A broad-based business group says it has real reservations about Gov. Jim Justice’s big tax plan.
The Business and Industry Council distributed a memo to lawmakers this morning, laying out those concerns.
“We all agree the elimination of the personal income tax is a laudable goal, but BIC members believe there needs to be study, debate, and public input in order to develop a comprehensive tax restructuring plan,” the organization stated in the memo signed by chairman Mike Clowser.
The Business and Industry Council represents retailers, manufacturers, gas and mining companies, contractors, auto dealers, professional services, hospitals, realtors, foresters, beverage and beer wholesalers, telecommunication providers and more. That broad base makes it influential with West Virginia legislators.
BIC was an ally of Justice in his “Roads to Prosperity” effort that culminated with a vote of West Virginia citizens to allow West Virginia to generate highway improvement money through bonds.
For the current proposal, “We applaud Governor Justice’s initiative to do all he can to make West Virginia the most attractive state in the nation to live and work, but our members have concerns over the impact this income tax plan will have on every West Virginian and West Virginia business. ”
The memo included several bullet points about concerns by West Virginia businesses.
The governor is proposing a 60 percent cut in the state personal income tax, suggesting it will be a splash that will encourage population growth. He would like to eliminate the tax entirely within three years or so, banking on that growth.
The income tax accounts for about $2.1 billion of the state’s tax base, about 43 percent of the General Fund to pay for government services like education and healthcare.
An outline of the governor’s plan estimates initial personal income tax reductions totaling $1,035,650,000 and rebates totaling $52 million for lower-income residents — but also tax increases of $902,600,000 to make up for most of those breaks.
The proposal would also raise a variety of other taxes, including on soft drinks, tobacco, beer and wine. And Justice proposes taxing some professional services for the first time, including law offices, accountants, gyms and more. He also advocates a “luxury tax” on some items costing more than $5,000. And he proposes sliding scales for severance taxes for coal, oil and natural gas, paying more when markets are better.
Justice refers to the additional taxes as pulling the rope.
“To truly make this work, we all need to pull the rope together as West Virginians,” he stated in a document that was distributed this week.
The Business and Industry Council agrees that the tax plan could help individuals who pay the personal income tax. But it said many businesses wouldn’t benefit.
That’s because the governor’s proposal specifically exempts “Schedule C” businesses — essentially those classified as sole proprietors — from the income tax cut. But many of those same businesses would be subject to new sales taxes under the plan.
“The proposal reduces the personal income tax obligation of an individual wage earner based on their income level but does nothing to benefit a business,” the organization wrote.
“The majority of West Virginia businesses are operated as sole proprietors, limited liability companies limited partnerships or general partnerships. As we understand the proposed legislation, owners of these businesses will see no benefit from the plan.”
BIC members highlighted multiple areas of immediate concern with the legislation, including:
- West Virginia will have the highest state consumer sales tax rate in the nation at 7.9 percent (or 8.9 percent for those counties with a one percent municipal sales tax). With 60 percent of West Virginia’s population living on the border, and border state sales taxes ranging from 5.3 to 6 percent, this legislation could encourage state residents to cross the border to make purchases, thus hurting existing state businesses.
- The legislation would significantly raise taxes on tobacco products, beer, wine, liquor, and soft drinks. West Virginia consumers would pay more for these products, or for those that live near our borders, choose to make these purchases out of state. West Virginia has done a tremendous job in cultivating the craft beer industry. This will make West Virginia retailers and brewery companies less competitive and hurt sales.
- Businesses that currently do not pay consumer sales taxes and falling under the category of providing “professional services” (legal, accounting, advertising, and more), will be required to do so. Only three states in the country tax professional services and the impact of this will lead West Virginia professional service firms to be less competitive and/or consider moving operations out of state. Additionally, this class will be negatively impacted in three ways: 1) new tax on professional services; 2) increase in the consumer sales tax; and 3) paying increased taxes on other goods targeted in the proposed plan.
- The bill implements a tax on “luxury items” (jewelry, boats, ATVs, appliances, furniture, electronic equipment, etc.) that kicks in at a cost of $5,000 and is levied on the aggregate of items sold. West Virginians may choose to purchase these items in a surrounding state, given the additional tax, thus hurting state businesses that currently sell those products and lead to little tax revenue to the State.
- The severance of coal, gas and oil will be taxed in a tiered fashion equating to “if the market price goes up, they pay more, and if it goes down, they pay less”. Market pricing for these resources is complex and West Virginia already taxes these resources at some of the highest rates among market peers, potentially placing these industries in a less than competitive position. The oil and gas industry and the mining industry are reviewing to determine the impact on our already struggling coal and gas workforce.
- The proposed legislation leaves a funding gap of nearly $150 million (the difference between the amount the personal income tax brings in today and the amount the Governor’s proposed tax increases would contribute). The Legislature would need to identify significant cuts to state services or programs to make up the difference.
Justice was asked about concerns with how his tax plan would affect businesses during a town hall event last week. “I just read your proposal and it will kill many businesses such as mine,” said a citizen, identified as Greg of Kenova.
Justice responded, as he did with many questions, to promise population growth to take care of the concern.
“If you’re one of the professionals we’re talking about, putting you into the same category as a plumber or an electrician that pays the tax all the time — just step back and think about it. For the most part, the more wealthy people are using those services more than the poorest people. The more wealthy people are going to more easily be able to afford a slight increase than the people in our lower brackets.
“From the standpoint of the professional services you can pass along the tax we put on the professional services if you choose to do so. Or if you choose to be very, very competitive with your neighbors you can find a way to maybe eat part of that yourself. But the biggest thing that’s going to happen is just this: Where you have X amount of business today, if we do this and bring you a multiple of times of business, are you not going to be better off?”
Worries about how the plan would affect business have arisen in speeches at the state Legislature and in analysis by tax experts who monitor changes at the state level. One analyst predicted West Virginia’s tax proposal could increase taxes on business up to $330 million.
The Council on State Taxation, a nonprofit trade association representing multistate corporations, also expressed concern today that “the proposal will ultimately shift the State’s overall tax burden from individuals to businesses.”
“The proposed sales tax rate increase from 6 percent to 7.9 percent (a 32 percent increase) and expansion of the tax base to professional services would fall disproportionately on businesses,” wrote Patrick Reynolds, senior tax counsel with the Council on State Taxation.
Right now, the organization says, West Virginia derives about 44 percent of its sales tax revenue from taxing business-to-business transactions.
“The bill would increase this percentage and represents an increase in the overall tax burden on businesses,” Reynolds wrote. “The increased tax burden on business inputs will likely deter increased business activity (investment and jobs) in the state.”
Another analyst also concluded West Virginia’s tax proposal would represent an overall increase for business.
Ryan Maness, senior policy analyst and tax counsel for MultiState, a state and local government relations company, drew that conclusion in a post titled “West Virginia Tax Reform Carries Historic Price Tag for State Businesses.”
While individuals will see a tax cut, Maness concluded, state businesses will be on the hook for about $230-330 million in new taxes.
Maness also looked at the taxation of business-to-business transactions and the newly-taxed professional services.
“When West Virginia lawmakers assess whether this bill is the right course for their state, they should have a clear view of all of its costs and benefits,” Maness wrote.
“While individual taxpayers will see a net tax cut, tax hikes on job creators could result in more harm to people than the benefit of a modest individual income tax cut.”