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Tradeoffs on income tax reductions remain under scrutiny

CHARLESTON, W.Va. — Tucked inside the battle over the budget is a skirmish over the personal income tax.

Some Democrats in the state Senate, including those who voted for a revenue bill last week, are expressing concern about the fairness of the income tax tiers set up in the bill. They say tax increases also on the special session call — like those for sales tax and fuel tax — wind up hitting lower wage earners harder than the breaks offered on income tax.

Mike Romano

Senator Mike Romano, D-Harrison, voted for the revenue bill last week. But on Monday he suggested he would not have done so if he hadn’t known in advance that the House of Delegates was poised to kill it.

“We’re balancing the budget and giving the rich a tax break on the backs of the middle class and working people in this state. I can’t be a part of that,” Romano said in a telephone interview. “If we’re moving towards some kind of budget compromise that does that, I disagree with it philosophically, morally and economically.”

The original version of the bill would have established 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.

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

Last Wednesday, Romano and Senator Glenn Jeffries, a Democrat from Putnam County, took their concerns to Senate President Mitch Carmichael. They asked for a fourth income tax bracket at the top.

“And I said we’re going to raise holy hell if there’s not a fourth bracket in here,” Romano recounted. “I asked for a fourth bracket of $125,000 at 6.25 percent.”

What came out was a new top bracket of 6 percent for those making more than $300,000. That bracket is written into the bill as temporary, ending in 2021.

Romano said that was an improvement, but he believes that’s still outweighed by other tax increases, especially the increase of the consumer sales tax from 6 percent to 7 percent.

“No doubt they’ve reduced the income tax rates for everybody,” he said. But, “remember this is in combination with some big tax increases too — the sales tax and the telecommunications tax. A 40-percent reduction to somebody making $500,000 is worth a helluva lot more than someone making $50,000.”

He added, “We’re raising other taxes to get this income tax reduction. The other taxes are purely regressive. Rich people are going to get more in taxes than these regressive taxes are being increased. The middle income and lower income people are going to pay more in taxes than they’re getting a break on. So you tell me if that’s fair.”

Appearing Tuesday on MetroNews’ “Talklilne,” Senate Minority Leader Roman Prezioso said establishing that fourth income tax tier for higher wage earners was a key to getting significant Democratic support.

“We didn’t agree with the numbers,” said Prezioso, D-Marion. “We thought the shift was going to be too much of a burden on the moderate- to low-income, and we wanted that fourth tier. We kept being insistent that we would get a fourth tier in there that targeted the rich. That’s what brought most of the Democrats into the fold on voting for that the last night.

“It’s not a perfect thing, but we thought if we looked at it as a total program, a recovery program to build into the future with the governor’s jobs program, we can move forward and we wouldn’t have to address this thing next year.”

Mike Woelfel

Senator Mike Woelfel, a Democrat from Cabell County, has been among those expressing concerns with the changes to the tax structure.

“Members of our caucus had proposed an additional tier, and really several of us believe that the tax rate for high income West Virginians is a little bit low. There’s an argument that the whole package is regressive,” Woelfel said in a Monday telephone interview.

“It talks about growing the base, but what it does is just to shift considerable tax burden to the working poor and middle class and shifts tax away from upper level earners as the reform moves forward.”

Woelfel said he voted for the revenue bill anyway because he viewed it as better than an earlier legislative budget that relied on $90 million from the Rainy Day Fund and trimmed millions from higher education and the medical services line item for the Division of Health and Human Resources.

“A number of members of our caucus were reticent about the direction it’s going to take our state, not to mention the big hole it’s going to leave in future budgets,” Woelfel said. “We wanted to support the governor, and this is certainly a better plan than the deep cuts.”

Woelfel was concerned not only about the proposed tax structure, but also about the geography of the effects of an increased sales tax.

“I’m in a border community in greater Huntington. The sales tax – we already have in Huntington, a one percent sales tax. We have lots of shopping options right across our bridges here. That’s going to effect business and jobs. Any time you go to a regressive tax like a  sales tax, to me it’s problematic.”

Mitch Carmichael

Senate President Carmichael has talked enthusiastically about the income tax reductions, saying they will spur investments in West Virginia’s economy. On Friday evening, Carmichael touted the measure’s support from the governor and its 32-1 passage vote in the Senate.

He objected to claims from the Republican majority in the House of Delegates that the bill represents too much of a tradeoff on other taxes to justify the income tax reduction.

“I would love to see good reporting on this,” said Carmichael, R-Jackson. “It really needs to be identified that what is missing from the public discourse on this is we just put forth a tax cut for West Virginia citizens that puts money in working families pockets. It’s a Republican initiative that’s signed onto by a Democratic governor, and it’s encountering opposition.”

Robert Karnes

Senator Robert Karnes, a Republican from Upshur County, shepherded the income tax changes through the Senate’s Select Committee on Tax Reform during the regular legislative session.

Karnes and other supporters view the income tax changes as a way to stimulate economic growth in West Virginia.

