Senate Tax Plan Creates Big Budget Hole, Shifts Tax Load Onto Working Families (Updated)

Last Wednesday, the Senate passed Senate Bill 409 that makes sweeping changes to the state’s tax system that decrease personal income and severance taxes while increasing sales taxes.  Similar to previous Senate tax proposalsSB 409 shifts the tax load onto working families to pay for tax cuts for wealthier West Virginians. On top of shifting tax responsibilities, SB 409 also exacerbates the state’s budget crisis by creating large revenue gaps in future years.

Overall, SB 409 would increase tax collections by $89 million in FY 2018 while decreasing them for each year after. The reason for the first year gain in tax collections is because the sales tax hikes begin July 1, 2017 (the beginning of FY 2018), while major decreases in the personal income tax do not begin until six months later on January 1, 2018. By FY 2022, SB 409 is expected to lower overall state revenue collections by $83 million and these reductions will grow only bigger over the long-term.

Reduction and Elimination of the Personal Income Tax

 

Beginning on January 1, 2018, West Virginia’s five income tax brackets would be abolished and replaced with three new brackets. These include 1.85 percent on income below $20,000, 3.65 percent on incomes between $20,000 and $35,000, and 5.45 percent on incomes above $35,000. According to the State Tax Department, these changes are expected to lower personal income tax collections by $154 million next year (FY 2018) and $384 million by FY 2019.

Similar to Kansas, SB 409 puts West Virginia on a path to eliminate the state income tax over the next two decades. The personal income tax is the state’s largest source of revenue ($1.8 billion), making up about 45 percent of the General Revenue Fund. The bill contains a sales tax revenue trigger to reduce each of the proposed income tax brackets by 0.1 percent for each $50 million in revenue from the sales tax that is above $1.8 billion. For example, if sales tax revenue increases to $1.9 billion than each income tax rate will drop by 0.2 percent (e.g. 2.8 percent in income between $20-$40k). According to the State Tax Department, the elimination of the personal income tax could occur around FY 2030. Over this time, the Tax Department projects that revenues would fall by $2.5 billion below current projections by FY 2030.

SB 409 also includes a tax credit for low-income seniors of up to $200 for seniors below 125 percent of the federal poverty level and  a partial tax credit for seniors with incomes between 150 percent and 125 percent of the federal poverty. This credit is expected to cost $5 million in its first year of implementation.

Coal Severance Tax Reductions

On top of lowering personal income tax collections, SB 409 lowers the coal severance tax rate from 5 percent to 2.5 percent over five years in 0.5% increments. The rate drop to 4.5 percent on July 1, 2017; 4.0 percent on July 1, 2018; 3.5 percent on July 1, 2019; 3.0 percent on July 1, 2020; and finally to 2.5 percent on July 1, 2021. By FY 2022, this is expected to lower state coal severance taxes by $76 million and coal severance taxes directed to coal producing counties by $4 million.

Sales Tax Increase with Broader Tax Base

While SB 409 reduces income and severance taxes, it increases the state’s sales and use tax and includes a broader base of services and goods included in the  tax base. All together, these changes are expected to increase sales tax collections by $261 million in FY 2018 and $400 million by FY 2019.

Beginning on July 1, 2017, the Sales and Use Tax would increase to 7 percent from 6 percent ($200m) and it would include the following items currently exempted from the sales tax: telecommunications ($69.3m), personal services (barbering, manicuring, cosmetology, embalming and funeral directing, and non-medical personal care services not otherwise funded by Medicaid or Medicare – $10.5m), solid waste disposal charges ($4m), electronic data processing services ($5.8m), and other services (summer camp tuition, health fitness services, primary opinion research, music instruction, artistic performances, newspaper delivery services, and travel agency commissions – $4m).

SB 409 would also increase the sales tax on groceries (food for home consumption) to 3.5 percent from zero ($94m) and the sales tax on the sales of mobile homes from 3 percent (effective rate) to 7 percent ($5.8m). Because many municipalities in West Virginia (28 currently impost local sales taxes up to 1% with 11 more municipalities by 2018), the broadening of the sales tax base in SB 409 is expected to increase local sales tax collections by $15 million per year.

Beyond income, severance and sales tax changes, SB 409 also removes property tax revenue caps and allows county boards of education to establish their own levy rates: Currently, property tax revenues cannot grow by more than 1 percent per year for counties and municipalities, and 2 percent per year for county school boards unless it is because of new construction or improvements to existing property. As noted in the fiscal note from the WV Department of Education, there may be major constitutional issues with the adoption of these changes and it is unclear what the revenue implications would be for the state or county school boards.

Similar to previous version of the bill, SB 409 would increase taxes on those making less than $84,000 while lowering taxes on those making over $84,000.  Altogether, SB 409 would increase taxes on 80 percent of West Virginians while lowering taxes on the top 20 percent of earners.  Those making on average $11,000 would see their annual taxes raise by $113 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) would see an average tax cut of $4,343.

 

As noted previously, these changes will not only exacerbate income inequality and make it harder for low- and middle-income families to make ends meet, but they will lead to large future budget shortfalls that will damage our state’s ability to invest in the building blocks of our state’s economy.

Cutting income and severance taxes – while phasing out the income tax – is not going to pave a strong future for the state. Instead of moving in this direction, lawmakers need to work together to ensure tax reform is addressing the state’s looming budget crisis together not making it worse.

