Pages tagged "Taxes"
Middle-class West Virginians would receive only 10 percent of the benefits of the tax reform by 2027, according to an analysis from the Institute on Taxation and Economic Policy. The middle fifth of West Virginians would receive only half of the benefits going to the top one percent of West Virginians.
While some households at each income level would face a tax increase, the average impact on each income group would be a tax cut. But the average tax cut for the richest one percent of West Virginians — $18,860 in 2019 and $21,390 in 2027 —would be vastly larger than the average tax break for any other group. The middle fifth of income earners in West Virginia would receive an average tax cut of $350 in 2019 and $470 in 2027.
The wealthiest West Virginians aren't receiving the largest tax cuts simply because they have most of the income. Instead, the tax plan favors them heavily. Even when measured as a share of income, the tax cuts for the richest one percent of West Virginians are more than twice the size of the than the tax cuts for the middle class.
While the average impact of the plan on each income group is a tax cut, some households in each income group would pay higher taxes under the plan. Overall six percent of West Virginians would pay more in taxes. For some income groups the share of taxpayers with a tax increase is higher or lower, one reason for the variation is that state and local taxes would no longer be deductible on federal tax returns under the Senate plan. This has a significant effect on many middle-income and upper-middle income households in some states.
In West Virginia, the middle 20 percent of income-earners, the group that is quite literally the "middle-class," would receive nine percent of the benefits in the U.S. in 2018 and just seven percent of the benefits in 2027, according to an analysis from the Institute on Taxation and Economic Policy. In other words, in 2027 the middle fifth of West Virginians would receive only one fourth of the benefits received by the richest one percent of Americans.
The richest one percent of West Virginians would enjoy an average tax cut of $18,830 in 2018, and this average tax cut would rise to $21,090 in 2027. The middle fifth of income-earners would receive an average tax cut of $450 in 2018, which would fall to $240 in 2027. Only the top one percent of West Virginians would see their tax cut grow over time, for everyone else, the size of the tax cuts shrinks by 2027.
Even when measured as a percentage of income, the richest one percent receive a larger average tax break in 2018 and 2027 than any other income group. In West Virginia, the richest one percent receive an average tax cut equal to about 2.6 percent of their income in 2018 and 2027. The middle fifth of income-earners receive a break equal to 1.1 percent of their income in 2018, falling to just 0.4 percent of their income in 2027. By 2027, the size of the tax cut as a percentage of income is 6.5 times greater for the top one percent than it is for the middle class in West Virginia.
In addition, Some households in every income group would face a tax hike under the bill. For example, in 2018, six percent of West Virginia households in the middle fifth of the income distribution would face a tax hike, rising to nine percent of these households in 2027. This would occur because several provisions in the bill raise revenue by repealing or limiting tax breaks that benefit the middle-class, and for some households the loss of these tax breaks would not be offset by the new tax breaks introduced in the bill.
The tax plan passed the Senate by a vote of 32-1, but was killed by the House, prompting a 10-day recess for the legislature. The bill, while currently dead, is still heavily favored by the Senate and the Governor and likely still will be the basis for the budget deal.
The tax plan introduced during the special session and passed by the Senate would make major changes to the state's tax system. The plan includes changes to the severance tax, major income tax reductions, a sales tax increase with base broadening, a temporary tax bracket for high-incomes, a temporary increase in the corporate net income tax, and increases in motor fuel taxes and Division of Motor Vehicle fees dedicated to the state's roads. Altogether, these changes would decrease General Revenue Fund collections by $52.2 million in the first year of full implementation, and lower General Revenue collections even further once the temporary corporate net income and high-income tax bracket expire. The tax plan would also increases State Road Fund Revenues by $118 million.
The table below breaks down the tax changes in SB 1004. The centerpieces of the plan are raising revenue with an increase to the sales tax and temporary taxes on businesses and high-income earner, which are almost entirely offset by major cuts to the income tax. The tax plan lowers revenue collections in future years even further since both the increased corporate net income and high-income tax expire by FY 2020, and the personal income tax is phased out over the coming decades.
