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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.

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

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

According to SB 335, the 6 percent sales and use tax would be repealed on July 1, 2017, and the personal income tax would be repealed on January 1, 2018.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

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

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

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

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

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

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

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

 

 

5 Things You Need to Know about “Right to Work” in WV

The West Virginia Legislature is poised to enact a so-called right-to-work (RTW) law this week. The House of Delegates is taking up an amended version of the “WV Workplace Freedom Act” this afternoon. The law would prohibit unions and employers from negotiating a contract that requires employees who benefit from union representation to pay for their fair share toward those costs.

So far, 25 states have enacted RTW laws, predominantly in the South and Southwest. While right-to-work laws have nothing to do with guaranteeing jobs for workers, some in the business community view it as a strategy for attracting new businesses to locate in West Virginia, despite its downside risks of lowering wages and hurting unions that helped build the middle class in our country.

Here are five important things you need to know:

 1. It’s about lowering wages and eroding workplace protections. As an economic development tool, the professed aim of RTW is to reduce the power of unions by depriving them of resources (dues), which ultimately weakens the union and strengthens the employers’ hand in bargaining for lower pay and benefits. By decreasing the likelihood that businesses will have to negotiate with their workers, this will lower labor costs, reduce the cost of doing business, and will supposedly incentivize out-of-state manufacturers and other businesses to locate in West Virginia. If RTW didn’t lower wages and weaken workplace protections across the board, there would be no incentive for companies to move to West Virginia. This, in a nutshell, is the hope of RTW supporters such as the West Virginia Chamber of Commerce.

 2. Academic research is unanimous that RTW reduces unionization. While there is no strong evidence that RTW laws help or harm a state’s economy, there is a broad academic consensus that it weakens labor unions. If this happens, it could mean even worse economic and social outcomes in the state. This is because unionization is strongly associated with higher economic mobility, less income inequality, higher wages, safer workers conditions, better benefits and larger voter turnout.

 3. The WVU report on RTW is fundamentally flawed. While a recent study by John Deskins at West Virginia University concluded that RTW would boost jobs in West Virginia, the study is fraught with basic design problems. For example, the WVU study misidentifies that Texas and Utah adopted RTW in the 1990s, when both states adopted RTW before 1960. The WVU study also failed to adopt a standard academic practice that accounts for unobserved differences between states, such as the advent of air-conditioning in the South, access to oversees markets, and other important state characteristics. When researchers at the Economic Policy Institute accounted for these problems and replicated WVU’s findings, they found no relationship between RTW status and employment growth. Tim Bartik, an economist with the Upjohn Institute and one of the country’s leading economic development experts, recently reviewed the WVU study and concluded that it “does not provide any convincing evidence that a state that adopts RTW laws will, as a result, experience faster job growth.” The flaws with the WVU study highlight why state policymakers should not rely on its conclusions to adopt RTW.

 4. RTW is not about “workplace freedom.” While RTW proponents define ‘workplace freedom” as letting workers opt out of paying a representation fee to pay for the benefits they are receiving under any negotiated union contract, most would define workplace freedom as being treated with dignity and respect on the job. That means getting paid an honest wage for an honest day’s work, and having access to benefits such as paid sick days, paid family leave, health care, and a retirement plan. The only freedom workers would receive if RTW were enacted is the ability to get something for nothing.

 5. Low workforce skills are the central reason for West Virginia’s economic woes, not lack of RTW. A recent in-depth study by the Center for Business and Economic Research at the University of Kentucky that explored why the state is so poor found that the shortage of skilled workers – not RTW – was the central reason for the state’s relative poor economic performance. Since West Virginia faces many of the same social and economic problems as Kentucky, policymakers would be well advised to promote polices that improve the skills of the state’s workforce instead of RTW that could reduce workforce training.

While we are all worried about our economic future and want to build a strong economy in our state with good-paying jobs, enacting right to work is not going to get us there. Instead it may hurt working families by redistributing income from workers to employers and from middle-class taxpayers to the wealthy.  I hope the legislature in West Virginia will see that we can’t build West Virginia by tearing down working families and unions. Instead we need  to focus on the policies that we know work, such investing in early childhood education, research and development, higher education, workforce training, and effective ways to help more people get out of poverty. 

20,000 West Virginians Would Be Eligible for Overtime Under New Proposal

Yesterday, the Obama administration’s Department of Labor proposed a new rule that will raise the overtime salary threshold from $23,660 to $50,440 by 2016, and index it for the future. This change will extend overtime protection to about 5 million workers in its first year, including 20,000 in West Virginia

Under the Fair Labor Standards Act, workers eligible for overtime must be paid “time-and-a-half” or 1.5 times their regular pay rate for each hour of work per week over 40 hours. Currently, hourly workers in most service and blue-collar jobs are guaranteed the right to overtime pay.

For salaried workers, the right to overtime is determined by their pay and nature of work. Currently, salaried workers who earn below $455/week ($23,660/year) are eligible for overtime, but workers who earn more than $455/week can be exempted from overtime if their occupations are considered professional, administrative, or executive.

The current salary threshold has not kept pace with inflation or the changing economy. In 1975, the overtime salary threshold covered about 62 percent of all salaried workers, compared to just 8% today. Had the threshold kept pace with inflation since 1975, it would be about $52,000 today. The proposed threshold largely restores its lost value.

