No shortage of sticking points in potential state budget deal

CHARLESTON, W.Va. — Governor Jim Justice provides an enthusiastic explanation of why legislators should be on board with a budget package they’re being called into special session to consider this week.

Jim Justice

“I think we’re on a pathway to pass a budget that is going to be really special,” the governor said last week when announcing he’d call the session.

“If we can get everyone to just buy in, it could be a real bipartisan effort in which all of us could be really proud.”

The governor went on to list the key ingredients of what he believes would be a successful state budget, including “modest additional cuts” to state agencies, a 1-percent increase in the consumer sales tax, a reduction in the state income tax, an additional tax on business and changes to the severance tax.

More key pieces, he said, would be increased fuel taxes, DMV taxes and tolling ability to pay for ambitious road building and maintenance plans.

The governor is enthusiastic about the overview, but as legislators have examined the particular pieces they’ve found a variety of causes for concern. As lawmakers gather at the Capitol, the budget package could live or die on the merits of its various components.

Roman Prezioso

“The governor’s saying ‘Look, we’ve got to take bold steps now to try to fix the big picture’ instead of saying ‘Here we go again,” Senate Minority Leader Roman Prezioso said Friday.

“Then you look at the big picture, the governor’s saying he wants to lower the income tax, he wants to make it more attractive for people to come here. The longer you drag this out, the more the people have the opportunity to look at the issues, the more they have the tendency to say ‘Whoa I can’t support this.’

“He fires you up. But then when we walk out we hear from constituent groups saying ‘Hey we’d better slow this thing down.’ The longer it goes the harder it’s going to get.”

If there are sticking points during the coming days of budget talks, they’re likely to be in these areas:

Severance taxes:

Justice has advocated a sliding scale for energy producers to get a break when prices are low but to pay more when prices are higher.

“We may be able to lower our severance tax to our coal companies when things are bad and raise them for all of us when things are good,” he said last Wednesday.

The proposal would have different rates for thin seam, steam and metallurgical coal, as well as natural gas.

But ironing out the details of the rates has been challenging. The Justice administration has been meeting behind the scenes with representatives of the coal industry to work this out.

The particular concern is metallurgical coal, which has been rebounding based on international market factors including a cyclone affecting Australian coal suppliers.

Rupie Phillips

The sliding tier proposal has drawn criticism from some lawmakers in the southern coalfields, including the Legislature’s only independent, Delegate Rupie Phillips, who represents parts of Logan, Boone and Wyoming counties.

“While this plan might work for steam coal mines, our met coal operators will be unfairly punished by it,” Phillips stated in a release put out Monday by the House of Delegates.

“These companies are just now starting to recover some of the money they lost during the Obama administration and have just begun putting our miners back to work. We shouldn’t do anything right now that keeps them from providing jobs and opportunities for our people.”

The severance tax proposal would also have an effect on the budget as a whole.

Mark Muchow, deputy secretary for the Department of Revenue, estimated that an early version of changes to the severance tax would result in a loss of about $135 million in the coming fiscal year and roughly $140 million to $150 million a year after that.

It’s likely that the numbers under discussion have changed since that assessment was made, though.

Taxes on business

The governor wants some sort of tax to be a symbol that the businesses are contributing to improving the state’s fiscal health.

At one point, Justice was proposing a tax of.045 percent of the gross income of the business. The state Chamber of Commerce publicly expressed its willingness to take part a few weeks ago.

Steve Hedric

The Charleston Regional Chamber of Commerce expressed concern over the commercial activities tax and suggested that an increase in the corporate net income tax could be the way to go.

“Corporate net income tax might be the fairest because it’s based on ability to pay rather than just that you’re here. It’s also not a pyramiding tax,” said Steve Hedric, chairman of the Charleston Regional Chamber.

Speaking on MetroNews’ “Talkline” last week, Justice chief of staff Nick Casey Casey said the new framework would raise the corporate net income tax from 6.5 percent to 8.5 percent.

Tim Armstead

House Speaker Tim Armstead, writing on his Facebook page, objected to an increase in the corporate net income tax. Armstead recalled efforts to reduce the tax between 2006 and 2014.

Armstead wrote, “Then-Governor Manchin, working with Democrats and Republicans to do this, said at the time it would ‘show our citizens, our businesses and our nation that West Virginia is committed to making our state economically competitive.’

“Now, it appears Governor Justice wants us to throw away those eight years of work in a matter of days to immediately raise it two percent to 8.5 percent.”

Justice has said he doesn’t want to quibble about what the tax is, but he does want businesses to take on increased taxes to help the state with its budget.

“I think we’ll have a very, very modest business type tax whether it be net corporate income,” Justice said. “Everybody is worried about this CAT tax, which I truly believe would be the best, the simplest and the easiest.

“I just want the businesses to participate. I don’t really care how, whether it’s corporate net income or gross margin or CAT or whatever it may be. I don’t care. I just think we’ve all got to pull the rope together.”

