The New “Road to Prosperity” Explained

On October 7th, voters in West Virginia overwhelmingly approved a $1.6 billion general obligation bond to invest in the state’s road system. This is on top of the estimated $500 million in Turnpike Bonds and $500 million in federal GARVEE road bonds that were approved during the special legislative session earlier this year, along with about $130 million in increased State Road Fund revenues to pay for the $1.6 billion “Road to Prosperity” road bond.

The legislature is meeting in a Special Session this week to consider legislation that will address filling vacancies at the WV Department of Transportation and to make changes to the WV Jobs Act – which requires the state to hire at least 75 percent of its workers on state funded public improvements projects ($500,000 or above) from the local labor market.

According to Governor Jim Justice, this unprecedented investment will lead to the creation of an estimated 48,000 jobs in West Virginia. While this could be an enormous opportunity for the state’s short and long-term growth, it is important to put these numbers in context and for people to have a clear understanding of what the impact could be over the next several years. Below, I take a dive into answering some of the important questions surrounding the road bonds and there impact on West Virginia’s economy and fiscal health.

So, how big is $2.6 billion in road construction?

It’s pretty big. Altogether, the state spends about $700 million in state revenues on roads and about $400 million in federal revenues or $1.1 billion. The state revenues come from motor fuel taxes, DMV fees, and the sales tax on vehicles, while federal matching funds come mostly from the federal highway trust fund.So, $2.6 billion is more than double what the state spends each year on roads and four times more than what the state collects in taxes/fees each year in West Virginia. The voters approved $1.6 billion in general obligation bonds is approximately $500 million more than the state spends each year on roads or $900 million more than the state collects in West Virginia in taxes/fees for roads. In 2014, per capita spending on highways was $658 per person  compared to the national average of $508 per person – ranking 14th highest among the 50 states.

While $2.6 billion in additional road spending may be a lot of money, West Virginia’s spending on roads has stagnated over the last decade. West Virginia spends less today compared to the 1980s and 1990s on roads after you adjust for inflation and spending per mile. According to the 2015 report by the WV Blue Ribbon Commission on Highways, West Virginia would need approximately $750 million per year in additional funds to maintain its existing highways system and $1.130 billion annually to provide for expansion of the current highway system. The commission recommended an additional $419 million per year in additional revenues into the State Road Fund.

The $2.6 billion in bonds that have been approved by the legislature (Turnpike/GARVEE) and by the people (General Obligation Bond) this month are planned to be issued over the next four years. The voters approved bond of $1.6 billion will be issued in four increments, $800 million in 2017, $400 million in 2018, and $200 million in 2019 and 2020. The Turnpike and GARVEE bonds will also be issued in increments over the next few years.

Is West Virginia taking on too much debt?

The last general obligation bond constitutional amendment for roads was passed in 1996 at $550 million (Safe Road Amendment). This is about $879 million in today’s dollars. This debt is scheduled to be retired by June 1, 2025. As of June 30, 2017, the state’s total net tax supported debt is $1.521 billion, while the non-tax supported debt from the state’s 20 other bonding authorities (mostly colleges, but includes Turnpike Authority) is $6.249 billion.

According to the West Virginia’s Treasurer’s Office’s 2017 Debt Capacity Report, West Virginia’s net tax supported debt and debt service are currently below the recommended caps or debt ratios for each category that the “municipal bond industry and others use” to analyze a state’s fiscal position.

The debt ratios include net tax supported debt service (principle + interest payments) as a share of the state’s General Revenue Fund and Total Revenues (General Revenue Fund + Lottery Funds + State Road Funds), and net tax supported debt as a share of the Assessed Value of Real/Personal Property, State Personal Income, and net tax supported debt per capita in West Virginia.

The chart below shows the recommended caps (debt ratios) for each of the five categories included in the 2017 Debt Capacity Report along with their projected 2018 debt ratios without the $1.6 billion in tax supported  general obligation bonds that passed earlier this month. Included in the chart is also the estimated debt ratio if you include $1.2 billion of the $1.6 billion (75 percent) in new tax supported general obligation bonds that are scheduled to be issued by 2018 and 75 percent or $97.5 million of the projected $130 million in new dedicated debt service payments that are to be used to pay the new bond debt.

