Nuts and bolts of the possible Justice/Senate budget compromise

CHARLESTON, W.Va. — When Gov. Jim Justice and legislative leaders get serious about a compromise on the state budget, the path likely begins with a rewritten tax bill that never saw the light of day during the finale of the regular 60-day session.

The bill is on the Legislature’s website, available for anyone to see, and includes elements of the state Senate’s desired approach to income tax reform along with Justice’s tax increase proposals.

Ryan Ferns

Senate Majority Leader Ryan Ferns, appearing Monday morning on “Talkline” with Hoppy Kercheval, said that seems to him like a logical place to start. Ferns said Senate President Mitch Carmichael has been directly involved in those talks.

“I think he’s been more active in those discussions than I have. I think he’s hopeful the governor will adopt some of our ideas as it relates to tax reform,” Ferns, R-Ohio, said Monday. “I think it’s probably our best hope for a compromise at this point.”

During the last hours of the legislative session, Governor Justice expressed high hopes for a compromise with the Senate. But Carmichael said that night that the tax bill that represented the compromise wasn’t ready to roll out because leaders wanted to be sure it was nailed down.

Carmichael that night described the possible budget deal as one that built on the Senate’s existing tax reform ideas by incorporating the governor’s revenue proposals.

“These are not the governor’s tax increases. This is essentially the Senate tax reform plan. It raises the consumer sales tax and decreases the personal income tax, broadens the base, and the long-term structure will create jobs, growth and opportunity,” Carmichael said a little after midnight as the session came to a close.

“This is essentially the concepts and the structure the Senate has developed through our Senate Select Committee on Tax Reform and the governor’s ideas he supported in the State of the State address about lowering the personal income tax and moving in that direction.”

Across the Capitol, speaking in the early morning hours after the final night, House Speaker Tim Armstead expressed immediate reservations.

“I am concerned because my understanding of the proposal that is out there now is that it contains the commercial activities tax, it contains other increasing of the sales tax, which has been greatly opposed by our caucus,” Armstead, R-Kanawha, said.

Here’s a breakdown of what’s spelled out in that bill:

Sales tax: 

The sales tax would go up June 1 from its current 6 percent to 7 percent.

Some new sectors of the economy, particularly personal services, would be subject to sales tax. For example, that includes health and fitness services. Areas like primary opinion research services and electronic data processing services also would lose existing exemptions.

One of the big new areas to be taxed would be telecommunications, generally meaning landline and cell phone service. That was proposed by then-Gov. Earl Ray Tomblin in the last year of his administration but went nowhere with the Legislature.

Mobile homes used as the owner’s main residence would be taxed at 6-and-a-half percent.

“I think we can actually do a little more in terms of broadening sales tax base and eliminating loopholes,” Ferns said Monday.

House leadership has advocated for eliminating some exemptions that are currently in the tax code but has been skeptical of increasing the sales tax.

Advertising and legal services, sometimes discussed during the legislative session as areas where taxes might be established, continue their exemptions as this bill is currently constructed.

Income tax:

The bill moves state personal income tax from its current five tiers to three starting Jan. 1, 2018. Tinkering with the income tax was a goal of Senate Republicans all session long with the longer-term goal of phasing out the tax.

Justice also said he would like to eventually phase out the income tax, but he said several times over the course of the session that move would need to be made when West Virginia is on more solid financial footing.

West Virginia’s current top income tax rate is 6.5 percent for those making more than $60,000.

This bill would establish a 1.85 percent income tax for individuals who make $20,000 a year or less, 3.65 percent plus another $370 for those who make $20,000 to $35,000 and 5.45 percent plus another $917.50 for those who make more than $35,000.

The income tax would then go down by .1 percent over a period of years, triggered by the federal Consumer Price Index and dependent on the health of the state’s General Revenue Fund. The long-term goal is to phase out the state income tax.

Temporary additional tax:

If you are skeptical about a “temporary” tax, that’s understandable. But this is a Justice-backed measure meant to be in effect for 2017, 2018 and 2019. To the governor’s mind, this is a tax meant to make sure the state’s wealthiest are paying a bit more to help with the fiscal crisis.

Those who make $300,000 to $350,000 would pay $250 a year, those earning $350,000 to $400,000 would pay $350, those who make $400,000 to $500,000 would pay $500 and those who earn more than $500,000 would pay $1,000.

Commercial activities tax:

This tax, proposed by Justice in his State of the State address and then lowered from his original proposal, would be .045 percent of the gross income of the business.

It’s similar to a tax established in Ohio. Observers in West Virginia have been comparing it to a business and occupation tax, sometimes calling it by that name.

Justice says he wants this tax to ensure businesses are contributing to fixing the state’s fiscal struggles. The state Chamber of Commerce publicly expressed its willingness to take part a few weeks ago.

But it’s been a sticking point for Republicans in the Legislature.

