A Marriage Not Made in Heaven: A State EITC Without an Income Tax

Last Friday, the Senate Select Committee on Tax Reform explored the idea of amending SB 335 to include a version of a refundable state Earned Income Tax Credit. As noted previously, SB 335 would replace the personal and corporate income tax, along with the sales and use tax, with a general consumption tax of 8 percent. One major problem with this idea is that if West Virginia ceases to have an income tax , how could it create an WV EITC that is based on someones state income tax liability (see here for how a WV EITC would work)? How big would a WV EITC have to be to offset the increased tax liabilities for low-income West Virginians if SB 335 is enacted?

Let’s look at the first question. Washington State is the only state in the country that does not have a state income tax that currently has a refundable state tax credit based on the federal EITC (10%) called the Working Families Tax Exemption (WFTE). While the WFTE was enacted in 2008, it has never been activated or funded because of ongoing budget problems. Another major problem with the WFTE is that it has very high administrative costs because the state does not have an income tax ($4.4 million) which complicates the application process. So, while it is possible to have a refundable state EITC without an state income tax, it is not a marriage made in heaven.

Another issue that came up during the committee meeting on Friday was how large a West Virginia EITC would have to be to offset the tax increases imposed on the bottom 40 percent of tax payers in West Virginia under SB 335. As the graph below highlights, those in the bottom 20 percent (less than $19,000) would see an average tax increase of $500 while those in the second 20 percent (less than $33,000) would see a tax increase of $946.

In order to offset the tax increase of those under $19,000 (bottom 20 percent), it would cost approximately $233 million, and to offset everyone under $33,000 (bottom 40 percent) it would take approximately $412 million. If lawmakers wanted to use a state EITC to make sure the average taxpayer in the bottom 20 percent was held harmless it would require a state EITC that is 65 percent of the federal EITC and 115 percent of the federal EITC to offset everyone in the bottom 40 percent making under $33,000. However, if just a state EITC is used to offset the $412 million in increased taxes under SB 335 for the bottom 40 percent, many people would be left behind while some EITC recipients would see a large tax cut. This is because a good portion of those in the bottom 40 percent of taxpayers are not eligible or receive very little from the EITC (97 percent of EITC benefits goes to households with children).

For example, in 2014, the average EITC credit was $2,241 in West Virginia. At 115 percent of the federal credit, the average state EITC would be $2,577 in West Virginia. If this person is in the second 20 percent, this means that may see a net tax decrease of over $1,600 on average ($2,577-$946= $1,631). The central reason for the discrepancy is only a portion of those in the bottom 40 percent of taxpayers receive benefits from the EITC, as mentioned above. In 2014, approximately 161,000 tax filers in West Virginia received the federal EITC while 513,000 tax filers had income within the EITC income limits that did not receive a EITC.  In other words, EITC recipients only make up about one-third of tax filers below $50,000 (EITC max income range), not including those with low incomes that didn’t file taxes at all. If you only use a refundable state EITC to offset the total tax increase ($412 million for bottom 40 percent as a whole), people that are eligible for the EITC will likely receive a tax cut while others that receive little to nothing from the EITC will continue to see a large tax increase. This was a major point of confusion at the committee meeting, but I hope this helps clarify why a WV EITC would only offset the tax hikes for those that are eligible for an EITC.

Of course, none of this analysis takes away from the fact that this bill would offer huge tax cuts for the wealthy and that to make low-income West Virginians hole would require a large drop in the amount of revenue that the new consumption tax brings to the budget. This would likly mean large budget cuts, which takes us in the opposite direction we want to go when we are facing a $500 million budget gap this year.

 

 

 

 

Governor Justice Offers Revised Plan to Balance State Budget

Governor Justice held a press conference Monday, where he laid out an alternative plan to closing the state’s $497 million FY 2018 budget gap. It revises the plan in the Governor’s proposed FY 2018 Executive Budget, by reducing the proposed increases in sales and business taxes, while calling for higher taxes on tobacco and sugar-sweetened beverages.

