CHARLESTON, W.Va. — Assessments of two different revenue plans by the Senate and House of Delegates show very different results.
The House proposal is expected to raise a little more than $100 million in additional revenue for the coming fiscal year, mainly by eliminating sales tax exemptions on some economic sectors. That leaves the plan about $150 million short of bridging the state’s fiscal gap.
The Senate proposal raises an estimated $147 million for the coming fiscal year, both by eliminating some exemptions and also by raising the state sales tax to 7.25 percent. But it results in significant revenue reductions in the years after that through proposed tax decreases.
The plans have been at odds within the Legislature as the House passed its proposal with a bipartisan 74-17 vote on May 16
The Senate passed its plan May 24 on a 18-13 vote that included all Republicans except for Senator Randy Smith voting in favor and all Democrats against. The House then voted 85-0 to refuse to concur.
The Legislature then recessed from its special session until June 5, this coming Monday, to allow time for negotiations among all sides and Gov. Jim Justice.
What might result is some sort of compromise, but it’s worth getting into the nuts and bolts of what each house’s plan is expected to do to affect Justice’s budget proposal of $4.35 billion. This is based on fiscal notes filed by the state Department of Revenue, assessing the potential effects of each bill. The assessments don’t take into account any potential boost in economic activity that could result from changes to policy:
House of Delegates leaves gap this year, but not deeper gaps in coming years
The House plan is anticipated to raise an additional $105.5 million for the coming fiscal year, mainly by extending the state sales tax to additional economic sectors such as telecommunications and communications.
The House plan also would eliminate income taxes for veterans’ retirement and Social Security income, but it would stop short of the broader personal income tax reductions and elimination that the Senate plan would aim to do.
Those income tax exemptions would still offset some of the “broadening-the-base” revenue anticipated by the House plan.
So over the coming years, the House plan is anticipated to bring in smaller amounts of additional revenue: an additional $72.3 million in fiscal year 2019, $38.2 million in 2020, by $30.6 in 2021, and $27.3 million in 2022.
The House bill would raise revenue by removing exemptions for telecommunications services; electronic data processing; health and fitness memberships; primary opinion research; materials directly used in communications with the exception of those materials used for developing broadband infrastructure; and the annual Division of Highways transfer for sales taxes paid on construction materials. The bill would change current law affecting contracting by taxing the first $40,000 of labor services.
All those changes would start July 1, although the annual Division of Highways transfer would stop earlier than that. But since July 1 is approaching rapidly, the state revenue department anticipates lower initial collections because vendors and tax collectors are running out of time to adequately prepare for the upcoming tax changes.
Just by themselves, the elimination of those exemptions would increase General Revenue Fund collections by about $124.2 million in fiscal year 2018, reflecting an 11-month collection period, $137.4 million in 2019, and $140.4 million in 2020. By fiscal year 2022, estimated increases to General Revenue Fund revenue collections are expected to be about $148.0 million.
State officials anticipate the House proposal would result in a small increase in revenues for the Sales Tax Increment Financing Districts and about $6 million for the local governments that levy municipal sales taxes.
The proposal would allow all military retirement benefits to be exempt from personal income tax starting Jan. 1, 2018.
Then it would begin a three-year phase-out of taxable Social Security income for those making less than $100,000 by exempting 25 percent starting Jan. 1, 2018, 50 percent Jan. 1, 2019, and 100 percent Jan. 1, 2020,
Finally, it would increase the personal exemption allowance to $2,500 per person for individuals with federal adjusted gross income of less than $100,000 beginning Jan. 1, 2018.
The changes are expected to reduce General Revenue Fund collections by about $18.7 million in fiscal year 2018 and $63.5 million in fiscal year 2019. Following that, the resulting revenue reductions are expected to be $100.6 million in fiscal year 2020, $112.2 million in 2021, and $119.1 million in 2022.
The House plan strips out severance tax changes that were supported by the governor and included in the Senate’s plan.
Senate plan comes closer this year, but potentially leaves big holes in coming budgets
The Senate plan is expected to generate an additional $147.3 million for the coming fiscal year.
After that, state analysts anticipate decreased tax collections as reductions in the personal income tax take effect: reductions of $56.1 million in fiscal year 2019, $121.5 million in fiscal 2020, $137.4 million in 2021, and $177.6 million in 2022.
That’s because the Senate plan proposes to raise the consumer sales tax to 7.25 percent from its current 6 percent. Six months later, it would begin a reduction of the personal income tax — 15 percent starting Jan. 1, 2018, followed by another 5 percent the next year. After that, triggers could result in continued reductions, eventually leading to elimination.
The Senate plan also broadens the sales tax to economic areas such as telecommunications, digital goods, electronic data processing services, health fitness memberships and primary opinion research. The bill would add a new sales tax exemption for services of professional employer organizations, resulting in a small loss of revenue.
The bill would also eliminate the annual transfer of General Revenue Fund sales tax collections to the State Road Fund, an estimated net gain of $11.7 million per year for the General Fund.
The revenue department anticipates increased sales tax collections in fiscal year 2018 of about $311.5 million, including the State Road Fund sales tax transfer and assuming full immediate compliance with the tax changes. For fiscal 2019, sales tax receipts are estimated to rise by $346.9 million.
But, as with the House plan, the revenue department is already warning there could be lag time for vendors and tax collectors to prepare for the changes.
