WV Center on Budget and Policy > Blog > Taxes > Eliminating the Personal Property Tax: Part 6 – Replacing the Revenue

Eliminating the Personal Property Tax: Part 6 – Replacing the Revenue

(Continued from part 5 – published 1/14/13)

Eliminating the personal property tax would cost a substantial amount of revenue at all levels of government across the state. Eliminating the personal property tax without some replacement revenue would be wildly irresponsible, and would have devastating effects on local services and education throughout the state. And to its credit, the WV Chamber of Commerce acknowledges that if the tax is eliminated, the levying bodies will need a way to recoup the lost revenue. 

So what options are out there to replace the hundreds of millions of dollars in lost property tax revenue? One way could be to simply raise property taxes on real property. However, that is not as easy as it sounds. The first stumbling block comes from the state’s constitution – maximum property tax rates are set in the constitution. But maxing out the levy rates across the state wouldn’t bring in nearly enough revenue. For example, when the proposal was only exempting business personal property, rather than all personal property, maxing out rates left school districts $10 million short. Fully eliminating the tax would only create a bigger hole to fill.

For the sake of argument, let’s assume that we can exceed the maximum rates and raise real property taxes enough to offset the lost personal property. What would that look like? Let’s assume that the classes of property are left unchanged, other than the elimination of personal property. That means class II property would consist of owner-occupied homes, and classes III & IV would consist primarily of commercial and industrial real estate, or business property. If the ratio between the tax rates on class II and classes III & IV remains the same (with the class II rate equal to 1/2 the class III and IV rate), then the average effective rate for class II property would rise from 1.2% to 1.7% and the average effective rate on class III & IV property would rise from 2.4% to 3.5%.

  Total Assessed Value Total Revenue Effective Rate
Real & Personal      
Class II $30,334,751,040 $358,256,806 1.2%
Class III & IV $45,261,736,698 $1,081,229,839 2.4%
Total $75,596,487,738 $1,439,486,645  
       
Real Only      
Class II $30,045,307,112 $521,741,598 1.7%
Class III & IV $26,424,893,000 $917,745,047 3.5%
Total $56,470,200,112 $1,439,486,645  

 

Now the question is, would the higher rates on real property result in higher or lower taxes for a typical taxpayer. Let’s look at two examples, a business paying the class III & IV rate, and a homeowner paying the class II rate. For the business, we’ll use the Gestamp stamping plant as an example, since we know its personal vs real property breakdown. In this example, the business has real property assessed at $9.9 million, and personal property assessed at $23.4 million.

  Assessed Value Rate Tax
Real $9,900,990 2.4% $236,519
Personal $25,380,000 2.4% $606,287
Total     $842,806
       
Real $9,900,990 3.5% $343,865
Personal $25,380,000 0.0% $0
Total     $343,865

As the table shows, the business would save $606,287 by through eliminating the personal property tax, and would pay an extra $107,346 in higher real property taxes, for a total savings of $498,941, a decrease of over 60%.

Now for the changes to class II property, we’ll assume a homeowner will real property assessed at $100,000 and personal property assessed at $5,000.

  Assessed Value Rate Tax
Real $100,000 1.2% $1,181
Personal $5,000 2.4% $119
Total     $1,300
       
Real $100,000 1.7% $1,737
Personal $5,000 0.0% $0
Total     $1,747

In this scenario, the taxpayer would save $119 in personal property taxes, but pay $556 more in real property taxes, for a total increase of $437, an increase of 37%.

Replacing the personal property tax with increased real property taxes would likely result in savings for businesses with a great deal of personal property, like manufacturers, but would result in higher taxes for homeowners and small businesses without much personal property.

But even it isn’t even as simple as that. These are the statewide average tax increases needed to replace the revenue, with personal property taxes accounting for about 1/3 of all property tax revenue. But as previous posts have shown, in several counties, personal property taxes account for well over half of all property tax revenue. These counties would see even more skewed results to keep it revenue neutral, with dramatically higher real estate taxes to offset the loss.

Other options are equally impractical. The state can’t simply replace the revenue, as the $447 million needed to do so is equal to about 11 percent of the general revenue fund. Nor could the state simply allow the localities to levy a sales tax, as it would take a 38% increase in what the sales tax currently brings in to replace the revenue, not to mention that a sales tax increase would be regressive.

No matter which way you slice it, it would be very difficult to replace the lost revenue without raising taxes on working families and homeowners, and even then, there remains significant challenges in getting the revenue to the right places.

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