Because the sales tax increase has an earlier effective date than the income tax cut, the tax plan would increase General Revenue Fund revenues by $135.3 million in FY 2018, but would reduce revenue by $59.2 million in FY 2019 once the income tax cut is in effect for the full fiscal year. And once the temporary corporate net income and high-income tax bracket expire, the plan would result in a net revenue loss of $92.2 million.
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. These revenues would go to the State Road Fund, and would not contribute to closing the state's $500 million budget gap for FY 2018.
Like previous versions of the compromise tax plan, this plan would not only worsen our state's budget problems, it would do so by increasing 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 $123 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) would see an average tax cut of $2,626. Once again, the latest compromise tax plan is a plan that raises taxes on most West Virginians to give large tax breaks to those that need them the least.
The table below breaks out the tax changes for each income group in West Virginia. It includes the full-implementation of income tax reductions in 2018 and the 6.5% rate on incomes over $300k. While every income group sees an increase in their taxes from the proposed changes to the sales tax, motor fuel tax/DMV fees, and the increased corporate net income tax, the large personal income tax reductions mostly goes to the top income groups. In fact, approximately 60 percent of the more than $300 million in income tax cuts go to the top 20 percent, according to the Institute on Taxation and Economic Policy. This is why higher income West Virginians are estimated to receive an overall reduction in taxes while low and middle-income West Virginians see an increase in taxes.
The two temporary provisions of the tax plan, the increased rate for the corporate net income tax and the 6.5% income tax on incomes over $300,000, expire after 2020. Taking out these two parts of the plan largely benefit the top 1% of West Virginians, and do little for the other 99%. Once these two provisions expire, the overall tax cut for the top 1% of West Virginians will increase from $2,626 to $4,134.
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 taxes on the wealthy, while planning for further tax cuts for the wealthy in the future, 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.
After the initial cuts to the personal income tax rate, the compromise tax plan calls for a further 0.1 percentage point reduction in each tax bracket's rates if General Revenue tax collections are at a certain level. If general revenue tax collections in a particular tax year are higher than they were five years ago, after making a special inflation adjustment, then the personal income tax rates are reduced for that year. The special inflation adjustment, or "trigger index", calculated by taking the percentage increase in that year's June Consumer Price Index for all Urban Consumers (CPI-U) over the average June CPI-U of the past five years, and adding 0.5 percent to it.
Here's how that would work. For FY 2019, June 2018's CPI-U is projected to be 251.97. The average CPI-U for the five years prior to that is 239.57., for a 5.2 percent increase between the June 2018 CPI-U and the average of the previous five years. Add 0.5 percent to that, and you get the "trigger index" for FY 2019 of 5.7 percent.
Next, that "trigger index" of 5.7 percent would be applied to General Revenue collections from five years prior, in this case FY 2014. In FY 2014, general revenue collections were $4.104 billion. Increase that by 5.7 percent and you get $4.339 billion. If revenue collections in FY 2019 are greater than $4.339 billion, than the income tax rates would be lowered by 0.1 percentage points.
Based on current revenue and CPI-U projections, including the fiscal impact of the compromise tax plan, the personal income tax could potentially see further reductions as early as FY 2021, the first year projected revenues would exceed the General Revenue threshold to trigger a tax cut.
(Note: FY 2019-FY2022 revenue projections are the WV Budget Office adjusted to include the estimated fiscal impacts of the compromise tax plan. FY 2023 projections are based on historic General Revenue growth rates.)
Changes to the trigger index can result in different years that the income tax cuts occur in. For example, if the addition to the CPI-U increase is 1 percent rather than 0.5 percent, than the first year of income tax reduction is FY 2023 instead of FY 2021.
Further cuts to the personal income tax would make an already regressive tax system even more regressive, with the tax savings largely benefiting the wealthy. There is also little evidence that cuts to the income tax will boost economic growth, attract more people, or grow small businesses. Instead, more tax cuts will continue to undermine the state's ability to invest in its public colleges, schools, public safety, and health-care services.