“I think the B & O tax is probably not the best direction,” Ferns said Monday. “We’re going to have to make some compromise somewhere as it comes to raising revenue.

“I think there are other ways of generating that amount of revenue that don’t send a terrible message to the rest of the country about what’s going on with the business climate in West Virginia.”

The bill, as written, would repeal the commercial activities tax by 2020.

Severance tax:

Starting July 1, this would set up tiers for taxes on coal and natural gas.

An earlier tax reform proposal by the Senate’s Joint Committee on Tax Reform also proposed changing severance taxes for both natural gas and coal. And the Justice administration had, earlier in the session, introduced a tiered severance tax proposal.

For metallurgical coal, if the price is less than $60 a ton, the rate would be 1.5 percent; between $60 and $100 a ton, the rate would be 2 percent; between $100 a ton and $150 a ton the rate would be 2.5 percent; and at $150 a ton or more the rate would be 3 percent.

Steam grade coal would be subject to nine tiers ranging between 1.25 percent for coal priced at less than $30 a ton to 3.5 percent for coal priced at $70 a ton or more.

Thin seam coal would be subject to nine tiers ranging from 1 percent for coal priced at less than $60 a ton to 5 percent for coal priced at $200 or more per ton.

Natural gas would be also be subject to a system of nine tiers, starting with 2.5 percent for gas selling at less than $3 per thousand cubic feet up to 5 percent for gas selling at $9 or more.

Fuel taxes:

Justice has proposed raising the gasoline tax to help provide more funding for West Virginia highways construction and maintenance. He envisions leveraging the additional funding through bond sales for a large-scale highways program.

The state’s gasoline tax that goes to the Road Fund is actually made up of two components. One is a stable excise tax and the other is a fluctuating number tied to the average price per gallon of gasoline.

In this case, the excise tax would be bumped from its current 20.5 cents per gallon to 25 cents a gallon starting July 1.

The variable component would also get some new parameters starting July 1, bottoming out at no less than 15.2 cents per gallon. Currently, the variable component is 11.7 cents per gallon.

The proposal would also stipulate that the average wholesale price of fuel would never be considered lower than $3.04 a gallon and would never drop lower than 10 percent from the prior year.

The bottom line is, the gasoline tax would never be lower than 40.2 cents a gallon.

DMV fees:

Justice also has proposed increasing DMV fees, leveraging the increased revenue for highways and bridges projects.

Certificates of title would double, from $5 to $10. Re-certificates and transfers of title would do the same. Salvage titles would go from $15 to $22.50.

License renewal stickers for vehicles would double from $5 to $10. Registration fees for Class A motor vehicles would bump from $28.50 to $50.

An annual registration fee for a vehicle that uses hydrogen or natural gas for fuel would be $200. Hybrid vehicles would come with a DMV fee of $100.

The fee for a driver’s license would go from $2.50 to $5. The fee for a written driver’s test would go from $5 to $7.50.

Teacher payraises:

The bill includes Governor Justice’s proposal of an average 2 percent payraise for classroom teachers. The actual amount is $808.

National analysis:

Because the bill was written but never actually went up for consideration, there’s no fiscal note by the state Department of Tax and Revenue.

Right after the legislative session ended, the national Tax Foundation analyzed the bill in an article carrying the headline “Late-breaking West Virginia compromise would create two new taxes.”

“The SB 484 floor amendment contains tax provisions, not the associated budget, but Governor Justice has stated that the compromise is a $50 million reduction against his previous ask of $450 million, meaning $400 million in new revenue for the state,” notes the analysis by Jared Walczak.

The analysis singled out the temporary taxes meant to be paid by high earners, saying “Even for a temporary tax that only applies to a relatively small number of taxpayers, violating the taboo against tax cliffs on individual income would be a troubling development.”

And the analysis takes issue with the corporate activities tax proposal:

“Although the rate is low—at least initially—gross receipts taxes are imposed on businesses without regard to profitability or ability to pay. They also “pyramid,” meaning that the tax is imposed again at each transacted stage of the production process, resulting in the tax being embedded in the price of a final good or service multiple times over.”

Governor Justice announced last week a veto of the budget actually passed by the Legislature on the final night of the regular session.

He’ll call legislators in for a special session to work on the budget once leaders have a framework in place, possibly late this month.

The Tax Foundation, using the tax bill as a potential framework, concludes its analysis with a range of possibilities:

“Options may be constrained in special session, but there are theoretically several paths forward,” Walczak wrote.

“The House and Senate could find a compromise based, perhaps, on the Senate’s previous offer (SB 409 as amended) or the House’s sales tax broadening and lowering plans. They could revise the emerging deal, possibly stripping out some of the most economically damaging provisions (like the CAT). They could adopt it as-is. Or, for that matter, they could fail to come to any agreement at all. Some options are, of course, far less attractive than others.”

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