 

Forced Pooling Bill Includes Tax Cut for Natural Gas Industry

Yesterday, the state Senate passed SB 576, which would allow natural gas producers to force unwilling landowners to allow drilling on their property. But beyond empowering natural gas producers over landowners in the state, the bill was amended to include what is effectively a cut in the severance tax rate for natural gas production.

The amendment to SB 576 creates a tiered severance tax rate for natural gas, with the tax rate tied to the price of natural gas. But unlike the governor’s proposed tiered natural gas severance tax proposal, which would only increase severance tax rates if the price of gas increased, this amendment would result in a tax cut for natural gas for the next several year.

The amendment to SB 576 replaces the 5 percent severance tax on natural gas with a tiered rate based on price. Natural gas would receive a tax cut  from 5 percent to 4 percent when the price of natural gas is under $2.50/MCF. The rate changes to 5 percent when the price is between $2.50 and $4.00/MCF and can go up to 9 percent when the price is at or above $10.00/MCF.

This new severance tax system would result in a tax cut for the natural gas industry for the next several years, and despite the potential higher rates, the rate is not likely to exceed 5 percent for the foreseeable future.  The last time the average price of natural gas produced in West Virginia was above $4.00/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.

According to the Tax Department, the current price of natural gas produced in West Virginia is $2.00/MCF, which under SB 576, would drop the severance tax rate from 5 percent to 4 percent in FY 2017. The reduced rate would cost the state about $21 million in tax revenue, furthering the state’s budget crisis. The price of natural gas would have to increase by 25 percent to bring the severance tax rate back up to its current rate of 5 percent. According to the federal Energy Information Agency, the national price of natural gas is projected to increase by 2.03 percent per year from 2017 to 2050. At that rate it would be 2029 before the severance tax would be restored to its current 5 percent rate, and would not reach the threshold to increase it beyond 5 percent in the next 30 years.

Currently, the State Tax Department has natural gas severance tax collections projected through 2022. Based on those projections, the severance tax change in SB 576 would cost the state a total of $175 million between FY 2017 and FY 2022.

It also should be noted that natural gas production in West Virginia has had no problem quintupling in recent years with a 5 percent severance tax rate. And production has continued to reach record heights even as prices have plummeted. 

With its current budget problems, the last thing West Virginia should be doing is lowering its severance tax on natural gas extraction given our state’s looming budget crisis. The severance tax is a highly exportable tax that has very little impact on local production growth or jobs. Instead the state should be ensuring that we are adequately taxing our non-renewable minerals to help diversify and grow our economy.

Tax Reform Might Improve WV’s Business Tax Climate, Sound Familiar?

Today, the House will vote on HB 2933, the latest version of “tax reform” in the state. HB 2933 would broaden the sales tax base, lower the sales tax rate to 5%, and create a flat 5.1% income tax rate. The bill would drastically increase West Virginia’s already regressive tax system. The vast majority of West Virginians would pay more in state taxes under the proposal, while the wealthiest 1% would receive an average tax cut of over $6,000.

HB 2933, along with the other tax-reform proposals floated by the legislature, is little more than a tax cut for the wealthy, paid for by higher taxes on the poor and middle class, and budget cuts. But not to worry, says the conservative Tax Foundation. According to the Tax Foundation, cutting taxes on the richest 5% of West Virginians and raising them on nearly everyone else would give the state the 10th best Business Tax Climate in the country, 8 spots higher than its current rank of 18th. West Virginia would be more competitive and have an advantage over our neighboring states. Sounds great, right? West Virginia is rarely in the top 10 of anything, and being one of the top states for business taxes has got to be good for the struggling state, right? Unfortunately, we’ve heard this song and dance before, and it always ends the same way.

If all this is ringing a bell, it’s because we’ve heard it all before. The Tax Foundation said the same thing 10 years ago, the last time West Virginia was on the verge of a major tax reform. The Tax Foundation said that the 2007 tax reform was, “What West Virginia Needs to Do in Order to Compete in the 21st Century.” And West Virginia listened. The state phased in a series of major business tax cuts that reduced business taxes by $225 million by 2015. And, as a result, the state’s “Business Tax Climate” improved from 34th in 2007 to 18th in 2017, an improvement of 16 spots. Only two states have had a greater increase in their Business Tax Climate ranking than West Virginia since 2007.

And, all the while, as the state’s Business Tax Climate dramatically improved, the tax cuts blew a hole in the state’s budget, putting the state in a near-perpetual budget crisis. This has led to, among other things, major cuts to higher education, making college less affordable in a state with the least-educated workforce.

One thing our improving tax climate didn’t translate into was any discernible economic growth. While West Virginia has one of the most improved Business Tax Climates in the country, its job growth has been non-existent. In fact, West Virginia had more private-sector jobs in 2007 than it does today.So don’t get too excited about the Tax Foundation’s claims. As we’ve noted before, their rankings are a poor predictor of economic growth, and have served West Virginia poorly. The Tax Foundation has an anti-tax ideology, and that comes first in its rankings, regardless of the effect of its policies on the public investments that states like West Virginia need to prosper, like infrastructure and education.