On the expenditure side, the governor made few changes from the original plan of $26 million in targeted cuts, including cuts to WVU, Marshall University, and the Education Broadcast Authority. With his revised plan, the governor proposed spreading out appropriations to his Save Our State (“SOS”) fund over three years, reducing the impact on the FY 2018 budget by $70 million. He also proposed “smoothing” the annual required contribution for the teachers’ retirement system, which would reduce the state’s payment in the FY 2018 budget by $40.75 million. The governor also noted that he would be open to further cuts of up to $50 million total, but left it to the legislature to identify where to make them.

On the revenue side, there are some significant changes. To recap, in his original FY 2018 budget proposal, Governor Justice proposed raising $450 million in new revenue to help close the budget gap. This included increasing the sales tax from 6.0% to 6.5% as well as broadening the sales tax base to include professional and advertising services. The proposal also included increases to the beer barrel and wholesale liquor taxes. The governor also proposed a new Commercial Activity Tax of 0.2% on businesses.

In his revised plan, the governor proposed a smaller increase in the sales tax, from 6.0% to 6.25%, while still broadening the base to include professional services, but not advertising services. He also proposed a smaller Commercial Activity Tax of 0.075% instead of 0.2%. The governor’s revised proposal keeps the increases on the beer barrel and wholesale liquor taxes, and also increases the tax on sugary drinks and cigarettes, as part of a “Better Health Initiative for WV.” Finally, the governor proposed a new high-income surcharge of $500 for annual incomes above $200,000, $750 for incomes above $250,000, and $1,000 for incomes above $300,000.

Presumably still on the table is the governor’s alternative budget that spells out the spending cuts needed to balance the budget absent any new revenue. This includes major cuts to higher education, including closing several colleges, eliminating the PROMISE scholarship program, and eliminating state funding to Senior Services, public libraries, Veterans’ Assistance, and Education and the Arts, among other cuts.

Tiered Natural Gas Severance Tax Proposal Effectively Doesn’t Change Much

One of Governor Jim Justice’s proposals in his Fiscal Year 2018 Executive Budget was to tier the state’s severance tax on coal and natural gas. Rather than the current flat 5 percent of production value, a tiered severance tax rate would adjust based on the price of coal or natural gas. While the budget document did not have the details of the proposal, Senate Bill 415, introduced this week at the request of the governor, shows how that would work for natural gas.

SB 415 replaces the 5 percent severance tax on natural gas with a tiered rate based on price. The rates range from 5 percent for when the price of natural gas is at or below $3.00/MCF up to 10 percent when the price is at or above $9.00/MCF.

While the bill potentially doubles the severance tax on natural gas, it is unlikely to have much of an impact. The last time the average price of natural gas produced in West Virginia was above $3.00/MCF was in FY2014, when the price averaged an estimated $4.12/MCF, and natural gas severance tax collections peaked at $161 million. Since then, the price of natural gas has plummeted, and for FY 2016, the price of natural gas produced in West Virginia averaged an estimated $1.08/MCF.

Under the tiered tax system in SB 415, the price of natural gas produced in West Virginia would have to nearly triple just to bump up the rate from its current 5 percent to 5.5 percent. And that dramatic increase in price does not seem likely anytime soon. According to the federal Energy Information Agency, the national price of natural gas is projected to increase by 2.5 percent per year from 2016 to 2050. At that rate the price of natural gas in West Virginia would still only be $2.52/MCF by 2050, well below the threshold to increase the rate.

Despite its potential to substantially increase the severance tax on natural gas, the tiered tax proposed in SB 415 is unlikely to result in any change in the state’s severance tax on natural gas.

Governor Justice’s Tax Plan: Who Pays?

Governor Jim Justice has not introduced any tax measures yet, but in his State of the State Address and his executive budget  there are plans to enact several tax increases to close the Fiscal Year 2018 budget gap of $500 million and address the state’s declining road fund that pays for highway construction, maintenance, and road repairs. This includes an estimated $450.2 million in the proposed general revenue fund revenue enhancements and $177 million in new revenue for the state road fund. While Governor Justice should be commended for putting forth much-needed revenue to address the state’s growing budget crisis, the combined impact of his tax increases will fall harder on low-income West Virginians. Instead of just relying on regressive tax measures, Governor Justice should include revenue enhancements that ask a little more from the folks that have received most of the income gains in the state over the last several decades.

