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According to SB 335, the 6 percent sales and use tax would be repealed on July 1, 2017, and the personal income tax would be repealed on January 1, 2018.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.