The WV Treasurer’s Office estimates that on June 30, 2018 the total estimated net tax supported debt will be $1.414 billion and the total debt service will be $182.9 million without any additional debt. As you can see from the chart, when you include the additional $1.2 billion in new tax supported debt and $97.5 million in additional debt service payments (based on the WV Treasurer’s Office own projections for each of the five categories) for 2018, the state goes above each of its own recommended debt caps. For example, the recommended per capita cap on net tax supported debt is $1,100. The Treasurer’s Office estimated earlier this year that this number will be $327 below this cap by 2018. However, if you include the more than  the additional $1.2 billion in voter approved general obligation bonds that are scheduled to be sold by 2018 this figures grows to $1,428 or $328 above the state’s own per capita recommended debt cap.

While it is hard to know for sure what impact the additional bond debt will have on the state’s fiscal health, Moody’s Investor Service warned earlier this year that a “significant increase in state’s Net Tax Supported Debt burden…could lead to a downgrade.” As Brad McElhinny pointed out recently at Metro News, the 2017 Debt Capacity Report from the WV Treasurer’s office also warned against the state increasing its debt in the midst of chronic budget gaps:

Although West Virginia is below all of the recommended caps on the ratios examined in this report, that does not provide a license to issue debt. Until West Virginia leaders come up with a comprehensive plan to fix the budget deficits and address declining revenues, debt should only be issued within the recommended ratios to move West Virginia forward and help address its financial issues.

The additional state debt could also hurt the state’s fiscal health if the state is unable to meet its debt service requirement in the future do to declining revenues or if the added cost of maintaining additional roads from new construction squeezes out other budget priorities. When it comes to GARVEEs, it is important to realize that they produce no new revenues and add to debt services costs since they borrow from future federal money – which could diminish the state’s ability to match federal funds in the future.

That said, the benefit of speeding up road projects could result in cost savings, as the rate of construction inflation is higher than the interest rate on most general obligation bonds. This is a way to short-cut inflation.  In addition, if the new roadway spending goes toward rehabilitation projects instead of waiting until the roads are in functional disrepair it can lower future costs.

Where is the $2.6 billion going? 

According to the West Virginia Department of Transportation’s “Road to Prosperity”project list, there are $337.1 million in GARVEE (1&2) bond projects, $370.5 million in Turnpike bond projects, and $2.03 billion in General Obligation Bond projects – a total of $2.736 billion. Of this amount, approximately $1.95 billion (71%) in listed bond projects go toward new construction (e.g. widening lanes, new roads, etc.) while $784 million go toward road repairs, resurfacing, and replacements.

Of the voter approved General Obligation Bonds listed projects (aka Road to Prosperity Amendment), approximately 84 percent or $1.7 billion is planned to go toward new construction while the remaining 16 percent ($328.5 million) is expected to go toward repairs, resurfacing, and replacements. While all of the new GARVEE bonds are expected to go toward existing roads, over two-thirds of Turnpike Bond projects are being used for new construction.

Will the road bonds create 48,000 jobs?

Governor Justice has repeatedly said that the $2.6 billion in new road spending will create “48,000 jobs” in West Virginia. Apparently this number was derived from a 2014 report from Duke University’s Center on Globalization, Governance & Competitiveness. In the report it states that “each $1 billion dollars invested in transportation infrastructure creates 21,671 jobs” or about one job per $41,145 in transportation spending. At $2.6 billion this would equate to over 56,000 jobs or 38,800 jobs at $1.6 billion. While the Governor has been clear that this is an imprecise figure, it is not typically a sound practice to simply apply multipliers that are based on national figures instead of at the state level or from studies that don’t take into consideration a state’s economy and demographics.

It is also important to keep in mind that the projected new jobs are temporary and that the money used to pay the debt service on the bonds will partly come from an increase from regressive fees/taxes that could lower consumer demand in other areas unlike federal spending that can come from deficit spending. The economic impact of the proposed road bonds also depends on several other factors, including the use of local labor and local inputs like raw materials, the portion of the economic benefits that may spill over into neighboring states, the rate of interest on the bond itself, the amount of slack in the local construction market, and whether the investment is targeted where the quality of the roads is bad. While all of these factors – and more – need to be considered before policymakers can make a sound judgment on the number of jobs that will be created, let’s roll with their figures for a minute.