Governor Justice’s proposed revenue enhancements for FY 2018 include:

General Revenue Fund Revenue Enhancements

  • Increasing the Sales & Use Tax from 6 percent to 6.5 percent ($92.7 million).
  • Broadening the Sales Tax base to include some professional services ($82 million) and advertising services ($5.6 million).
  • Enacting a new Commercial Activity Tax (gross receipts tax) on businesses of 0.2 percent ($214 million).
  • Raising Beer Barrel Tax from $5.50 to $8.00 ($2.8 million) and Wholesale Liquor from 28 percent to 32% ($2.8 million).
  • Repealing Film Tax Credit ($2.5 million in FY19), modifying Excess Acreage Tax to 5 cents per acre (unknown), and a new tiered Severance Tax rate (unknown).
  • Ending a general revenue fund transfer to Division of Highways ($11.7 million) and re-directing Workers’ Compensation Debt Fund revenue (onetime money) to general revenue fund in FY 2017 ($25.5 million) and FY2018 ($38.25).

State Road Fund Enhancements

  • Raising the excise motor fuel tax from 20.5 cents per gallon to 30.5 cents per gallon ($144 million)
  • Raise Division of Motor Vehicle registration fees from $30 to $50 ($33 million)
  • Implementing a $1 toll increase on the West Virginia Turnpike ($500 million) to fund a Turnpike Bond, a voter approved general obligation bond ($400 million), and legislative approval for increasing GARVEE capacity (bond) ($500 million).

The specifics of the revenue enhancements listed above are unknown, but it is clear that the brunt of the changes will fall harder on low-income West Virginians compared to those with higher incomes. The chart below illustrates this point by looking at the tax impact of the proposed sales tax changes, enactment of a new commercial activities tax, and the 10 cent gas tax increase. For West Virginians that only make $11,000 annually (lowest 20 percent), they will pay on average 1.3 percent more of their income in additional taxes or $133 dollars. For West Virginians in the top one percent who make on average $778,000, they will pay an additional 0.2 percent of their income in taxes under Justice’s revenue plan. While the amount of taxes paid by income group increases with income, the tax change as a share of income decreases – meaning that it takes a larger bit out of low and middle income taxpayers than higher income West Virginians.

Until Governor Justice’s revenue plan is introduced, it will be difficult to measure exactly how it will impact working families in the state. That said, it is clear that it would fall hardest on low-income people in the state. There are number of options that exist to make his plan more balanced. This could include reinstating the business franchise tax and raising the corporate net income tax to their 2006 levels, increasing the severance tax on natural gas from 5 percent to 6.5 percent, enacting a three percent income tax surcharge on incomes above $200,000, and creating a refundable state Earned Income Tax Credit that is available in 26 other states. Lawmakers could also include expanding the sales tax base to include digital downloads and other personal services. 

Though Justice’s tax plan is not perfect, it offers a real opportunity for lawmakers to include more progressive revenue enhancements that will ensure that state addresses its huge budget crisis while ensuring that it takes a balanced approach to tax increases that is more closely aligned with the ability to pay.

Replacing Income Taxes with a General Consumption Tax is Radical and Regressive (SB 335)

Senate leadership introduced SB 335 which would would abolish the personal income tax and sales and use tax, phase out the corporate income tax, lower the severance tax, and replace these taxes with an 8 percent broad-based general consumption or sales tax. While it is unclear whether this tax shift would be revenue neutral, it would dramatically increase taxes on most West Virginians and give large tax breaks to the wealthiest people in the state. West Virginia would also be the only state with a general consumption tax.

According to SB 335, the 6 percent sales and use tax would be repealed on July 1, 2017, and the personal income tax would be repealed on January 1, 2018. A new and temporary flat personal income tax would be created on January 1, 2018, but would be phased out by 2021. The flat personal income tax rate would be 0.60 percent in 2018, 0.40 percent in 2019, 0.20 percent in 2020, and zero in 2021 when it is eliminated (see current personal income tax brackets here).

