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Analysis: budget package could add $50 million in year 1 but fall behind after that

CHARLESTON, W.Va. — A bill representing a compromise budget between Gov. Jim Justice and state Senate leadership would raise revenue up to $50 million for the coming fiscal year but cut revenue by $170 million each of the following two years, an analysis says.

Mark Muchow

By 2020, the revenue decline hits $220 million, under the assessment prepared by Mark Muchow, deputy secretary of the state Department of Revenue.

The revenue decline represented in the assessment occurs because of cuts to the state income tax.

On Wednesday afternoon, Justice announced his intention to call the Legislature back into session next Thursday. The administration has been working with the state Senate majority on a budget possibility with aspects favored by each.

The bill that Muchow assessed was one prepared late in the regular 60-day legislative session to represent a compromise between Justice and the Senate. Discussions that have happened since — and that could still happen — could alter the bill and its math.

Generally, the budget package under consideration would step down the state income tax, as desired by the Republican majority in the Senate.

But it keeps elements of Justice’s proposals such as increased gas taxes and DMV fees for infrastructure projects.

That package, so far, has included a corporate activities tax that Justice backs as a way to ensure business plays a part in solving the state’s fiscal problems. And it includes lump-sum taxes on higher wage earners that Justice says represents a contribution by the rich.

The package also includes a tiered severance tax system that has been a point of contention. And it raises the state sales tax from 6 percent to 7.

Muchow’s assessment of the bill that represents the budget deal concludes that its various components would have several results:

Proposed changes to the sales tax would generate about $280 million the first year it goes into effect. Critics note that this tax would increase for West Virginians, regardless of income. Those who live on border counties also have expressed concern.

Of the overall amount, about $200 million would be the result of increasing the sales tax to 7 percent.

Another $80 million would result from broadening the sales tax to include telecommunications services, services of barbers, beauticians and manicurists, data processing services, primary opinion research services and personalized health fitness services.

The bill also includes eliminating an annual sales tax revenue transfer from the general fund to the Department of Highways. Doing so keeps an additional $12 million in the general fund.

Personal income tax is reduced from five brackets to three. The criticism of the income tax cut is that it would generally benefit the wealthiest West Virginians. Those who support it contend it would result in greater economic activity.

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.

The result, Muchow concludes, would be an overall personal income tax reduction of about 20 percent, including more than $380 million the first year.

“Most of the impact of the Personal Income Tax rate changes would not be felt until FY2019 due to the January 2018 effective date,” Muchow writes.

The governor’s proposed .045 percent commercial activities tax, plus the surcharge on wealthier residents, would bring in an additional $49 million in the first year, Muchow says.

The tiered severance taxes in the bill would reduce coal and natural gas collections by about 50 percent from the current amount, according to Muchow. He says that amounts to $135 million for the coming fiscal year and $140 million to $150 million in the years after that.

The local government share of the severance tax loss would be 5 percent for coal and 10 percent for natural gas.

The increased fuel taxes and Division of Motor Vehicles fees would boost state Road Fund collections by $129.9 million for the coming fiscal year and $138 million a year after that, Muchow concludes.

Mitch Carmichael

Senate President Mitch Carmichael has praised the possible budget deal, emphasizing the personal income tax reduction. Carmichael also has described the highways funding package as a way to improve roads and create jobs.

Speaking Wednesday afternoon in a Capitol hallway, Carmichael said the declining revenue after year one is proof that the bill constitutes a tax cut.

“It absolutely proves it’s a tax cut,” said Carmichael, R-Jackson. “The plan is to generate jobs and opportunity and growth through the cut, which will allow tax-paying citizens to have money in their pocket and the jobs program through the roads.”

He continued, “The out years show that without growth, without new jobs, new opportunity, this is a tax cut.”

Tim Armstead

Speaking on MetroNews’ “Talkline” on Wednesday, House Speaker Tim Armstead said he thinks the budget proposal is about to collapse under its own weight.

The effect of reducing the income tax — and the other taxes that would have to be raised to counter that — is one of the main concerns in the House, Armstead said.

The speaker said that was an area of skepticism for delegates as they watched the Senate tinker with various tax reform proposals during the regular session.

“It was a plan supposedly to get rid of the income tax. There was a great deal of interest in our caucus,” Armstead said on “Talkline.” “But as the details came out and it became evident what you’d have to raise in other areas, I think people were concerned about that.

“Unless you just did away with every exemption to the sales tax you’d have to go up to 13, 14 percent on the sales tax. Certainly people have an interest in getting rid of the income tax, sure. But look at what we’d have to raise just to get the 1 percent off. To make this plan work you are taxing almost everything. I think that’s where the great concern is in the House.”

Ted Boettner

The West Virginia Center on Budget and Policy, a nonprofit tax think tank in Charleston, has raised concerns about the effects of the budget package being discussed by Justice and Carmichael.

The main concern for the center is the shifting of tax burden from wealthier residents to the less wealthy.

“This means that the compromise tax plan – if this is in fact it – raises taxes on most West Virginians to help pay for tax reductions for higher-income West Virginians while leaving some revenue to spare in the first year,” executive director Ted Boettner wrote this week.

He continued, “As the governor and legislature work out a compromise on the budget, including tax changes, they should keep in mind that setting West Virginia on a path of further cuts and just one year of revenue gain is not going to help build a stronger West Virginia where communities can thrive.”

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