Just as it was 10 years ago, the Tax Foundation’s favored policies are tax cuts for businesses and the wealthy at the expense of everything else that matters. And West Virginia learned the hard way, that recipe did little more than deprive the state of its ability to invest in the future. Why would we expect anything different this time?

House and Senate Tax Proposals Shift Tax Load Onto Working Families (Updated)

The House and the Senate have advanced two similar tax bills that make substantial changes to the state’s personal income and sales tax, which account for over 75 percent of state general revenue fund collections. Both of these bills will shift the tax load from the wealthy onto working families. It is unclear how either of them will help balance the state’s looming budget deficit or make the investments needed to address many of the state’s major problems.

House Bill 2933, which was amended and passed out of House Finance Committee late on Friday without a fiscal note, makes several changes to the sales and personal income tax. On the sales tax side,  HB 2933 broadens the sales tax base to include mobile homes, telecommunications (e.g. cellphones), professional (legal, accounting, etc.), personal (barber shops, messages, etc.), and contract services (e.g. home repairs/renovations), lowers the sales tax from 6 percent to 5 percent, and taxes groceries at 3 percent.

On the personal income tax side, HB 2933 eliminates the state’s long-standing graduated income tax structure and replaces it with a new 5.1 percent flat income tax rate. It also replaces the state’s low-income family tax credit with a new $10,000 standard deductions for tax filers with income (AGI) below $50,000. And it eliminates the state’s $2,000 personal exemption.

Upon full implementation, HB 2933 would increase taxes on approximately 75 percent of West Virginia taxpayers, while giving those in the top 1 percent with average incomes of $778,000 a tax break of over $6,500. Those with average incomes of $11,000 would see a small tax decrease of $17, while those with average incomes of $66,000 would see an increase of $325. All together, HB 2933 is estimated to  increase tax revenue by $11 million by FY 2020.

Senate Bill 409, which passed out of the Senate Committee on Tax Reform (with no fiscal note) and is on the agenda of the Senate Finance Committee on Monday, makes changes to the state’s sales tax, personal income tax, coal severance tax, and property taxes.  On the sales tax side, SB 409 increases the sales tax rate to 7 percent from 6 percent, taxes groceries and mobile homes at 3.5 percent, broadens the sales tax base to include telecommunications, several personal services, electronic data processing services, and several other services (e.g. solid waste disposal, fitness club memberships, music instruction, artistic performances, summer camp tuition, newspaper delivery, funerals, public opinion research, travel agency fees, etc.).

SB 409 also lowers the coal severance tax from 5 percent to 2.5 percent, while increasing the thin-seam coal severance tax to 2.5 percent from 1 percent and 2 percent. According to an earlier fiscal note of SB 335, this would reduce coal severance taxes by $68 million by FY 2019.

SB 409 abolishes the 5 current income tax brackets and puts in its place three new brackets. These include 1.5 percent on income below $20,000, 3 percent on income between $20,000 and $40,000, and 4.5 percent on income above $40,000. An analysis (handout) by WVU found that a similar proposal with three brackets (1.6 percent under $20k, 3.3 percent on $20-$35k, and 5 percent above $35k) reduced personal income taxes by $575 million in FY 2019.

The bill contains a sales tax revenue trigger to reduce each of these income tax brackets by 0.1 percent for each $50 million in revenue from the sales tax that is above $1.8 billion. For example, if sales tax revenue increases to $1.9 billion than each income tax rate will drop by 0.2 percent (e.g. 2.8 percent in income between $20-$40k). Eventually, this will led to the income tax being fully repealed (e.g. when sales tax revenue is $3.3 billion, the 3 percent rate on income between $20k-$40k will be zero). According to the State Tax Department, sales tax revenue will exceed $1.8 billion by FY 2021.

The last substantial change to the state’s tax system in SB 409 is removing property tax revenue caps. Currently, property tax revenues cannot grow by more than 1 percent per year for counties and municipalities, and 2 percent per year for county school boards unless it is because of new construction or improvements to existing property. SB 409 would allow some counties that are growing to take this additional property tax revenue and deposit into a new fund for schools.  While removing these revenue caps is sound policy, it is unclear from the language in the bill how this would impact local government finances or the school aid formula.

According to an analysis  by the State Tax Department, SB 409 will increase revenues by $61.1 million in FY 2018, but is expected to lower revenues by $90.6 million in FY 2019.

A flat income tax won’t significantly boost growth 

One common argument given for a flat income tax is that it will boost our state’s economy because it lowers taxes on businesses and the wealthy. This is a strategy that is not supported by evidence from other states or mainstream economic research. Since 2010, more than a dozen states have cut their income tax rates, with Kansas, Maine, North Carolina, Ohio, and Wisconsin embracing the largest reductions in income taxes. Of these states, only North Carolina has experienced faster employment and income growth than the nation as a whole in the years immediately following their cuts.

While North Carolina experienced slightly higher income and job growth than the nation as a whole after shifting to a flat income tax in 2014, the state is adding jobs more slowly than most of its neighboring states.

The mediocre results in states that have cut their income tax rates is aligned with the findings of mainstream academic research, which typically finds that income tax levels provide little to no impact on economic growth. After reviewing major studies published in academic journals since 2000 that examined the effect of state personal income tax levels on broad measures of state economic growth, the Center on Budget and Policy Priorities concluded that “of the 15, 11 found no significant effects and one of the others produced internally inconsistent results.” This means for every one academic study that found personal income taxes boosted state economic growth, there were about four that found no significant effects.