The corporate net income tax would be phased out beginning January 1, 2018, as long as the balance of the Rainy Day Funds (A & B) are 10 percent of the general revenue fund expenditures (it’s 15.1 percent today). If this trigger is met, the corporate net income tax rate would fall from 6.5 percent in 2017 to 5.5 percent in 2018; 4.5 percent in 2019; 3.5 percent in 2020; 2.5 percent in 2021, 1.5 percent in 2022; 0.5 percent in 2023; and zero in 2024. The severance tax (coal, oil, natural gas, and other minerals) rate would drop by 2 percentage points based on the same trigger as the drop in the corporate net income tax rate. This would reduce the rate from 5 percent today, to 4 percent in 2018 and 3 percent in 2019.

While the new general consumption tax is very broad, it contains a number of modifications and exemptions. The modifications include two different tax rates on motor vehicles. The consumption tax rate would be 8 percent on the first $10,000 of a vehicle and then 6 percent rate on anything over that amount. The general consumption tax also exempts many items that are already exempt under law – including nonprofit and government purchases, sales for resale for businesses, and a direct use exemption for agriculture, natural resource production, and manufacturing, to name just a few.

Though it is not clear what the revenue impact of SB 335 would be, if it is revenue neutral (big if) it would need to generate over $3 billion in revenue annually and it would comprise over three-quarters of the state’s general revenue fund budget.

Eliminating West Virginia’s income taxes and its sales and use tax and replacing it with a general consumption tax – which operates the same as a sales tax – would make the state’s upside down state and local tax system even more regressive and it would give large tax cuts to those that don’t need them and huge tax increases to those who are struggling to get by. It would also mean that West Virginia would have the highest statewide tax on groceries.

As the chart below highlights, somebody making on average $26,000 a year (second 20 percent) would pay an additional $946 in taxes under SB 335, while someone in the top one percent would get a tax break of nearly $28,000. This is a “Robin Hood in Reverse” tax plan. If enacted it might be one of the biggest transfers of wealth from the poor and middle class to the rich in the state’s history.

Aside from exacerbating income inequality and reducing consumer spending – which would hurt our state’s economy – it is highly unlikely that the state could implement this legislation within four months. It would take at least six months or longer to make the administrative changes and to inform businesses of the new tax system. West Virginia lawmakers would be wise to learn from the experience in Kansas, which enacted the largest income tax cut in history, that it is a surefire recipe for large budget gaps,  fiscal instability, more debt, and sub pare economic growth. This is why Kansas is now reversing course and rolling back Governor Brownback’s income tax cuts that have devastated the state.

For more on SB 335, see my presentation to the Senate Select Committee on Tax Reform and our new report  on why replacing the income tax with a higher sales tax is poor strategy for growing our state’s economy.

 

 

West Virginia Eyes Tax Reform

This Gazette-Mail piece reports on a new West Virginia Center on Budget and Policy issue brief on what eliminating the state’s income tax would mean for West Virginia.

The brief  shows a reduction or elimination of the state’s income tax is not a surefire way to generate economic growth and the change in tax structure erodes state revenue for important services.

Lawmakers should consider tax reform that would address our budget deficit, is based on the ability to pay, and enact an Earned Income Tax Credit to help hardworking West Virginians provide their families a secure future.

In The News
Brad McElhinny dives into the tax debate in this MetroNews piece. Last week, Senate Bill 335 was introduced, which would eliminate the state’s personal and corporate tax and the sales tax, and replace it with a general consumption tax.

West Virginia Executive Director Ted Boettner presented to the Senate Select Committee on Tax Reform on how a shift from income and sales tax to a general consumption tax would benefit the wealthy and destabilize the state’s revenue system. For more on the bill, see Boettner’s post.

Around the same time Boettner was presenting in Charleston, Republican lawmakers in Kansas voted to roll back income tax cuts enacted in 2012 that led to $700 million in reduced revenue, several rounds of cuts to service such as education, and the state’s credit rating being lowered three times.

