CHARLESTON, W.Va. — Gov. Jim Justice says he is a numbers guy and a fact guy.
The trouble is, if you are also a numbers guy trying to figure out the long-term effects of an income tax overhaul favored by the governor, the facts have been few and far between.
After behind-the-scenes negotiations produced “The Tax Reform Act of 2017” last week, the Republican majority in the state Senate passed it Tuesday with no fiscal assessment available to the public. Fiscal notes take time, but there’s still none listed.
The bill aims to balance the budget for the coming fiscal year by raising the state sales tax to 6.95 percent starting July 1 while also lowering the personal income tax by an average of 20 percent over two years, starting next Jan. 1.
The bill then would continue to reduce and eventually eliminate the personal income tax over time, if economic triggers are hit. It’s those years that concern skeptics.
Governor Justice, speaking to the House of Delegates last week, said to trust him.
“I deal in logic, and I deal in facts,” Justice said at the beginning of his remarks to delegates.
The governor later touched on the common comparison with Kansas, which reduced its income tax a few years ago and is now struggling to balance its budget.
Justice said he understands the desire to be careful but then said too much caution could result in too few economic incentives.
“As you progress forward, you may say ‘Well let’s do this. Let’s slow down the rate of how aggressively we cut back the income taxes because we don’t want to end up like Kansas.’ Well, I’m with you. I’m with you wholeheartedly,” the governor said.
“Well, we’ve got triggers built in to make sure we don’t end up like Kansas. But I would tell you just this if you slow it and slow it and slow it down, you might as well not do it because it’s not going to have any effect.”
Justice said the state’s finances are already in terrible shape — and that’s even more reason to take dramatic action. If that backfires, he suggested, West Virginia could adjust when the time arrives.
“Don’t forget where you came from. Where you are is you are upside down $500 million and getting ready to go upside down $700 million.
“We know we can balance ourselves in ’18 and ’19 but with this income tax thing, we go off the track and every way and we’ve got a billion-dollar deficit in 2021. Don’t believe that.”
What’s more, he promised, his aggressive roads construction plan will produce its own economic growth, offsetting any risk from the income tax restructuring.
“Of everything I’m good at, I can buzz the bloomin’ numbers. I’m telling you what happens is this those road jobs save your bloomin’ bacon for a long time. And if you don’t cut the income tax enough to get real growth coming, the road jobs will run out.
“And when the road jobs run out if you don’t have some kind of growth then you’re going to have to backfill and you’re going to have to do something.
He concluded that taking a big chance is better than sitting still.
“I would rather put myself on a pathway of hope and put myself on a pathway of doing something with this drug epidemic and put myself on a pathway to really doing something,” he said.
“And maybe it doesn’t work in 2021, 2022. If it doesn’t work, we may have to step back and adjust what we need to do. We’ve got our leg in a crocodile’s mouth.”
How far into the crocodile’s mouth, and how much farther if the economy doesn’t break the way the governor wants?
Well, that’s what’s hard to figure.
An early estimate, calculated almost a month ago now by state deputy revenue secretary Mark Muchow, suggested an income tax reduction of 20 percent in one year would drop revenue by $380 million. And a full tax plan the Senate was considering at that time could have lowered revenue by $170 million in fiscal year 2019 and 2020 and then $220 million by 2021.
But the plan that Muchow assessed changed over and over and over, sometimes several times in a day during the course of negotiations between the Senate and the administration in the special session.
The final version of the bill itself, as expressed by a strike-and-insert amendment sponsored by Senator Robert Karnes, the chief architect of the income tax proposal, establishes four tax brackets:
At the bottom is an income tax rate of 2.25 percent for those making $20,000 or less; next, 3.95 percent for those earning between $20,000 and $35,000; 5.65 percent for those earning between $35,000 and $250,000 and 6 percent for those who make more than $250,000.
West Virginia’s current lowest income tax bracket is 3 percent for those making less than $10,000 and its current top income tax rate is 6.5 percent for those making more than $60,000.
Republicans in the Senate emphasize that each new bracket represents a tax break for wage earners.
But the Republicans in the House and Democrats in both houses have expressed concern that the top bracket gets the highest break in terms of sheer dollars while everyone will pay higher sales taxes regardless of income.
More concern is aimed at the triggered income tax reductions over time.
After fiscal year 2018, when the general fund has gone up by $110,000 over the prior trigger — adjusted upward by one-half of the annual growth of the consumer price index — then the tax rates will drop by one-tenth of a percent until they reach zero.
There are some other rules, too, but that’s a complicated enough way of expressing it.
MORE: Read the Tax Reform Act of 2017.
The governor’s chief of staff, Nick Casey, last week said the complex nature of the income tax cuts and the frequent changes made assessing their effects a major challenge.
“The fiscal assessment for the final bill that was passed is in process,” Casey, an accountant, said last Wednesday. “The complexity of that is when you change the personal income tax rates – like, move a bracket – there’s quite a bit of calculations you have to get to put that together.
“So we’ve had rough fiscal information when someone would say ‘Well, what’s it going to be if you had a bracket that starts at $300,000. Well, then drop it down another $50,000’ and you have to go through another set of gyrations and calculations.”
Casey said he was comfortable with the bill as it developed.
“We have to have a balanced budget. So when you look at all the iterations and discussions of the bill, we were always running kind of a financial analysis of it – not down to the nickels and dimes but on a $4-billion-dollar budget down to the 1 or 2 percents.
