The House Finance Committee has taken a step toward approving Governor Jim Justice’s proposal to eliminate the state income tax on Social Security benefits for middle and higher income West Virginians.
However, lawmakers are taking a more cautious approach to the tax cut. The bill that came out of committee would phase out the tax over three years, rather than eliminating it all at once and thus cutting an estimated $37 million out of state revenue.
“The shock to me of $37 million to the budget at one time is substantial enough not to consider doing this at this time when we’ve got all these other things rolling through at the same time,” committee chairman Vernon Criss (R, Wood). “It has been our custom, as well as our prudence, that we generally phase tax cuts in.”
Fair enough.
The state has already lowered the state income tax marginal rates by 21.25 percent, and the rates will be phased down more when certain revenue benchmarks are met. That is a boon to taxpayers, but it also represents an estimated $750 million drop in revenue to the state. The state is running surpluses now, but those conditions can shift rapidly. A phased in elimination of the tax on the remaining Social Security recipients is fiscally prudent.
The larger point is that West Virginia should get rid of the tax. West Virginia is one of only 12 states that still taxes Social Security benefits.* And the state has already phased out the tax on single filers who make less than $50,000 a year and joint filers under $100,000.
The Justice administration estimates that excluding Social Security benefits at all income levels from the state income tax will benefit at least 50,000 senior households.
Opponents will argue that those seniors are well off and that they don’t need the money, but that isn’t the point. Employees contributed 6.2 percent of every paycheck into Social Security during their working years, and that is included in the total amount of taxable income. Therefore, when an individual retires, West Virginia is taxing the income again.
In addition, regardless of what the states do, the federal government still takes its share. Since 1984, Social Security benefits have been subject to federal income taxes. Up to 85 percent of benefits may be subject to federal taxes for higher income earners.
It is unlikely the federal government will ever get rid of its income tax on Social Security since Washington always needs more money. The Congressional Budget Office estimates the deficit just this year will be $1.5 trillion. But taxing West Virginians on their benefits has no impact on that one way or another.
Eliminating the state income tax on Social Security benefits for middle and higher income individuals is one more step toward making the Mountain State a more attractive relocation destination, while simultaneously encouraging that demographic to remain here in retirement where they can keep more of their own money.