A recent study conducted by the nonpartisan Tax Policy Center further undermines the claim that states can improve their economies by cutting personal income taxes. It found that personal income taxes have a statistically insignificant impact on growth. This study replicated a 2008 study by economist Robert Reed that many tax-cut proponents often cite that found evidence that income tax cuts increase economic growth. The TPC study mirrored the findings of a 2006 study by economist Rex Piesky that showed that higher tax states either are associated with stronger growth or have a statically insignificant impact on economic growth. Piesky concluded that the “conventional wisdom about the impact of taxes on economic growth rests on a weak foundation.”

Part of the reason that state income tax cuts fail to unleash economic growth is because the vast majority of tax payers are in no position to create any jobs. According to a recent national study
by the U.S. Treasury Department, only 2.7 percent of income-tax payers own a small business with an employee other than the owner. In West Virginia, the average taxable income for businesses that paid the personal income tax in 2013 was just $21,656. Even if these businesses made enough
money to have to pay the state’s top income tax rate of 6.5 percent, they would only pay about $1,400 on average. So reducing their taxes by perhaps a hundred dollars would produce nowhere near enough money to hire an additional worker. Since most new jobs are grown organically by in-state firms and small businesses, income tax cuts will do little to attract new out-of-state companies.

Flat Income Taxes Can Grow More Slowly

According to a recent paper by the Federal Reserve Bank of Kansas City, states with progressive, graduated personal income tax brackets have faster revenue growth compared to states with flat income taxes.

Structures that are more progressive and not indexed for inflation will experience faster growth and more volatility in revenues. Colorado is the only state in the Tenth District with a flat income tax, where all incomes pay the same tax rate. The long-run and short-run elasticities for Colorado show that its personal income tax revenues have grown more slowly than in other states and are also less volatile.

While the volatility of personal income tax collections from states with graduated income tax brackets is higher, these states tend to produce lower revenues over time.

Expanding the Sales Tax to Pay for More Taxes on Working Families

While lowering the sales tax rate and expanding it to include more services is generally sound policy if revenue neutral, the addition of new sales taxes on business to business sales such as accounting and legal services could create “tax pyramiding” where some business may choose to produce these services themselves (vertical integration). Since only a few states tax professional services (none that border West Virginia and all below 5 percent) a new sales tax on these services may reduce employment and firms in West Virginia as business choose to locate across the border. Business will also be hurt by an increase in taxes they pay. In FY 2015, business paid $500 million in sales taxes in West Virginia compared to just $200 million in personal income taxes.

Both HB 2933 and SB 409 expand the sale tax base in an effort to pay for reducing income taxes that mostly go to high-income tax payers. This means they are shifting the tax load onto working families because sales taxes are regressive and take a large chunk of income from low and moderate-income tax payers. This is especially true with the addition of the sales tax on groceries or food for home consumption. Only 13 states tax groceries, with four states taxing them below 3 percent. Virginia is the only border state with a tax on groceries, which is 2%.

The tax bills being proposed by the Senate and House do little to nothing to address the state’s looming budget shortfall. In fact, SB 409 is expected to lead to a large decrease in revenues by FY 2019, while HB 2933 only slightly increases revenue collections. That said, it is clear that both aim to shift the tax load onto working families to pay for tax breaks for those on the top. This will not only further exacerbate growing income inequality in West Virginia, but it could lead to major cuts in services down the road like we’ve seen in Kansas that embarked on a similar tax cut and tax shift crusade. Instead of moving in this direction, lawmakers should be working to ensure that the state has the resources it needs to invest in the things communities need and asks everyone to contribute. Cutting taxes for the wealthy while increasing taxes for most West Virginians is not going to get us there.

Constitutional Amendment Would Cripple State Finances Further

Today, the Senate Select Committee on Tax Reform will consider a joint resolution that calls for a constitutional amendment (SJR 8)  that would transform the state and local tax system in West Virginia. Called the “Fair and Simple Tax Reform” amendment, it is part of an upside down tax package that includes SB 335 that creates a new eight percent sales tax while phasing out income taxes and reducing severance taxes.

In order for the amendment to be placed on the ballot in 2018, it would require the approval of two-thirds of legislators in the Senate (23 out of 34 members) and House ( 66 out of 100 members). To be ratified, a simple majority of voters is needed.

Property Tax Changes Proposed

Personal Property: SJR 8 would immediately abolish the personal property tax on vehicles and phase out over 10 years other (business) personal property taxes except public utility personal property. In 2016, personal property taxes accounted for $589 million or 34 percent of total property taxes ($1.735 billion) in West Virginia.

New Property Classes, Assessments, and Tax Rates: Currently West Virginia has four classes of property for property tax purposes. Class I includes all personal property used exclusively for agriculture, however, all Class I property is currently exempted from property taxes. Class II property includes owner occupied residencies and farm property. Class III includes all other real and personal property (including commercial real estate, business personal property, and personal vehicles) that is located outside a municipality, and Class IV includes all other real and personal property located inside a municipality.

Under the current property tax system, property is assessed at 60 percent of its value before the levy rates are applied. Levy rates vary by levying body. Maximum Class II rates are 28.6 cents/$100 for counties, 45.9 cents/$100 for school districts, 25 cents/$100 for municipalities. Maximum Class III and IV rates are 57.2 cents/$100 for counties, 91.8 cents/$100 for school districts, and 50 cents/$100 for municipalities.

