the pros and cons. I think there are some changes in here that are good and there are also changes that need to be reviewed.”

Plymale said he is particularly concerned about the effects of raising the consumer sales tax on the economies of border counties.

“You’ve got to look at the sales tax proposal and what that does to border areas and what that does to businesses,” he said. “I don’t want to put us to where we’re not competitive in our regions, particularly with 50 percent of our population on borders, I have a concern with that.”

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