According to the Duke study, over half (57 percent) of the projected jobs per $1 billion spent on transportation are in the construction sector.  If we conservatively say half of the projected 48,000 new jobs will be in the construction industry, than construction employment should conservatively hit 50,000 absent any major declines in sectors within the construction industry. This appears to be a very unlikely scenario, while an additional 5,000 construction jobs – as predicted by Steve White with the Affiliated Construction Trades Foundation – seems like a more probable outcome. As the chart below shows, construction employment is at a 25 year low, with the state down about 9,000 construction jobs since their annual peak in 2006 – so while it appears there could be a lot of slack within the construction industry it is doubtful that it could jump by more than 10,000 jobs within the next few years.

Is this a good investment for the state?

There is little doubt well-targeted investments in transportation infrastructure such as roads create good-paying jobs – especially in the short-run. The long-run impacts, however, are largely determined on whether this investment leads to additional investments from businesses or people and whether the additional new roads will require new revenues in the future to be maintained. Another important consideration is whether the WV Jobs Act  will be enforced, which could determine how much of the $2.6 billion stays in our local economy.

Since the state did not perform a life-cycle benefit-cost analysis (as far as I am aware of) for each of the larger proposed road projects, it is not clear whether the benefits will outweigh the costs over the long-run. A 2010 study by economist Michael Hicks that looked at the impact on small businesses of the Corridor G project that goes from Charleston to Pikeville (KY), found “startling” results that suggest an increase in firm productivity but Hicks warned that the results “should be interpreted with caution.”

Conclusion

The enormous investment provided by the road bonds offers a great opportunity to boost jobs and economic growth in the short-term, but it is unclear what the long-term impact will have on the state’s economic and fiscal health. It will be imperative for the Justice administration to hire as many local workers and utilize as much in-state businesses in the process as possible get the best bang for the buck. Additionally, it will be important for lawmakers to ensure that the additional debt does not lead to another credit downgrade or additional budget austerity that is already hurting our state’s economic position. Lawmakers should also take steps to increase transparency and accountability by ensuring the public knows how the$2.6 billion in road bonds are spent in West Virginia.

 

 

A Short History of the 2017 Budget Crisis in West Virginia (So Far)

This week, Governor Justice said he would let the state budget become law instead of signing it because the budget contained so many cuts ( a “travesty”) and that his proposed tax plans failed to become law. Governor Justice mostly blamed Democrats and Republicans in the House of Delegates, along with the Senate Democrats, for the state’s “bare bones” budget because they refused to go along with several income tax cut plans that were put together between himself and Senate Republicans. It is important to recognize that had the legislature gone along with most of the governor’s proposed tax plans, the state would have do to make much deeper cuts next year and beyond.

Given the choice between baking in large-scale future budget cuts with big tax cuts and passing a budget with sizable cuts for one year, it seems like the legislature made the better of two bad choices in refusing to go along with Senate Republicans and the governor.

As Governor Justice pointed out during his budget announcement, there were several tax plans that he and the Senate proposed that failed to pass in the House. While the governor called them “missed opportunities” it is more apt to look back upon each of the tax plans as missed fiscal calamities for the state that would have resulted in deeper budget cuts in the future.

While Governor Justice put together several tax plans during the regular legislative session that raised enough revenue to close the budget gap  – which moved from -$497 million to -$270 million based on agreed to budget reductions – his joint proposal with Senate Republicans during the last night of the 60-day regular session would have led to larger budget cuts in FY 2018 and beyond. Therefore, it is difficult to understand how Governor Justice can see this as a “missed opportunity” if he is concerned about budget cuts hurting the state.

Strangely, Governor Justice told the media  that  “all this [the passed state budget and no tax reform] does is kick the can down the road, and there’s massive budget holes in the out years.” The governor went on to say that the budget gap for FY 2019 is “$179 million” and “$486 million” by FY 2022. A simple look at the revenue impact of each of the “missed opportunities” or tax proposals shows that these gaps would have likely been much larger in outer years if most of these tax proposals would have been adopted.