SJR 8 would restructure the property tax system into three classes. Class A would include real property used for farming and real estate. Class A would be assessed based upon economic output and would be taxed at a rate of 50 cents/$100 of value. Class B would include residential real property, including rental property. Class B property would be assessed at market value an taxed at a rate of $1.50/$100 of value. Class C would include all other real property, including commercial property. Class C property assessed at market value and would be taxed at a rate of $1.75/$100 of value. The levying bodies would be allocated a share of the total, counties would be allocated 15 percent, municipalities would be allocated 10 percent, and school districts would be allocated 65 percent. Ten percent would be set aside for a State Equalization Fund. In addition, levying bodies would have to vote if they wanted to have a tax rate greater than 80 percent of the maximum rate.

Based on FY 2017 assessed values and levy rates, SJR 8 would reduce total property tax revenue by approximately $385 million, assuming maximum rates under the new proposal. Businesses would be the big winners under the proposal, with commercial property taxes being cut nearly in half, from $1.189 billion to $607 million, once personal property taxes are fully phased out. On the other hand, property taxes on homeowners would dramatically increase. Property taxes on residential property would increase from $418 million to $726 million, a $308 million increase. This would be offset somewhat by the exemption of personal vehicles, which amounts to about $128 million.

Personal & Corporate Income Tax Proposed Changes

Flattening and Abolishing the Personal Income Tax: Currently, West Virginia has a graduated income tax structure that includes five tax brackets, including a top rate of 6.5 percent on income over $60,000 and a bottom rate of three percent on income under $10,000. SJR 8 would enshrine in our state constitution that the state’s personal income tax could be no higher than a flat three percent tax rate and that it shall be phased out within 10 years of passage. It also allows each taxpayer the current deductions allowed under law. According to a recent fiscal note of SB 335 that includes the adoption of a 2.65 percent flat income tax rate, it would reduce income tax revenue by $890 million in FY 2019.

Capping the Corporate Net Income Tax: Currently, the corporate net income tax rate is 6.5 percent. Under SB 335, it would eventually be repealed depending on a number of triggers but it could take several decades. This provision says if it is ever reinstated, it cannot be greater than three percent. This would reduce the rate by half. In FY 2018, the state is expected to collect $137 million in corporate income taxes.

Other Proposed Tax Changes

Phase down of all state and local taxes except (income, property, sales): It is unclear if this is an error, but according to SJR 8:

Any state tax levied at the time this amendment is ratified, which is not specifically authorized or prohibited by this amendment, may continue to be levied for a period of not more than ten years following ratification of this amendment.  Any municipal tax levied at the time this amendment is ratified, may continue for a period of not more than ten years following ratification of this amendment.

This could potentially mean that local government would have to remove its current Business & Occupation taxes and rely only on property and sales taxes. At the state level, this would mean the phase out of the Business & Occupation Tax, Insurance Tax, Tobacco Taxes, Alcohol Taxes, Health Care Provider Tax, Special Reclamation Tax, Severance Tax, Motor Fuel Taxes, Property Transfer Tax, Soft Drink Tax, Solid Waste Fees, and other smaller taxes. Altogether, these taxes are over $1.3 billion annually. At the local level, it would wipe out the municipal Business & Occupation Tax, Hotel Occupancy Tax, and some other small ones. The B&O Tax in Charleston, West Virginia is 43 percent or $43 million of city revenues.

Tax Expenditures: Currently, the state spends hundreds of millions each year through the tax code on tax credits, exemptions, preferences, deductions, property abatements and other tax incentives. SJR 8 would allow tax expenditures that are currently in state law but would limit the creation of new ones unless they are approved by 3/5 of the legislature.

Altogether, these proposed changes would have a profoundly negative impact on the state, creating a near certain fiscal disaster. While costing the state and local governments more than $1 billion, low- and middle-income families would likely pay more in taxes, in order to finance the enormous tax cuts for businesses and the wealthy that would be enacted. These changes would leave the state and local communities crippled and unable to provide even the most basic of public services. Schools and colleges would be closed, parks and libraries would be abandoned, thousands would lose healthcare coverage, and infrastructure would be neglected as these tax proposals bankrupt the state.

Repeal of ACA Would Shift $4 Billion in Costs to West Virginia State Budget

As the House of Representatives takes up repealing the Affordable Care Act (ACA) and replacing it with the American Health Care Act (AHCA), a new report by the Urban Institute finds that the AHCA if enacted would cut federal funding for Medicaid in West Virginia by $4 billion over 10 years. To make up for this shortfall, West Virginia would have to increase Medicaid spending by over one-third over the coming decade to avoid reducing Medicaid benefits.

The cuts to Medicaid come from the reductions in funding for the Medicaid expansion population under the AHCA, which covers approximately 175,000 West Virginians, and further reductions in federal funding to Medicaid through “per capita caps” that change the federal funding formula and reduce it over time.

Altogether, the Urban Institute estimates that federal Medicaid spending in West Virginia would be 9.8 percent lower between 2019 and 2028 than it would be under current law (ACA). A difference of $4 billion in federal Medicaid spending in West Virginia. If West Virginia would want to continue to covering the same population that it does currently, state spending would have to increase by 33.8 percent to make up for the federal reduction in Medicaid payments. This is the highest percentage increase than in all but four other states.

