Senate Tax Plan Creates Big Budget Hole, Shifts Tax Load Onto Working Families (Updated)
Overall, SB 409 would increase tax collections by $89 million in FY 2018 while decreasing them for each year after. The reason for the first year gain in tax collections is because the sales tax hikes begin July 1, 2017 (the beginning of FY 2018), while major decreases in the personal income tax do not begin until six months later on January 1, 2018. By FY 2022, SB 409 is expected to lower overall state revenue collections by $83 million and these reductions will grow only bigger over the long-term.
Reduction and Elimination of the Personal Income Tax
Beginning on January 1, 2018, West Virginia's five income tax brackets would be abolished and replaced with three new brackets. These include 1.85 percent on income below $20,000, 3.65 percent on incomes between $20,000 and $35,000, and 5.45 percent on incomes above $35,000. According to the State Tax Department, these changes are expected to lower personal income tax collections by $154 million next year (FY 2018) and $384 million by FY 2019.
Similar to Kansas, SB 409 puts West Virginia on a path to eliminate the state income tax over the next two decades. The personal income tax is the state's largest source of revenue ($1.8 billion), making up about 45 percent of the General Revenue Fund. The bill contains a sales tax revenue trigger to reduce each of the proposed 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). According to the State Tax Department, the elimination of the personal income tax could occur around FY 2030. Over this time, the Tax Department projects that revenues would fall by $2.5 billion below current projections by FY 2030.
SB 409 also includes a tax credit for low-income seniors of up to $200 for seniors below 125 percent of the federal poverty level and a partial tax credit for seniors with incomes between 150 percent and 125 percent of the federal poverty. This credit is expected to cost $5 million in its first year of implementation.
Coal Severance Tax Reductions
On top of lowering personal income tax collections, SB 409 lowers the coal severance tax rate from 5 percent to 2.5 percent over five years in 0.5% increments. The rate drop to 4.5 percent on July 1, 2017; 4.0 percent on July 1, 2018; 3.5 percent on July 1, 2019; 3.0 percent on July 1, 2020; and finally to 2.5 percent on July 1, 2021. By FY 2022, this is expected to lower state coal severance taxes by $76 million and coal severance taxes directed to coal producing counties by $4 million.
Sales Tax Increase with Broader Tax Base
While SB 409 reduces income and severance taxes, it increases the state's sales and use tax and includes a broader base of services and goods included in the tax base. All together, these changes are expected to increase sales tax collections by $261 million in FY 2018 and $400 million by FY 2019.
Beginning on July 1, 2017, the Sales and Use Tax would increase to 7 percent from 6 percent ($200m) and it would include the following items currently exempted from the sales tax: telecommunications ($69.3m), personal services (barbering, manicuring, cosmetology, embalming and funeral directing, and non-medical personal care services not otherwise funded by Medicaid or Medicare - $10.5m), solid waste disposal charges ($4m), electronic data processing services ($5.8m), and other services (summer camp tuition, health fitness services, primary opinion research, music instruction, artistic performances, newspaper delivery services, and travel agency commissions - $4m).
SB 409 would also increase the sales tax on groceries (food for home consumption) to 3.5 percent from zero ($94m) and the sales tax on the sales of mobile homes from 3 percent (effective rate) to 7 percent ($5.8m). Because many municipalities in West Virginia (28 currently impost local sales taxes up to 1% with 11 more municipalities by 2018), the broadening of the sales tax base in SB 409 is expected to increase local sales tax collections by $15 million per year.
Beyond income, severance and sales tax changes, SB 409 also removes property tax revenue caps and allows county boards of education to establish their own levy rates: 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. As noted in the fiscal note from the WV Department of Education, there may be major constitutional issues with the adoption of these changes and it is unclear what the revenue implications would be for the state or county school boards.
Similar to previous version of the bill, SB 409 would increase taxes on those making less than $84,000 while lowering taxes on those making over $84,000. Altogether, SB 409 would increase taxes on 80 percent of West Virginians while lowering taxes on the top 20 percent of earners. Those making on average $11,000 would see their annual taxes raise by $113 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) would see an average tax cut of $4,343.
As noted previously, 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.