Below is table that includes the net revenue impact of each of the proposed tax plans from the governor, House, Senate and several that the governor endorsed along with Senate leadership. Outside of the governor’s first tax plan that was included as part of this original budget for FY 2018 and his second proposed tax plan based on agreed to budget cuts (these were not mentioned as “missed opportunities” by the Governor), all of the other tax plans proposed by the Governor (along with the Senate) failed to raise enough money to close the projected budget gap for FY 2018 let alone for future budget years.

In fact, the tax plan the governor put together with Senate Republicans on the last night of the session on April 8th – missed opportunity #1 according to the governor – would have drastically reduced revenues for the state and expenditures absent future tax increases. By FY 2021, the State Tax Department estimated that it would have reduced General Revenue Fund collections by -$220 million and much more going forward, as the income tax was phased down. The House did not fare much better. Two out of three of the tax plans that passed the House lowered net revenue collections by FY 2020, which would require tax increases or more future budget cuts. While the tax plan passed by the Senate last Thursday increased net revenue by $93 million in FY 2018 – presumably close to enough revenue to pass the governor’s FY 2018 budget during the special session along with the new revenue estimates – the estimated revenue for FY 2019 was $30 million less, leading most likely to more budget cuts next year.

While Protect WV,  WV Center on Budget Policy,  and some lawmakers (see here and here) put forth a several revenue proposals for avoiding the deep cuts included in the FY 2018 budget, the legislature unfortunately could not agree on any revenue enhancements. Despite this inaction, the state’s fiscal health and funding of future budget priorities would have been much worse had most of the “missed opportunities” become law. On top of the tax proposals not bringing in enough money to fund budget priorities, most of the compromise tax plans between the Governor and Senate  (see here, here, here, and here) lowered taxes on the wealthy while increasing them on most West Virginians.

If there is silver lining to the state’s budget crisis this year it is that the budget passed by the legislature last week contains about $122 million more in General Revenue Fund appropriations than the budget vetoed by the governor in April. While it remains to be seen whether the new revenue estimates for next year pan out, they at least helped avoid more severe budget cuts.

Moving forward, the state is in for more hard times as the state faces yet again another large budget gap next year and likely stalemate on the need to pass sufficient revenues to meet the states needs. That said, it would have been a lot worse had the legislature acted on many of the governor’s tax proposals.

 

 

Senate Tax Plan Punches More Holes Into Budget (Updated)

Yesterday, the Senate Finance Committee passed an amended tax bill (HB 107) aimed at addressing the state’s budget shortfall, which was pegged at $497 million (or about 12 percent of the base budget) at the beginning of the year. Unlike the version of the bill passed by House, the Senate version creates net revenue losses beyond the FY 2018 budget.

The Senate bill includes raising the Sales Tax to 7.25 percent from 6 percent, expanding the sales tax base (telecommunications, digital goods, contracting services up to $40k, electronic data processing, health and fitness club memberships, primary opinion research, and ending direct use exemption for communications companies), an increase in the Historical Structure Rehabilitation Tax Credit to 25 percent from 10 percent, ending General Revenue transfer to Road Fund from sales taxes on highway construction, exempting all military retirement income from income tax, eliminating Social Security from income taxes over two years for those with less than $70,000, a new coal severance tax sliding scale based on price, a temporary three year increase in the Corporate Net Income Tax rate to 7 percent from 6.5 percent, and  new Personal Income Tax brackets that will reduce income tax collections by 15 percent in 2018 and 20 percent in 2019. The bill also includes a gradual phaseout of Personal Income Tax rates of 0.1 percent per year based on growth in the General Revenue Fund and inflation. The phase down is estimated to begin by FY 2021.

According to the Department of Revenue, the net impact of the legislation is a one-year increase in revenue in FY 2018 because the sales tax rate hike begins on July 1, 2017 while the personal income tax reduction does not begin until January 1, 2018 (Fiscal Year = July 1 to June 30th). After FY 2018, the Senate bill is projected to lower revenue by $56.1 million in FY2019, $121.5 million in FY2020, $137.4 million in FY21021, and $177.6 million in FY2022 when the Personal Income Tax rates begin to drop.