This calculator allows workers to see how much extra they can earn each week under the new rule.

Time to Modernize West Virginia’s Excess Acreage Tax

With tax reform looming on the state’s public policy agenda, now would be a opportune time to revisit the state’s Excess Acreage Tax. Since 1905, a corporation purchasing 10,000 acres or more of property in the state is subject to a one-time five cents per acre tax on owning the property. In 1999, Governor Underwood’s Commission on Fair Taxation (3-694) recommended increasing this tax to 50 cents per acre, making it an annual tax, lowering the threshold to 1,000 acres and allowing a credit against the state’s severance tax. This is a step in the right direction and it is long overdue.

As many West Virginians know, one of the state’s historic economic problems has been large absentee land and mineral ownership.  As we discussed in our 2013 report Who Owns West Virginia in the 21st Century?, this problem has not gone away. In 2012, the top 25 land owners in the state owned about 18 percent of the state’s private land and none of the top 10 largest land owners were headquartered in West Virginia. In Wyoming County, two out-of-state companies – Heartwood Forestland Fund and Norfolk Southern – owned over half of the county’s private land in 2012.

Adequate taxation of large landowners could not only spur development of more land in the state (especially in southern WV) but could also provide needed revenue to fund economic development and lower the tax responsibilities of landowners with improvements. According to data from the West Virginia Property Tax Department,  approximately 352 corporate entities (excluding non-profits) owned at least 1,000 acres of land in the state for a total of 3,380,000 acres. At 50 cents an acre, this would amount to an estimated $1.7 million in annual tax revenue – not including the tax credit against the state’s severance tax which would lower this amount. The state’s largest private land-owner – Heartwood Forestland Fund, which owns about 500,000 acres in the state – would have an annual tax bill of about $250,000.

While the proposal of increasing the tax from 5 to 50 cents is a step in the right direction, it might not be high enough to incentivize the development of more land or provide adequate revenue to fund economic development and other priorities. Adjusted for inflation, the five cents per acre tax that was established in 1905 would be the equivalent of about $1.25 today.

One idea would be to create a graduated Excess Acreage Tax rate that increased with the amount of property owned over 1,000 acres. This could help provide a much greater incentive to the largest land owners to develop or sell their land and it would help ensure that those at the bottom end don’t buy more land.

EXCESS ACREAGE TAX

If we started with a tax rate of 50 cents per acre between 1,000 and 2,499 acres and ended with a top rate of $5 per acre over 250,000, it could yield an estimated $10.6 million in revenue (not including the severance tax credit). If the lowest rate was set at a $1 per acre and increased by a $1 per acre until it hit $10 for landowners over 250,000 acres, it could yield $21.2 million annually. It would also be wise policy to exclude any producing farms, which is something we do not want to discourage with the Excess Acreage Tax.

Along with reforming the Excess Acreage Tax, lawmakers could also consider revamping the state’s preferential tax treatment of unimproved land. As the Lincoln Institute of Land Policy has pointed out, using the use-value assessment (UVA) approach instead of the market-based approach that is used on other types of property can dramatically lower property value and taxes.  For example, in Wyoming County, Heartwood Forestland Fund owns a parcel containing 12,463 acres that has an appraised value of $2,358,450 (assessed value is $1.4 million) and their total property tax bill in 2014 was $31,490. This means Heartwood is paying about $2.53 per acre, with an appraised value of just $189 per acre. Using a market-value approach would mean that this land would be valued closer to $500 an acre.

Governor Underwood’s Commission on Fair Taxation was correct in recommending much-needed changes to the state’s Excess Acreage Tax.  As the legislature moves ahead with reforming our state’s tax code this year, they should consider reforming the state’s Excess Acreage Tax. This could not only incentivize economic development in West Virginia, but also provide a much-needed source of revenue as coal continues to decline in southern West Virginia. 

UPDATED

Census Data Show Rich Getting Richer in West Virginia

Last week’s release of the American Community Survey (ACS) data contained more than just poverty statistics. It also contained some interesting information about income trends in West Virginia. As we noted last week, one of the reasons poverty has been slow to fall, despite economic growth, is income inequality, with little of the past three decades of economic growth reaching the poor and middle class (for more on that topic read this).

While we’ve covered growing income inequality before, the ACS data provides a fresh view on the extent of income inequality in West Virginia and its growth. According to the Census data, the richest 1/5th of households in West Virginia, the top 20%, take in nearly half of the income in the state. And their share has been growing in recent years.

income inequality

The trend is even more pronounced when looking at the top 5% of households in West Virginia. In 2013, the top 5% of households in West Virginia took in 21.1% of the state’s income, up from 19.8% in 2006.

The top 20% of households took home an average of $138,603 in 2013, compared to just $9,205 for the bottom 20%, and $41,253 for the household in the middle. Those in West Virginia’s top 5% had an average household income of $235,421 in 2013.

These numbers from the Census serve as yet another reminder that with growing income inequality, economic growth alone is not enough to help the middle class or lift families out of poverty. Without public policies like raising the minimum wage and expanding the EITC, more and more struggling West Virginians will see their slice of the economic pie shrink.