Over the course of a year, the Medicaid program provides health insurance to approximately 650,000 West Virginians (550,000 at any point in time). This includes children, people with disabilities, seniors, and low-income adults. As a result of the cost shift under the AHCA, West Virginia would inevitability have to reduce eligibility, provider payments, and benefits. The AHCA would also effectively end West Virginia’s Medicaid expansion, which provides health insurance to approximately 175,000 West Virginians.

West Virginia already faces a looming budget crisis of over $500 million next year, so passing the AHCA would ensure that the state’s dire fiscal times will continue as the state loses $4 billion in federal funds for Medicaid over ten years.

Preserving the structure of Medicaid is critical to all West Virginians and especially the one in three West Virginians that depend on it for their health and well-being.

Wealthiest 1% of West Virginians Gain from Tax Cuts in Health Care Repeal

The House proposal to repeal the federal Affordable Care Act (ACA) and replace it with the American Health Care Act (AHCA), provides only a tiny fraction of very wealthy West Virginians tax cuts while reducing the number of Americans with health coverage by an estimated 24 million. The two big tax cuts included in the AHCA are the repeal of taxes on investment income and earned income, both of which only apply only to people who make over $200,000 a year. These taxes were enacted to pay for the ACA’s health care expansions, including Medicaid in West Virginia that has provided insurance to over 170,000 West Virginians.

In West Virginia, 96 percent of the benefit from repealing these two taxes would go to the wealthy top 1 percent of West Virginians. Only 11,063 West Virginians, or 1.2 percent of taxpayers in the state, according to a recent analysis by the Institute on Taxation and Economic Policy (ITEP), would benefit from cutting these taxes. The average tax cut in West Virginia for the estimated 11,063 taxpayers impacted would be $5,239. The other 922,000 taxpayers in the state would receive no benefit.

Nationwide, the tax cuts would total $31.5 billion. Of that, only 0.15 percent would go to taxpayers in West Virginia, roughly $46 million.

Below are the state-by-state figures for more information on who benefits from these proposed tax cuts:

Eliminating Income Taxes in Favor of Higher Sales Taxes Will Not Boost West Virginia’s Economy

West Virginia grows its economy and creates good jobs by investing in the things that help communities and individuals thrive, like our schools, health care, and public safety. Our state needs tax reform that generates the resources we need to pay for these things and asks everyone to pay what they owe. Eliminating the state income tax does just the opposite.

Similar to Kansas’s failed tax experiment, Senate Bill 335 puts West Virginia on a path to eliminate the state’s personal and corporate income taxes, reduce severance taxes, and replace with them with a broad-base sales tax that would be the highest in the nation. In Kansas, this has resulted in an ongoing fiscal crisis that has forced cuts to schools and other services people rely on every day, without the promised economic benefit. Kansas legislators are now trying to reverse course.

SB 335 would dramatically increase taxes on low-income populations and the middle-class to pay for large tax breaks for the richest West Virginians. If enacted, it would be the largest redistribution of wealth in the state in the last century.

Cutting the state income tax and replacing only some of the lost revenue with higher sales taxes will have immediate and harmful effects on our state. Instead of growing our economy, it is almost certain to lead to deep cuts in investments in schools, roads, and other critical building blocks of strong economy – similar to what happened in Kansas.

SB 335 will also reduce what people spend in local stores, slowing the state’s economic growth and job creation. A higher sales tax makes the price of everything that is subject to a tax go up, and that is likely to reduce spending at local businesses. When they can, people will instead cross the border or buy from out-of-state Internet merchants who don’t charge sales tax or charge a lower rate, causing West Virginia small businesses to layoff workers.

Businesses will also face higher sales taxes that will eliminate a portion of any savings from the income tax cuts. A substantial share of business purchases – such as electricity, heat, water, machinery, equipment, computers, furniture, and shipping supplies – will now be taxed at eight percent, hurting West Virginia small businesses by adding thousands of dollars in annual expenses.

Our tourism industry will suffer as the state lodging tax increases to 11 percent. Combined with the six percent local hotel occupancy tax, West Virginia would have the highest lodging tax in the nation.

Because the increased sales tax revenue is unlikely to fully replace the lost income tax revenue, the state will very likely have to cut back on funding for schools and other services provided at the local level, and local governments, in turn, likely will increase business taxes to make up some of the difference.

The idea that economists agree that taxing consumption is better for economic growth than taxing income is just not true. There is no consensus among economists that shifting from reliance on state income taxes to sales taxes would improve state economic growth.

Most economists who favor a pure consumption tax also acknowledge that it will increase taxes for low- and moderate-income households and support taking steps to alleviate this problem. Yet the proposal in our state fails to do this.

Food Assistance Cutoff Needlessly Harms Vulnerable West Virginians and Economy

Yesterday, the House Health Committee passed out HB 2132 that imposes a statewide three-month time limit for SNAP food assistance for childless adults that are working fewer than 20 hours per week. This bill mirrors a similar provision found in SB 60 and HB 2741 that was discussed previously in this blog.