Muchow concluded that establishing the commercial activities tax — plus a separate lump sum tax on higher wage earners — would bring in about $49 million extra a year. Casey said a switch to raising the corporate net income tax would do about the same.

Income tax:

The budget package that’s been under discussion moves the 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.

“I think there will be the ability to genuinely lower our state income tax to the point of probably, really close to 20 percent,” Justice said. “The lowering of our lower bracket will be even more dramatic.”

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.

Muchow’s assessment says the state is likely to experience a $380 million revenue loss in the first full-year, although the changes wouldn’t be felt until the January 1, 2018, effective date.

Democrats in the Legislature have been particularly attuned to these changes because the income tax generally taxes people based on their ability to pay. Some observers are concerned that this structure represents an outsized break for the wealthiest wage-earners.

Prezioso said concerns might be assuaged with the addition of an earned income tax credit for those in the lowest bracket.

“Earned income could probably pick up one or two more votes in our caucus,” Prezioso said.

Corey Palumbo

Senator Corey Palumbo, D-Kanawha, said last week that making it clear that those in the lowest bracket get a break would help him feel more comfortable.

“I think that would be a good change because I think that’s what a lot of people including myself have been hesitant about this entire plan,” Palumbo said.

“It sort of shifts the burden to middle and lower income people. If you provide a greater benefit to folks at the bottom of the income scale it makes it more palatable.”

Robert Karnes

Republicans describe the change as an income tax reduction of about 40 percent for lower income brackets and about 16 to 17 percent for upper income brackets.

“Overall just the fact that 40 percent cut for lowest is pretty significant,” said Senator Robert Karnes, R-Upshur, who led the Senate’s Select Committee on Tax Reform during the regular session.

Republicans in the Senate have been enthusiastic about their belief that a reduction in the income tax would boost economic activity.

Sales tax

To make the budget balance if the income tax is lowered, the budget framework that’s been under consideration would raise the state sales tax from 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.

This part of the package has received criticism from legislators who live in border counties, saying their local businesses would be at a disadvantage compared to those in neighboring states.

Daryl Cowles

“A 7-percent tax will make it much harder for our border retailers to compete with businesses in neighboring states,” House Majority Leader Daryl Cowles, R-Morgan, stated in a release.

“Raising our tax that high could do significant harm to our economy due to the loss of retail activity, which could more than offset the supposed benefits of reducing the income tax.”

There’s an additional argument from progressives that the sales tax hits people regardless of income.

Muchow’s assessment concludes that the sales tax changes would produce an additional $280 million toward the general fund during first full year of effect.

That’s $200 million from the 1-percent overall increase and the remaining $80 million from eliminating exemptions, especially the telecommunications tax.

Gas taxes and increased DMV fees

This has been a cornerstone of the governor’s proposal to improve West Virginia’s infrastructure while also putting more state residents to work.

Justice wants to leverage the increased taxes and fees through bonding. Republicans in the House say they would prefer the state’s residents signal their willingness by approving the bond first.

Eric Householder

“I do not think we ought to raise the taxes before hand because you have to see if the voters are willing to accept the proposal,” said Delegate Eric Householder, R-Berkeley.

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 bottom line is, the gasoline tax would never be lower than 40.2 cents a gallon. The gas tax is currently 32.2 cents a gallon.

“There’s not an appetite in the Eastern Panhandle for an 8 cents per gallon gas increase,” Householder said.

Those who support increasing the fuel tax say the time is now. They point to other states that have made the decision to increase their fuel taxes in recent weeks.

Muchow concludes the tax and fee hikes would increase State Road Fund collections by $129.9 million for the coming fiscal year and by $138 million a year after that.

Justice said one of the big reasons he vetoed a budget passed last month by the Legislature is because it did not include the mechanisms to immediately put more workers on the job to improve the state’s transportation system.

“We were throwing away 48,000 road jobs. 48,000 jobs, throwing them away,” Justice said.

In his announcement of the special session on the budget, Justice said he understands all the concerns about its various aspects. But he wanted to emphasize the proposal as a whole. He said the entire package will put West Virginia on the path to improvement.

“What is our job here? Our job here is not to just balance the budget. I mean, I can balance the budget in 10 seconds,” Justice said.

“We can do something as absurd as let’s don’t have school in West Virginia. You know, and if that’s not crazy enough let’s just eliminate all of our Rainy Day Fund and we’ll just balance the budget for this year. But you see we have a bigger job from that, don’t we? Our job as legislators is to give us a pathway to get out of our problems and to get to solutions and to get to prosperity.”

The governor argued that the alternative would be continued use of the state’s Rainy Day Fund and cuts to higher education and healthcare.

“To me a vote against this would be voting for all the bad things I’ve already just said. I don’t’ see how in the world any legislator could walk away from this opportunity. The vote needs to be 34-0, 100-0, signed by me and let’s move on down the road. Because at the end of the day we will never have this level of opportunity. I’m just trying to tell you brass tax facts,” Justice said.

“This is the opportunity of a lifetime in the most dire situation, and if we can pull it off it will be an effort by a lot of really good people.”





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