“One percent of $4 billion is $40 million, so they were running that kind of information on it. So changing the sales tax rate from 6 to 6.5 or 6.85 to 6.95 takes a little bit of calculation. Also the base adjusts, and there was a base you calculate it on. And as of last night they took out two parts of the base.
“You have to recalculate again, so it’s a target that’s moving but a target you can work on.”
The uncertainty is even greater in later years. Not only are the income tax reductions hard to predict but other factors — such as energy markets and federal policy like the handling of Medicaid — could have major effects on state revenue.
“And then as you go into further out years it gets to be more of a concern. Part of that is because it is difficult for the financial folks to estimate severance taxes. It’s on the upswing now. How long will the upswing last?
“The other thing making it difficult on the out years is Washington, Medicaid for example. So a lot of the out years are of concern to us because of instability, because of the coal marketplace, what’s going on in Washington.”
As for the revenue bill itself, Casey thought an assessment might be publicly available by late last week. By the weekend, though, that section of the Legislature’s website was still marked in red with the phrase “Tax & Revenue Department, WV State has not submitted yet.”
None of that stopped the Senate’s Republicans from embracing the proposal.
Senate President Mitch Carmichael, after senators passed the bill 19-11 on Tuesday, expressed enthusiasm consistent with his position over the past few weeks.
Carmichael and most other Republicans in the Senate say they believe the income tax reductions will provide more money in people’s pockets and greater potential for economic growth.
“We’ve come to the point where we’re able to fill the budget holes and provides tax relief for working West Virginians,” said Carmichael, R-Jackson.
“The governor believes and the Senate concurs that this is a pro-growth strategy that will end up making our financial prospectives look much better than they currently are.”
Carmichael says only average economic growth or better would be necessary to make up for the state revenue lost to income tax reductions. He suggested those who say otherwise should have their conclusions challenged.
“You should be looking for ways to say yes to a proposal that cuts taxes for West Virginia and provides jobs and opportunity,” he said.
Democrats in the Senate, despite saying yes to an earlier version that passed 32-1 before being killed in the House, voted nay on the most recent.
Senate Minority Leader Roman Prezioso said last week that he and his fellow Democrats were concerned about overall tax effects on the lower- and middle-class, the fiscal uncertainty in later years and the fact that the House had already rejected versions of the bill.
“It seems now we’re trying to piecemeal it together and make it work on one side of the aisle and shove it down the other side,” Prezioso, D-Marion, said Wednesday evening.
“That just doesn’t work. You’re going to need consensus.”
As debate focused on the Senate’s compromise with the governor, others grew frustrated by its fluid nature, said House Majority Leader Daryl Cowles.
“That frustration is not just shared by Senate Democrats,” Cowles, R-Morgan, said at the midpoint of last week. “That is shared by a number of members, that the plan is always changing — the details are missing, the analysis on background. We need all that, and the sooner the better.”
On Friday, the House of Delegates approved its own revenue bill, 74-17, with support from Republicans and Democrats.
The House’s version removed sections restructuring the income tax and coal severances taxes while keeping the sales tax as-is. It adds new taxes to telecommunications and communications industries.
It does offer tax breaks to veterans retirement income and to Social Security income.
HOPPY KERCHEVAL: House revenue bill signals budget progress
There are still questions about the House’s version — most notably how far it goes toward balancing the budget.
Like the Senate’s version, the House’s passed without a fiscal note. But internal estimates put it at increasing revenue by about $100 million, still leaving a gap of about $100 million.
But unlike the Senate’s version, the House’s was brought up and discussed in the Finance Committee, giving delegates a chance to ask questions.
Both Muchow and state Tax Secretary Dale Steager were brought before the committee to discuss their impressions of the House proposal, although both noted they had just recently been able to read it.
Delegate Brent Boggs, the ranking Democrat on the Finance Committee, said members of his caucus have felt more comfortable with tax implications being discussed in the open.
“We do, and I think the House Republicans do as well. That’s one of the reasons we’ve been looking at things up in committee the last couple of days,” said Boggs, D-Braxton.
“The more information we get out the easier it is to make an informed decision instead of a rash decision.”
House Finance Chairman Eric Nelson said committee members of both parties wanted a chance to discuss the House’s version of the revenue bill and to ask questions of experts like Muchow.
“The committee members want to look at the whole bill, have full discussion, much greater discussion,” Nelson said Wednesday.
“When you’re on the floor, you don’t have that opportunity for anyone outside a member to speak in favor or against the bill. It’s the proper thing to do.”
At the time he spoke, Nelson said he hadn’t fully studied the ins and outs of the Senate’s bill. He said he remained concerned about the possibility of holes in future budgets.
“I know conceptually what it does. I think I have expressed certain concerns all along about doing our best to put together a structurally-sound financial situation not only for next year but also ’19 and beyond,” said Nelson, R-Kanawha.
Starting this week, lawmakers will begin to work out differences between the Senate’s plan and the House’s version, likely through a conference committee.
When Justice spoke to delegates from a table at the front of the House chambers last week, he made clear he prefers the ambitious route. He believes taking a big chance will pay off.
“Maybe it works, and if it works we go straight to the roof. We do wonderful,” the governor said.
“If it doesn’t work and we’ve got our foot in the crocodile’s mouth in 2021 or 2022. But right now we’ve got our whole leg in the crocodile’s mouth.”