As shown above, the Senate tax plan not only fails to provide enough revenue for next year’s budget, but it also creates large future revenue holes that will likely result in more deep cuts to higher education, schools, and health and human services. This is especially important since next year is an election year when legislators often shy away from raising taxes.

Similar to previous tax plans from the Senate, this plan increase taxes on most West Virginians while lowering them for higher-income residents. According to the Institute on Taxation and Economic Policy, the Senate tax plan increases taxes on 60 percent of West Virginia households while lowering taxes on the top 40 percent of households. This is because lower income West Virginians pay more in sales taxes than income taxes, while the opposite is true for higher income people. Overall, the top 1 percent in West Virginia would receive an estimated tax cut of $2,245 on average while those making $26,000 would see a tax increase of $88 dollars on average.

Over the next couple of weeks, the Senate and House will take their tax plans to a conference committee to work on amenable plan that can pass both chambers so they can finally pass a budget from the upcoming year. The plan will have to include additional revenue if it aims to avoid more draconian cuts, especially in the outer years. One item that needs to be taken off of the bargaining table is the deep cuts to the personal income tax that largely benefit wealthier West Virginians. Only when this happens, can we ensure that we are not going down the Kansas road of a fiscal inferno with deep cuts to important programs, more credit downgrades, and weaker economic growth.

A good place for negotiations to start would be to adopt a simple tax plan, like the one we have endorsed or Delegate Pushkin has introduced that asks everyone to pay their fair share to avoid a government shutdown and cuts to essential services for families, children, and seniors.

 

Compromise Tax Bill Falls Onto Working Families, Makes Budget Crisis Worse

On the last night of the 2017 Legislative Session, the Senate and the Governor appeared to have worked on a tax plan compromise bill that would make sweeping changes to the state’s tax system that would exacerbate our state’s budget crisis and shift the tax load onto working families to make room for tax breaks for the wealthy. This included severance and income tax reductions, a sales tax increase with base broadening, a temporary Commercial Activities Tax (CAT) on gross receipts and a high-income surcharge tax, and increases in motor fuel taxes and Division of Motor Vehicle fees dedicated to the state’s roads.  Altogether, these changes would lower General Revenue Fund collections by an estimated $115 million and increase State Road Fund revenues by nearly $118 million in the first year of full implementation.

The table below provides an overview of the tax changes included in the compromise tax plan that were offered as an amendment to Senate Bill 484. While the plan raises revenues by increasing the sales tax and enacting a temporary tax on businesses (CAT) and high-income earners, the deep cuts to the personal income and the severance tax lead to a sharp decline in revenues for the upcoming fiscal year of 2018. The tax plan lowers revenue collections in future years even further since both the CAT and high-income tax expire by FY 2020, and the personal income tax is phased out over the coming decades.

The changes to the State Road Fund include an 8-cent increase in the motor fuel tax and increases in various DMV fees. This totals approximately $118 million in additional revenue for FY 2018 or about $60 million less than the Governor proposed in his FY 2018 budget.

On top of the $115 million in lost revenues that punch a bigger hole in the state budget, the proposed tax changes would on average increase taxes on 80 percent of West Virginia households making below $84,000, while lowering them on the 20 percent of West Virginians that make more than $84,000. Those making on average $11,000 would see their annual taxes rise by $121 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) would see an average tax cut of $3,713. This means that the compromise tax plan – excluding severance tax changes – raises taxes on most West Virginians to give large tax breaks to those that need them the least.

As noted in previous tax proposals, 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.

 

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.

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.

 

 

 

 

Revenues at Nine-Year Low So Far

Today, the state budget office released revenue collections for October which were $6.3 million below estimates.  While personal income tax collections where $14 million above expectations, sales and use and corporate income taxes were down $13 million and $5 million, respectively. So far, the state’s General Revenue Fund is down $87.4 million over the first four months of fiscal year 2017.