If enacted, these bills would bar the state from applying for a federal waiver to temporarily suspend the federal requirement that limits SNAP to three months out of every three years for childless, non-disabled adults unless they are working at least 80 hours per month, participating in a qualified job training program, or in workfare. States are allowed to apply for the waiver to suspend the time limit in areas of sustained high unemployment. While West Virginia used the waiver to suspend the time limit statewide in years past, Governor Tomblin ended the waiver in nine counties beginning January 1, 2016 that had low unemployment. These bills would suspend the waiver statewide indefinitely regardless of whether there is high unemployment or a major crisis such as a flood or natural disaster.

Though work requirements may sound good – especially in a state with historically low workforce participation – denying food assistance to unemployed and part-time workers will do little to encourage employment. It will, however, increase food insecurity for thousands of West Virginians, drain millions of federal dollars from our economy, and put additional strain on our food pantries, soup kitchens, and charities that are already stretched thin.

SNAP Time Limits Put the Poorest and Most Vulnerable at Risk

The population subject to the three-month time limit are childless adults who are unemployed or working below 20 hours a week. These individuals are extremely poor, most only have a high school degree, and many are veterans, homeless people, noncustodial parents, and people with a mental and physical limitation. Most childless adults on SNAP are also strongly tied to the workforce. According to a recent report from the Center on Budget and Policy Priorities:

  • Childless adults participating in SNAP have an average income of 29 percent of the poverty line or $3,400, while 46 percent live in households with no incomes and three quarters live in a household with income below half the poverty line ($5,835 for one person). 
  • Over a quarter (28 percent) of childless adults on SNAP have less than a high school education, and more than half  (57 percent) have only a high school diploma or GED. Approximately 15 percent have some college education or a college degree.
  • Approximately 75 percent of SNAP households with a childless, working-age adult worked in the year before or after receiving SNAP while many of those not working while receiving SNAP were actively looking for work.

In 2015, the Ohio Association of Foodbanks released a report that assessed about 5,000 childless adults on SNAP who were referred to a work experience program in Franklin County, Ohio. The report found that many low-income childless adults face multiple challenges to employment, including little access to transportation, criminal records, mental and physical limitations, frequent job dismissals, no drivers license, and homelessness.

Because many childless adults on SNAP have these barriers to employment and independence, there are limited job or volunteer opportunities that match their abilities.

Expansion of SNAP Time Limit To Struggling Counties Makes No Sense

While most of the nation has recovered from the Great Recession, West Virginia has not. Most counties are still struggling with very high unemployment. Enacting a time limit to food assistance in areas of high unemployment and a lack of job opportunities when a temporary waiver of the time limit is available makes no sense. As discussed earlier, West Virginia has already ended the waiver in nine counties in West Virginia that had relatively low unemployment and higher population density (i.e. access to more jobs) and expanding it to distressed areas of the state will only makes things worse for low-income adults. Many of these areas have been hit particularly hard by the recent decline in coal production, such as Mingo County that has an unemployment rate of almost 10 percent.

According to the Department of Health and Human Services (DHHR), there are 7,310 non-exempt childless adults  on SNAP in the other 46 counties in West Virginia that would be cut off of food assistance if the state is forced to implement a three month limit. DHHR has already cut 5,417 people off of SNAP in the nine pilot counties where the federal work requirement restriction was put into place on January 1, 2016.

Though it is unknown how many childless adults on SNAP found employment after being cut off, DHHR found that the program has not “had a significant impact on employment figures for the ABAWD [able-bodied adults without dependents] population in the nine issuance-limited counties” and that they have not seen a “clear increase in the number of ABAWDs maintaining benefits sue to meeting the work requirements.” In fact, of the 13,984 state-wide referrals made to the SNAP Employment & Training Program in 2016, only 259 gained employment. Most likely, this means most people lost food assistance because they had barriers (see above) to meeting the work requirement.

Experience in Kansas Shows Time Limit Did Little to Encourage Work

While some proponents of imposing a three month time limit on SNAP highlight that it has been effective in raising employment, a careful analysis of the evidence suggests that imposing the time limit had little effect on work but did cause thousands of poor residents in Kansas to lose food assistance. The chart below looks at the number of childless non-disabled adults in SNAP before Kansas imposed its three-month time limit (Quarter 3, 2013) and a year after it was imposed (Quarter 1, 2015). Over 20,000 people stopped participating in SNAP after the Kansas benefit cutoff. The number of non-disabled childless adults on SNAP that were working also declined, from about 6,200 to 3,570. Though some have touted this as a success since the share of people working increased (from 21 percent to 42 percent), it really just reflects the number of caseload changes, not improved circumstances.

The much larger and important question is what happened to those that were cutoff of SNAP in Kansas. While we don’t know about what happened in Kansas, research in other states has found that most remain poor and that many do not find work and struggle with various other problems, including a lack of health insurance, adequate housing, and trouble paying monthly bills.

Cutting Off Food Assistance Hurts Our State’s Fragile Economy

The loss of federal dollars from SNAP flowing into the state is significant. According to DHHR, the average monthly SNAP benefit is $203.20. This means the state lost approximately $15 million in federal SNAP benefits that would other wise be in the state’s economy in 2016. If the state is forced to impose the time limit on the other 46 counties, this would amount to $17.8 million in lost federal money for the state. This does not take into account that SNAP has a high economic multiplier, which will lower economic growth. For every $1 in new SNAP benefits, it results in an estimated $1.80 in total economic activity.  Imposing the time limit would also strain local nonprofits and private charities who will have to serve this population with food assistance and other supportive services.

