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.
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.
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.
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.
– 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.
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.
– 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.
A recent WVCBP report looked at many of the people who could lose health coverage from the repeal of the Affordable Care Act – including small business workers and those working in various industries. Last week, the Urban Institute released state fact sheets with more demographic information on this population – with details on income, age, race, education, and employment status.
Of the estimated 184,000 West Virginians who would lose coverage from repealing the ACA, 84 percent have incomes below 200 percent of the federal poverty level – which is considered the amount of income a typical family needs to make ends meet. Approximately 44 percent of those that could lose coverage are below the federal poverty line, which was $24,300 in 2016. If the ACA is repealed, the share of those below the federal poverty line without health insurance would grow fourfold, from 7 percent to 28 percent, according to the Urban Institute.
Repealing the ACA would especially impact those in West Virginia without a college degree. Of the 171,000 adults who would lose coverage, 90 percent do not have a college degree. Approximately 91 percent are white, while 5 percent are black and 2 percent are Hispanic.
Among West Virginians who are expected to lose coverage, 73 percent are in working families. This figure is even higher for some families: 79 percent of children and 80 percent of parents who would lose coverage are in families with at least one worker.
A new West Virginia Center on Budget and Policy report shows the far-reaching effects of an ACA repeal in the Mountain State. Read.
The report shows West Virginia will be one of the most heavily impacted states by an ACA repeal. West Virginia will lose an estimated $349 million over five years in state and local taxes as a result of reduced economic activity generated by the ACA and the state’s budget crisis could worsen if ACA provisions that provide direct savings to the state are repealed among other negative impacts.
The WVCBP believes Congress and the President should build on the progress that has been made through the ACA. Any actions taken should carefully consider the impact they have on the number of uninsured and on health-care costs.
Based on what is known, the proposal shifts major decisions about how to respond to a repeal of the Affordable Care Act. At the same time, states will have less federal dollars to help subsidize the cost of health insurance and preserve gains made under the ACA.
Ultimately, the proposal leaves a variety of important questions unanswered.
In the News
This Bluefield Daily Telegraph story takes us to the nation’s capital city where U.S. Rep. Evan Jenkins (R-W.Va.) is fighting for more support to help out-of-work coal miners. Read.
The bill — Assisting America’s Dislocated Miners Act — if successful would establish the Dislocated Miners Assistance Program under the U.S. Department of Labor. The move would also provide $20 million per-year over five years to fund the program.
The WVCBP welcomes the effort by Congressman Jenkins and believes it could help diversify West Virginia’s economy.
Governor Jim Justice told a group of lawmakers and business owners the state’s budget gap is expected to reach $700 million in FY 2019. Read.
Justice went on to tell the Register-Herald that many of the “low-hanging fruit” have already been taken and further dips into the state’s Rainy Day Fund would be disastrous for the state’s bond rating.
The WVCBP looks forward to the new administration working with legislators to come up with real budget solutions that do not negatively impact West Virginians and the vital services they use daily.
Register for the WVCBP’s upcoming Budget Breakfast by Tuesday, January 31 to enjoy an early bird discount rate. The event slated for Feb. 23 will feature remarks by the Governor’s Chief of Staff Nick Casey and Senator Mike Hall. Register here.
Citizens are welcomed to join Protect West Virginia, Our Children Our Future, West Virginia Development Hub, and others to discuss the state’s on-going budget woes, how it impacts their daily lives, and how to take action from there to Protect West Virginia. More info on the event may be found here.
What We Are Reading…
– If you don’t think progressives and conservatives can find ways to work together to reduce income inequality, check out these eight market-oriented policy proposals that our friend Dean Baker published for the conservative American Enterprise Institute.
– And if you don’t think there is hope for Appalachia in the Trump-era, think again says former coal-miner Nick Mullins in this piece from the Huffington Post.
– If you are interested in economics and are looking for a place to study, discover, participate, and orient yourself in pluralist economics go to this new interactive website called Exploring Economics. Listen to Mariana Mazzucato give a Ted Talk about how government plays an important and large role as an investor and innovator.
U.S. Senators Shelley Moore Capito (R-W.Va.), Bill Cassidy, MD (R-La.), Susan Collins (R-Maine), and Johnny Isakson (R-Ga.) unveiled the outline of the Patient Freedom Act of 2017, a one-page document describing a proposed legislative approach that could follow the repeal of the Affordable Care Act. However, the proposal raises serious questions and leaves important questions unanswered.
Based on what is known, the proposal shifts major decisions about how to respond to a repeal of the Affordable Care Act. At the same time, states will have less federal dollars to help subsidize the cost of health insurance and preserve gains made under the ACA. This West Virginia Center on Budget and Policy report takes a deep dive into what West Virginia will lose with an ACA repeal.