As the chart below reveals, the state’s four-month revenue collections are lower in Fiscal Year 2017 than they were nine years ago (FY 2008) before the Great Recession hit the state’s economy. On top of the state’s weak economy – which is largely driven by declining coal prices and production, and low natural gas prices – major tax cuts enacted between FY 2008 and FY 2016 are also a driving factor in the state’s weak revenue collections. Adjusting for inflation, four-month revenue collections in 2016 are about where they were 2002, 14 years ago.

octrevwvfinal

While October’s revenue collections didn’t drop as far as they did in July, August, and September, it’s likely that Governor Tomblin and/or the next governor will have to address the budget shortfalls before the legislature convenes in February 2017.

The drop in revenue collections for the current fiscal year could also mean that the projected gap for next year (FY 2018) – which is currently between $300 to $400 million – could grow larger. Since the state has already made major cuts to the state’s budget over the last several years, policymakers will have to enact revenue enhancements if they want to avoid draconian cuts and get their fiscal house in order.

Governor’s Proposed Tax Increases Smaller than Past Tax Cuts

Last week, Governor Tomblin issued a proclamation to call the legislature into a special session to address the state’s impeding budget crisis on Monday. This announcement came on the heels of a recent downgrade in the state’s bond rating from Standard & Poor’s Rating Service.

Due to a lack of consensus between the legislature (mostly the House leadership) and the governor on how best to close an estimated $270 million budget gap (this does not include cuts and reductions already baked into the Governor’s budget proposal, which takes this number above half a billion dollars), the governor included not only three bills to raise taxes but also a bill to give him authority to furlough state employees in case of a fiscal emergency. Along with Governor Tomblin’s budget bill, he also included in the call a supplemental appropriation bill to transfer $38 million in various funds and tap the Rainy Day Fund for $29 million to close part of the budget gap for the current fiscal year.

The tax increases proposed by the governor include: 1) raising the tax on tobacco products – including a 45 cent increase in the state’s cigarette tax, increasing the wholesale tax on other tobacco products from 7 to 12 percent, and establishing a new tax of 7.5 cent per milliliter on electronic cigarettes; 2) applying a sales tax on telecommunications services and ancillary services; and 3) raising the sales and use tax rate by no more than one percentage point. The tobacco taxes increase is expected to raise $78 million, the sales tax on telecommunications services would raise $60 million, and the sales tax rate increase to 7% from 6% would raise $196 million for a total of $334 million.

As Sean pointed out yesterday, these three tax proposals all hit low- and moderate-income families much harder than those at the top, and make our state and local tax system even more regressive and upside down. The good news, as Sean points out, is that there are much better options to close the revenue gap that include asking the wealthy to pay their fair share. The bad news is that these options were not included in the governor’s proclamation and will most likely not be considered. Making things even worse, it seems likely that the only revenue proposal that might pass is raising the tobacco tax by 45 cents per pack (instead of $1 increase that would not only raise more revenue but do more to prevent youth smoking, early deaths, and control health care costs). 

While many legislators have signed “no tax” increase pledges and, alternatively, there are many others who believe that passing additional tax increases would significantly increase the state’s tax base, it is important to recognize that Governor Tomblin’s proposed tax increases would total less than the major tax cuts of the past. Beginning in 2007, West Virginia enacted a number of major tax cuts, including phasing out the grocery tax on food and the business franchise tax, reducing the corporate net income tax rate from 9 to 6.5 percent, and making some cuts to the personal income tax (increasing the homestead exemption and establishing a low income family tax credit).

Tax Changes Present and Past

According to the West Virginia Department of Commerce, the business tax reductions totaled more than $230 million in 2015. Overall, the major tax cuts of the past ten years add up to at least $424 million while the governor’s proposed tax increases total only $334 million. While the tax cuts of the past were somewhat balanced between difference income groups, the governor’s proposals all hit low- and middle-income families much harder.

The irony of the state’s current budget crisis is that the tax cuts of the past are roughly the size of the state’s current budget gap. These is why we warned years ago that eventually these tax cuts would come home to roost.

As the legislature continues to meet over the next week or so to iron out the FY 2017 budget, it is imperative that they take a fiscally responsible approach that includes additional revenue to meet the needs of our state’s citizens. The state cannot continue its dubious path of cutting its way to prosperity. Legislators need to explore options that ensure the wealthy pay their fair share and that provide the necessary resources for essential services and programs. Through these public investments we can create a shared prosperity that makes West Virginia a better place to live, work and raise a family.