Another major concern about the existing three month time limit in the nine pilot counties, and expanding to the other 46 counties, is that capacity of DHHR to work in rural areas to connect these individuals to jobs and training. As discussed above, this population faces several barriers to employment or volunteer work because of a lack of transportation and other challenges that are more acute in rural counties. DHHR estimates that it would cost over  $2 million  to extend the SNAP E&T program to these other counties, draining the state of resources when it faces a $500 million budget shortfall this year.

Instead of cutting thousands of more low-income people from food assistance by permanently tying the Governor’s hands from providing food assistance in areas that are struggling with job opportunities, the legislature should be exploring non-punitive ways to help connect more people to jobs and to ensure our most vulnerable residents have access to the services they need to achieve self-sufficiency.

 

Proposed Asset Limit for Food Assistance is Counterproductive and Expensive

The West Virginia Legislature has introduced legislation (SB 60 & HB 2741) that make it harder for low-income West Virginians to receive food assistance from the Supplemental Nutrition Assistance Program (SNAP). If enacted, this legislation would create economic hardship for thousands of low-income West Virginians, drain our state of millions in SNAP dollars, and cost the state additional money in administration costs.

The legislation contains three core provisions that aim to limit food assistance, including prohibiting low-income families with very modest resources from qualifying for SNAP; eliminating SNAP for unemployed and part-time workers after three months if they live in areas of high unemployment, even when they are looking for work; and giving a costly hand-out to private companies to set up duplicative verification systems. This post will focus on the first provision – creating a new asset limit or “asset test” for SNAP recipients, while the next posts will examine the other two provisions.

Asset Limits for Food Assistance Are Counterproductive

SB 60 and HB 2714  both require reinstating a federal “asset test” on how much a family can have in assets in order to be eligible for federal food assistance or SNAP. In 2002, the federal government made asset limits an option for states, allowing them to raise their asset limit or eliminate it entirely.

As of August 2016, 34 states – including West Virginia – and the District of Columbia have eliminated the “asset test” for SNAP. Five states have asset limits higher than the federal limit ($5,000 in Idaho, Maine, Michigan, and Texas and $25,000 in Nebraska), while 11 states retain the federal asset limit of $2,250 and $3,250 for households with an elderly or disabled member (See Map Below). Virginia is the only border state that adheres to the federal standard.

The reason most states have removed their asset test from SNAP is that they recognized that it was counter-productive and punishes families for saving money for emergencies or for their children’s future while they are temporarily enrolled in SNAP.  By removing the asset test or limit, it simplifies the application process, reduces errors associated with assets and vehicle information.

Studies have shown that asset limits reduce savings substantially due to the eligibility condition. A recent study (2016) by the Urban Institute found that states with relaxed asset limits (those not following the federal asset limits), “increase low-income households savings and participation in mainstream financial markets (i.e., having a bank account), and reduce the likelihood that households cycle on and off SNAP (referred to as churn).”  Having a bank account is important because it helps families save for emergencies,  conduct basic financial transactions, build credit history, and gain access to credit. Putting in place a restrictive and extremely low asset test will harm seniors and people with disabilities living on fixed incomes who have modest savings set aside for emergencies. Because SNAP works as a temporary stopgap – with 58 percent of new receipts leaving the program within a year – it is vital for them to retain their savings as they get back on their feet. Studies have also shown that asset limits (and more stringent vehicles asset tests) have no impact on the length of stay in SNAP.

A recent study conducted from the U.S. Department of Agriculture that explored the impact of asset limits on SNAP participation found that asset tests reduce eligibility by 3 percent (1.2 million households). The same study also found that if states reimposed the federal asset limit, 15.6 percent of SNAP eligible households would become ineligible.  This means that if West Virginia enacted the federal asset test the state would not only  increase food insecurity and economic hardship, it would also reduce the amount of SNAP dollars in West Virginia’s economy. Because SNAP has a high economic multiplier (every dollar in new SNAP benefits results in $1.80 in total economic activity) the reduction in benefits would likely reducing economic growth and employment.

States have also found that administering an asset test for SNAP can be costly and difficult, requiring additional resources and staff. Since low asset limits can increase the amount of churning in SNAP, this also increases administrative costs as people exit and then reenter SNAP. Most recently, Pennsylvania eliminated its SNAP asset test because they found that it cost the state $3.5 million a year to administer and resulted in $1.5 million in reduced SNAP benefits due to errors by caseworkers. Studies that have looked at the asset test in the Temporary Assistance for Needy Families (TANF) have also concluded that it can cost more to administer that it can potentially save.

While federal SNAP rules count the market value of most vehicles above a dollar threshold ($4,850) toward the asset limits, West Virginia, like 39 states, excludes the value of all vehicles while 11 states exclude at least one vehicle. SB 60 and HB 2714 would only allow for the exclusion of one vehicle, which can force families to sell a car and be left with fewer assets down the road.

West Virginia should not reinstate its asset limit for SNAP.  It would not only increase economic hardship and food insecurity among vulnerable populations, it would raise state administrative burdens and costs, and hurt our state’s economy by reducing federal SNAP benefits that flow into our state’s rural economy.