For municipalities that collect a local sales tax of up to 1 percent, local municipal sales tax collections are estimated to grow by roughly $3.5 million per year because of the elimination of exemptions.
As the sales tax collections increase, collections from personal income tax are expected to decrease.
The fiscal note provides some words of caution about this approach:
“The primary objective of this bill appears to be the elimination of the Personal Income Tax. An examination of the complete financial structure of those States that choose not to impose a Personal Income Tax might be a helpful consideration. These other states tend to rely much more heavily upon local governments and real property tax collections to provide services. States relying on local taxes for a majority of total state and local government financial responsibilities tend to spend more conservatively than others. However, most government financial responsibility resides at the state level in West Virginia as a result of the State imposing very low real property taxes on residents and lower than average real property taxes on commercial properties. Such policy is not likely to change because West Virginia decided to greatly limit the property tax many years ago by placing specific provisions in its Constitution.
“In addition to higher than average real property taxes, states without income taxes tend to impose special hybrid taxes to compensate for the lack of a broad-based individual income tax. Some of these taxes include the Business and Occupation Tax and Estate Tax in Washington, the Commerce Tax in Nevada, both a Franchise Tax and an Income Excise Tax on corporations and pass-through business entities in Tennessee, the Gross Margins Tax in Texas, and both the Business Profits Tax and Business Enterprise Tax in New Hampshire. Many states without income taxes also impose significantly greater sales tax burdens on business inputs than West Virginia. These states include Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Two states without a personal income tax, Alaska and Wyoming, are fortunate to have a very high ratio of mining output per resident with high natural resource related tax collections exported to nonresidents. However, Alaska is currently considering adoption of an income tax to address, in part, a growing fiscal deficit due largely to reduced natural resource extraction activities.”
The current five-bracket tax rate structure has a bottom rate of 3 percent and a top rate of 6.5 percent.
The proposed changes are described by state leaders as an average 20 percent reduction over two years.
Starting Jan. 1, 2018, the state would change to a four-bracket system with the following rates: 2.25 percent on the first $20,000; 3.95 percent on taxable income ranging between $20,000 and $35,000; 5.65 percent for taxable income between $35,000 and $200,000; and 6 percent for taxable income of $200,000 or more.
On Jan. 1, 2019, rates for the tiers would become 1.85 percent, 3.65 percent, 5.45 percent and 6 percent.
Changes to the personal income tax structure are anticipated to result in revenue losses of about $108 million in fiscal 2018, $314 million in fiscal 2019, the first full year of the personal income tax reductions, and about $382 million in fiscal 2020.
As supporters point out, those estimates don’t include the possibility of enhanced economic activity resulting from the income tax reductions.
The bill also contains a trigger mechanism that would further reduce personal income tax rates beginning as early as 2020 by 0.1 percentage points when certain conditions are met.
A rate reduction would occur if net collections for the General Revenue Fund increase by $110 million over the prior year, annually adjusted upward by half of Consumer Price Index inflation.
So, for example, if fiscal 2019 General Revenue Fund net collections exceed the prior year’s by at least $110 million, personal income tax rates for all tiers would reduce by 0.1 percentage points starting Jan. 1, 2020.
The revenue department anticipates the first likely triggered reduction could occur in 2022. If that’s the case, the revenue department anticipates fiscal 2021 personal income tax revenues may be reduced by nearly $400 million, and fiscal 2022 revenues may be reduced by about $438 million, assuming normal growth.
The Senate’s proposal also includes exemptions for Social Security income, reducing personal income tax collections by $9.1 million in fiscal 2018, by $42.3 million in fiscal 2019, $48.8 million in fiscal 2020, $52 million in fiscal 2021 and $56 million in fiscal 2022.
The Senate’s bill would also exempt military pensions at a cost of about $1 million in fiscal 2018 and about $3 million per year after that when the exemption is fully phased in.
The Senate’s bill replaces the current severance tax rate structure on coal with tiered tax rate structures meant to reduce taxes when prices are low and raise taxes when prices are high.
At current price levels, the proposed changes would result in a decrease in tax liability for steam coal and some potential small decrease in tax liability for certain types of thin-seam and some metallurgical coal, according to the fiscal note for the Senate plan.
The net impact of the proposed severance tax changes would be a $49.9 million reduction in state coal severance tax collections during the coming fiscal year compared to current law.
Coal counties that produce coal would lose an additional $1.7 million in fiscal 2018 in shared coal severance tax revenues. Beginning in fiscal 2019, the annual loss in state coal Severance Tax revenues would approach $51.0 million and the annual loss in county coal severance tax collections would approach or exceed $2.3 million per year.
Based on past independent research reports, lower tax rates on steam coal may result in a very modest increase in annual production, according to the revenue department.
The bill would temporarily increase the corporate net income tax rate from 6.5 percent to 7 percent beginning Jan. 1, 2018. Corporation net income tax revenues would rise by roughly $3.8 million in fiscal 2018, by $9.1 million in fiscal 2019, by $10.3 million in fiscal 2020, and by $7 million in fiscal 2021.
Both the Senate and House bills would increase the State Historic Rehabilitated Buildings Tax Credit from 10 percent to 25 percent, resulting in a net cost of $1.6 million per year beginning as early as fiscal 2019.