Revised Estimates Highlight Need for Additional $92 Million in Revenue

On Tuesday, Governor Tomblin revised his estimates for the FY 2017 General Revenue Fund Budget. Since the legislature failed to pass the state budget during the regular session, the governor is expected to call a special session sometime this Spring to pass a budget for FY 2017.

Altogether, the FY 2017 revised revenue estimates for the state’s General Revenue Fund decrease revenues by about $239 million for FY 2017, or from $4.33 billion to about $4.09 billion. About two-thirds, or $147 million, of the lower revenue estimates was due to the legislature’s failure to adopt several of the governor’s proposed revenue measures. These included:

  • Increasing tobacco products taxes by $78 million: This legislation included increasing the cigarette tax from 55 cents to $1 per pack ($71.5 million), increasing the wholesale price tax on other tobacco products from 7% to 12% ($4.7 million), and a 7.5 cent per milliliter tax on electronic cigarettes ($1.8 million).
  • Enacting a sales tax on telecommunication services ($60 million)
  • Eliminating sales and use tax exemption for highways purchases for one year ($9.0 million): The governor’s bill would have temporarily suspended the annual transfer of sales tax revenue to the State Road Fund, based on a formula tied to the value of contract purchases in FY2016, and moved the revenue to the General Revenue Fund. 

According to the governor, the remaining $92.4 million in decreased revenue for FY 2017 was due to “downward pressure on energy prices, and less economic growth than originally forecast for both the national and state economy.”

revied grf estimatesThe downward slide in estimated personal income tax collections is expected to be $20.5 million below original estimates, while the estimated decline in severance taxes is expected to be $17.6 million below the governor’s original estimates. Most surprising is the large drop in expected corporate income taxes, declining by over 17 percent or $28.6 million. 

At $137.5 million, the state’s corporate net income and business franchise collections will be at an all-time low in FY 2017 if the revised estimates are realized. While this is largely due to the elimination of the business franchise tax and the reduction of the corporate net income tax rate from 9% to 6.5% in 2015, it highlights that the tax cuts failed to spur any supply-side effects and that these business tax cuts have made it much harder to fund crucial programs and services. At its peak in 2008 (the same fiscal year that the tax reduction went into effect), these two taxes accounted for $388 million in General Revenue Funds. In 1990, they accounted for over 12 percent of the General Revenue Fund budget compared to less than four percent today.

 COrp taxes low

When the legislature reconvenes in early Spring to pass the state’s FY 2017 budget, it is clear that lawmakers will need to adopt additional revenues to avoid more harmful cuts in essential services and programs. As we highlighted in our recent analysis of the state’s budget this year, there are a number of avenues lawmakers could take to raise additional revenue in addition to what the governor is proposing, including expanding the sales tax to more personal services, modernizing the state’s personal income tax, adopting a higher tax on natural gas liquids, and scaling back or eliminating lottery funds subsidies.

When looking at revenue options, lawmakers should also consider taking a balanced approach that considers how tax increases would impact low- and middle-income families who already pay a higher share of their income in state and local taxes than the state’s wealthiest residents. This could include pairing any sales tax or sin tax increase with a refundable state Earned Income Tax Credit that would not only help balance out the negative impact of these regressive taxes but also help boost labor force participation, reduce poverty, and lead to better social and economic outcomes.

 

Gutting the Personal Income is a Poor Strategy (Part I)

Last week, the newly created Joint Select Committee on Tax Reform held its second meeting to discuss overhauling the state’s tax system. While the meeting included an overview of the state’s current tax system and historical tax reform efforts of the past (e.g. Cecil Underwood’s Commission on Fair Taxation), committee members made it quite clear in April that they want to explore abolishing the state’s personal income tax, even though they now say “there’s no hidden agenda” and/or proposals they have in mind for 2016.