States have two options with federal assistance and a third option with no federal assistance under the proposal:
States Can Keep Some ACA Provisions But With Significantly Less Federal Dollars
– The total subsidy dollars West Virginians receive through the ACA Marketplace would be cut. Ninety-five percent of the federal premium tax credit and cost-sharing subsidy dollars would be avaiable. It is unclear if those federal dollars would keep pace with inflation or if purchasing power will shrink dramatically over time. It is also unclear if federal dollars will increase if more people become eligible to receive subsidy dollars.
– The fate of federal dollars that support Medicaid expansion is also unclear. The proposal fails to outline if the current Medicaid federal matching dollars partnership would continue or if only a limited amount of federal money would be available.
States Use Federal Dollars To Create Health Savings Accounts
– States can take the reduced federal support and deposit a limited amount of money into eligible individuals’ Roth Health Savings Accounts to purchase a high-deductible health insurance plan. The states will administer this.
– Eligibility guidelines for qualifying for health savings accounts as well as the amount of money per person is murky.
– While the option for states to continue Medicaid expansion appears intact, it is unknown if the current financial partnership will continue or if the federal dollars will be limited or keep up with inflation.
– States have the option to discontinue the Medicaid expansion and put an allotment of dollars into health savings accounts. Lower-income West Virginians could put that money toward high-deductible plan premiums.
It is unknown if consumer protections, such as prohibiting insurance companies from charging higher premiums to any person with pre-existing conditions, based on gender or age, or other factors used as a basis to charge higher premiums pre-ACA, will remain under the above options.
Additionally, the proposal appears to eliminate requirements that insurance companies spend a specific portion of the plan premiums on health-care benefits rather than administrative costs and profits.
Finally, the individual mandate requiring everyone to purchase health insurance will be repealed. This will drive up insurance premiums for those who do buy insurance as those without insurance prolong seeking treatment and going the insurance pool. An Urban Institute report describes the impact of an individual mandate repeal on the private insurance market and the ACA Marketplace. Urban estimated the individual market would be near collapse, with a 92 percent reduction in enrollees coupled with a dramatic increase in premiums, undoing the progress made in making this market accessible and affordable.
We know that repealing the Affordable Care Act will increase the number of uninsured Americans by tens of millions. We also know it will significantly raise premiums for people who purchase health insurance in the individual market (people without employer-based health insurance and who are not eligible for Medicaid or Medicare). Read.
Members of Congress who care about the size of the federal budget deficit should take note that repealing the ACA also could significantly increase the federal budget deficit.
In June, 2015 the Congressional Budget Office of the U.S. Congress analyzed the budgetary effects of repealing the ACA and estimated that it would increase federal budget deficit by $137 billion over the 2016–2025 period.
ACA Repeal Restores Tax Breaks for the Wealthy
Among other reasons for the impact on the deficit, the prior ACA repeal bill vetoed by President Obama immediately provided a tax cut to individuals with incomes over $200,000 and couples with incomes over $250,000 a year.
Low- and moderate-income people pay Medicare taxes on all of their income. However, before the ACA, higher income people did not pay taxes on all of their income. The ACA ended this inequity in Medicare taxes.
An ACA repeal would restore this Medicare tax break for the wealthy:
– Millionaire household would receive a tax cut on average of $49,370 a year
– For multimillionaire tax filers – with incomes above $3.8 million a year – the average tax cut would be $195,000
Without this and other revenue in the ACA, any replacement plan can only leave more people without insurance and others with higher premiums and copayments.
Yet another analysis confirms the potential harm of repealing the Affordable Care Act. The Congressional Budget Office and the Joint Committee on Taxation examined the impact of the repeal bill passed by Congress in 2015 and 2016 (H.R.3762).
Tens of Millions Would Lose Health Care Quickly
– 18 million more people would be uninsured in the first year after repeal
– 27 million people would be uninsured after repeal of the ACA marketplace premium subsidies and the Medicaid expansion
– 32 million people would be uninsured by 2026
Premiums in the Individual Health Insurance Market Would Increase Dramatically
– 20 to 25 percent increase in premiums in the first year after repeal
– 50 percent increase after repeal of the ACA marketplace premium subsidies and the Medicaid expansion
– Premiums would about “double by 2026”
ACA Repeal Will Cause Chaos in the Nation’s Individual Health Insurance Markets
– For people without employer-based coverage or public health insurance, it could mean no insurance options are available to them
– About half of the nation’s population lives in areas that would have no insurers offering coverage in the individual market in the first year after repeal
– By 2026, three-quarters of the population would have no insurers
The West Virginia Center on Budget and Policy will release an Issue Brief that outlines the potential risks of an ACA repeal to West Virginians next week.