He was not particularly happy on Friday with changes to the income tax tiers proposed by the Democrats. But he said he was willing to accept the changes because he believes so strongly in the concept of lowering the income tax overall.

“That’s really what they’re shooting for, to say ‘Hey we’re going to try to still stick it to the rich guys.’ I think in West Virginia for the last eight decades we’ve had an attitude of ‘Let’s stick it to the rich guy’ and what we’ve actually done is we’ve chased most of them out of the state,” Karnes said during a break Friday on the Senate floor.

“We’ve chased most of their job-creating abilities out of the state as well. There’s a reason why we’re in the mess that we’re in and it’s because we’ve played class warfare for decades and we’ve chased people out of the state.”

Karnes went on to describe his broader view.

“I’m opposed to the idea of class warfare. I think we have to recognize that everybody contributes to society in different ways, and one of the things that’s been great about America and West Virginia in the past is we have been leading the world in the ability for people to move around economically from one strata to another.

“You can start out as the poorest guy in America and wind up as one of the richest, and that’s one of the great things in America. But when you attack wealth creation you’re actually stunting the ability for someone who is poor who starts to earn money to build their way up to the point where they can fit into the upper class.”

Sean O’Leary

Before the special session began, community groups and the West Virginia Center on Budget and Policy, a tax think tank and advocacy group, gathered to discuss their concerns over the tax structure in the revenue bill.

“There’s two major concerns with the compromise tax plans,” said Sean O’Leary, a policy analyst with the center. “The first one is that it doesn’t really close our budget gap. It’s not a structurally sound plan. It has that staggered cut with increases happening first. So it creates revenue in year one and next year we’re right back here with a budget gap.

“Beyond that, when the compromise becomes an overall reduction and you look at who’s getting a tax increase and who’s getting a tax cut, you’d be having a more regressive tax system. And because it doesn’t actually create revenue, you’d be asking most West Virginians to pay for a tax cut for wealthy West Virginians. That’s a real problem for West Virginia.”

Jim Justice

Asked on Friday evening to react to criticisms that the tax structure hits lower- and middle-income residents harder, Governor Justice expressed doubt.

“That’s not true at all. We tried to make a concerted effort to try as hard as we could to help the lowest income the very most and the middle very significantly. And the very highest, we even added a fourth bracket. We surely didn’t want to frontload and put a burden on the backs of the people,” Justice said during a news conference in the Governor’s Reception Room.

Mike Hall

Senate Finance Chairman Mike Hall, R-Putnam, said working out the math on aggressive income tax reductions is a challenge. Property tax rates are set in the state Constitution, so what’s left to raise if income tax is lowered is the sales tax.

Hall said citizens are more likely to notice the sales tax increase intended for July 1 than they are to feel the income tax decrease proposed for next Jan. 1. Hall has trouble seeing the tax package add up financially or politically.

“I just don’t see anywhere on the near term that you can safely get to the elimination of the income tax,” Hall said Tuesday morning.

“You can’t go to a 15 percent sales tax for Pete’s sake. You can see the struggle of even increasing a percent is difficult.”

John Unger

John Unger, a Democrat, is the only senator who voted against the revenue bill Friday evening. Unger said many of the effects, both on the budget and on the state’s tax structure, weren’t clear enough to give him confidence.

In a Tuesday morning telephone interview, Unger raised several questions. One was about the fairness of raising the sales tax on retirees who have saved all their lives while thinking their financial situations would be affected by the income tax. Another question was about what would happen to charitable giving if there’s no longer an incentive for income tax deductions.

“I’d like to see good research and data on this before voting on such a move,” said Unger, who is from Berkeley County. “I believe it is the fiscally-responsible thing to do for the people of West Virginia.”

If that weren’t enough to sort out, Democrats like Romano are also taking a look at changes to the severance tax in the revenue bill.

That was a matter negotiated behind the scenes between the Justice administration and coal operators right through the early hours of the special session.

Justice on Friday evening said the delay and the involvement of the West Virginia Coal Association was worthwhile. “I’m glad we waited because they came with some really good stuff.”

The bill establishes a sliding scale for different grades of coal.

Metallurgical coal is taxed at a bottom rate of 4.5 percent if its current sale price is $75 a ton and its top rate is 5 percent at $150 a ton and up. Steam coal is taxed at a bottom rate of 2.5 percent if it’s selling at less than $42 a ton and a top rate of 8 percent for coal selling at greater than $74 a ton. There are also rate scales for coal mined out of thin seams.

The original bill had a sliding severance tax scale for natural gas, but that was removed after representatives of the gas industry said the changes would inhibit their ability to compete with surrounding states and that they had not had an adequate opportunity to discuss the rates.

“Much to my chagrin, I understand that the Legislature in large part is allowing the industry players to be a part of arranging that severance tax sliding scale. As a matter of fact on the final bill, oil and gas was out,” Romano said. “You want to hear what the industry has to say but you can’t allow them to veto a provision in your bill.

“On the coal side, it’s my understanding that steam coal is going to get a 30 million tax break. If I’d have thought that budget was going to pass, I’d have objected to that.”

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