It is important to remember that during the 2015 Legislative Session several members of the uber-conservative  “Liberty Caucus” introduced a bill to abolish the personal income tax. The movement to abolish or rollback the personal income tax is not something unique to West Virginia. In fact, it is part of a well-organized conservative effort across the country that is being spearheaded by wealthy groups such as ALEC, the Heritage Foundation, and economists Stephen Moore and Arthur Laffer. So far, five states – Kansas, Maine, North Carolina, Ohio, and Wisconsin – have made major cuts to their personal income taxes on the advice of these groups and many more states have considered doing the same. As I pointed out in a recent op-ed in the Charleston Daily Mail, gutting the personal income tax is a poor strategy that would likely lead to growing budget deficits instead of a growing economy.

This post is the first a five-part series that aims to explore the ramifications of cutting or rolling back our state’s personal income tax. This will include a brief overview of the importance and structure of West Virginia’s personal income tax, along with responding to many of the erroneous arguments being put forth to abolish the tax – including out-migration, economic growth, and small business development. The series will end with a number of policy alternatives that would modernize and strengthen our state’s personal income tax so we can invest in West Virginia’s economy.

Brief Overview of West Virginia’s Personal Income Tax

West Virginia’s personal income tax  was established in 1961 and applies to most types of money income, including wages and salaries, interest, rental income, capital gains, and some business and pension income. West Virginia is one of 43 states that has a personal income tax and like 29 other states, it links to the federal definition of adjusted gross income (AGI) to define its tax base. West Virginia, like many states, also has a number of deductions, exemptions, and credits that lower the income subject to the tax. According to the latest Tax Expenditure Report from the WV State Tax Department, the state lost an estimated $242 million in forgone revenue from these expenditures in 2014. 

personal income tax expenditures

Similar to 33 states, West Virginia also has a progressive or graduated rate structure, with the income tax rates growing with income (see table below). This means that unlike the sales tax that hits low-income families the hardest, higher income residents pay a larger of their income in personal income taxes compared to low- and middle-income residents. The personal income tax also reduces the overall regressive nature of West Virginia’s state and local tax system. 

Who Pays sales income

West Virginia’s marginal personal income tax rates have changed dramatically through the years. Throughout the 1960s, the top marginal tax rate was 5.5 percent. From 1971 to 1982, the top rate grew to 9.6 percent, and from 1983 to 1986 it was 13 percent.

WVPITMTR

Since West Virginia’s marginal tax rates and income brackets have remained unchanged since the 1987, this means a lot more people are climbing into the higher income tax brackets. For example, in 1987 only four percent of families in the state had income (not to be confused with taxable income) above $60,000, compared to almost 40 percent in 2014. 

bracket and families

While the state’s top marginal rate is 6.5 percent (see table below), no one pays 6.5 percent of their taxable income in state income taxes. This is because they are only paying the higher rate on any income above each threshold, not on everything.

For example, suppose a family in West Virginia has $65,000 in taxable West Virginia income (this would be after any exemptions, deductions or credits) in 2014. They would pay three percent on the first $10,000, four percent on $15,000 ($25,000-$10,000), 4.5 percent on the next $15,000 ($40,000-$25,000), six percent on their next $20,000 ($60,000-$40,000), and 6.5 percent on the remaining $5,000. Note that even though this family is at the 6.5 percent tax bracket it does not owe 6.5 percent of its income but instead a maximum of 4.7 percent.

 brackets

Now that we have a good understanding of how the state’s personal income tax works, let’s look at what it pays for in West Virginia.The personal income tax is West Virginia’s second largest source of revenue outside of federal funds. It makes up 43 percent or $1.9 billion of the state’s $4.3 billion General Revenue Fund budget that funds public education, public safety, higher education, health and human services and many other important programs and services.

State Biudget

About $95.4 million in personal income tax revenue pays for the Old Workers’ Compensation Debt (which will be fully paid off by 2016) and a couple of years ago the legislature decided to dedicate $35 million of the $90 million to fund the liability in retiree health care (a.k.a. OPEB). The personal income tax is also a growing share of the budget, growing from 35 percent in 2002 to a projected 44 percent by 2020. 

 PIT History

As this post shows, the personal income tax is not only the largest source of revenue from state residents but it is also a progressive tax that helps reduce income inequality and pay for important budget priorities like education, higher education and health and human services. In the next post, we will explore whether the personal income tax leads people to flee West Virginia for states without a personal income tax. As we shall see, the idea that the personal income tax leads to out-migration of state residents and businesses is largely a myth.