The WVCBP along with the West Virginia Council of Churches, the Partnership of African American Churches, and the Covenant House hosted a press conference to bring attention to possible changes to the Consumer Financial Protection Bureau.

The CFPB has returned $11.8 billion to American consumers ripped off by banks and other financial institutions and industries such as payday lenders and debt collectors. Senators Capito and Manchin should not allow special interest groups to dismantle the bureau without fighting to protect the bureau that protects West Virginians.

This piece by Center on Budget and Policy Senior Fellow Paul Van de Water takes a look at health-care costs.

The latest projections from the Congressional Budget Office estimate federal health spending – including the costs of the Affordable Care Act – including the costs of the Affordable Care Act, which has enabled 20 million Americans to get coverage – will be less than what it had been projected to be in 2010 without the ACA.

Upcoming Events
The 4th Annual WVCBP Budget Breakfast is this Thursday. With a new governor and new budget, join us to find out what is in store. Register today.

Panelists include:
– Senate Finance Committee Chair Mike Hall
– Nick Casey, Chief of Staff for Governor Jim Justice
– Delegate Matt Rohrbach

Sponsorships are available and come with event tickets.

Join West Virginia Citizens Action Group, West Virginians for Affordable Health Care, and others as West Virginians come together to rally for answers! All across the country, elected officials are holding town hall meetings with their constituents to discuss their concerns about repealing the Affordable Care Act (ACA), but our congressional delegation has not stepped up to do so here in West Virginia.

It’s time our congressional representatives speak with their constitutes about the many concerns surrounding repealing the ACA. Help us on February 25th make it loud and clear: We want our Congresswoman and Congressmen to represent and listen to us! We demand town halls to express our concerns and get answers to our questions. The event will be held at the West Virginia Culture Center from 2:30 – 3:30 pm.

 

 

2017 Budget Breakfast – February 23!

Register now!

Panelists include:

  • Senate Finance Committee Chair Mike Hall
  • Nick Casey, Chief of Staff for Governor Jim Justice
  • Delegate Matt Rohrbach

Sponsorships available and all come with tickets to the event.

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Report: West Virginia to Lose Jobs, Funding Under ACA Repeal

Previous data shows that a repeal of the Affordable Care Act will more than double the number of uninsured people in West Virginia. Read.

A new report by the Economic Policy Institute looks at a repeal’s impact on employment. It estimates how the combination of tax cuts and spending cuts will affect employment across the nation.


The report’s main findings show:

– ACA repeal would cut federal spending nationwide by about $109 billion in 2019 and taxes by about $70 billion in 2019.

– The combination of tax cuts and spending cuts in an ACA repeal would reduce national job growth by almost 1.2 million in 2019, all else equal. That is because the spending cuts would hurt job growth more than the tax cuts would help it. The benefit cuts would come mostly out of the pockets of cash-constrained households that will be likely to significantly cut back their spending in response to lower disposable income, while the tax cuts would disproportionately go to high-income households who tend to save a significant portion of increases in disposable income.

– The jobs that would be lost are not just health-care jobs.

– The top 15 job-losing states, as measured by jobs lost as a share of both the total employment and the share of residents under age 65, are Arizona, Colorado, Kentucky, Louisiana, Maryland, Montana, Nevada, New Jersey, New Mexico, North Carolina, Oregon, Rhode Island, Vermont, Washington, and West Virginia.

– West Virginia would lose $1.2 billion in federal health-care dollars.

– Total employment in West Virginia would drop by 2 percent and 15,412 jobs in West Virginia would be lost.

– ACA repeal would eliminate 20 out of every 1,000 jobs in West Virginia.

Congress should act responsibly and move forward with legislation that makes positive improvements to the Affordable Care. Any vote to repeal all or part of the current law should move simultaneously with a legislation that clearly defines what comes next for the West Virginia economy, for the West Virginia state budget, and for insurance coverage in our state. This legislative package should be vetted through the normal legislative process that allows for committee hearings and public input, and requires the normal 60 vote approval in the Senate.