HB 2933, along with the other tax-reform proposals floated by the legislature, is little more than a tax cut for the wealthy, paid for by higher taxes on the poor and middle class, and budget cuts. But not to worry, says the conservative Tax Foundation. According to the Tax Foundation, cutting taxes on the richest 5% of West Virginians and raising them on nearly everyone else would give the state the 10th best Business Tax Climate in the country, 8 spots higher than its current rank of 18th. West Virginia would be more competitive and have an advantage over our neighboring states. Sounds great, right? West Virginia is rarely in the top 10 of anything, and being one of the top states for business taxes has got to be good for the struggling state, right? Unfortunately, we've heard this song and dance before, and it always ends the same way.
If all this is ringing a bell, it's because we've heard it all before. The Tax Foundation said the same thing 10 years ago, the last time West Virginia was on the verge of a major tax reform. The Tax Foundation said that the 2007 tax reform was, "What West Virginia Needs to Do in Order to Compete in the 21st Century." And West Virginia listened. The state phased in a series of major business tax cuts that reduced business taxes by $225 million by 2015. And, as a result, the state's "Business Tax Climate" improved from 34th in 2007 to 18th in 2017, an improvement of 16 spots. Only two states have had a greater increase in their Business Tax Climate ranking than West Virginia since 2007.
And, all the while, as the state's Business Tax Climate dramatically improved, the tax cuts blew a hole in the state's budget, putting the state in a near-perpetual budget crisis. This has led to, among other things, major cuts to higher education, making college less affordable in a state with the least-educated workforce.
One thing our improving tax climate didn't translate into was any discernible economic growth. While West Virginia has one of the most improved Business Tax Climates in the country, its job growth has been non-existent. In fact, West Virginia had more private-sector jobs in 2007 than it does today.So don't get too excited about the Tax Foundation's claims. As we've noted before, their rankings are a poor predictor of economic growth, and have served West Virginia poorly. The Tax Foundation has an anti-tax ideology, and that comes first in its rankings, regardless of the effect of its policies on the public investments that states like West Virginia need to prosper, like infrastructure and education.
Just as it was 10 years ago, the Tax Foundation's favored policies are tax cuts for businesses and the wealthy at the expense of everything else that matters. And West Virginia learned the hard way, that recipe did little more than deprive the state of its ability to invest in the future. Why would we expect anything different this time?
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.
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.
As we've shown before, there is little evidence to support claims that eliminating taxes on business personal property would significantly boost investment and job growth. Instead, the massive tax cut would have a profound impact on state and local government finances, straining the ability of municipalities, county governments, and school districts to provide needed services and would likely lead to cuts in services or a dramatic tax shift, such as higher property taxes on homeowners or higher taxes on real property owned by small businesses. The tax cut would also add tens of millions to the state's already $400+ million budget gap.
In FY 2016, the property tax on business personal property (which includes business machinery and equipment, inventory, and other business personal property like computers and fixtures, as well as the working interest in oil and natural gas property) totaled $388.4 million, which accounts for 23 percent of total property tax revenue in the state.
Since property taxes are levied by the state, counties, school districts, and municipalities, the impact of the tax cut would be felt at every level of government in West Virginia.
If the business personal property tax were to be fully eliminated, counties and municipalities would lose an estimated $130.5 million in annual property tax revenue.
The state would lose an estimated $1.6 million in revenue, but would also have to pay out an additional $110.1 million through the school aid formula due to the loss of revenue by school districts, for a total annual fiscal impact of $111.7 million for state government.
School districts would be the hardest hit by the elimination of the business personal property tax. Schools would lose $256.2 million in annual property tax revenue. While $110.1 million would be replaced through the school aid formula, schools in West Virginia would still lose a total of $146.2 million annually. Since school levy rates are set by the legislature, and since most school excess levies are at or near the max rate, local school districts would be unable to fill this deficit, and the state would need to provide additional revenue to maintain the current educational system.
One of the biggest priorities for businesses looking to locate in or expand in a state is an educated workforce. Cutting property taxes in an effort to encourage job growth and investment is self-defeating, as that tax revenue largely funds the school systems that educate the state's future workforce. Without an educated workforce, created through a well-funded public education system, West Virginia will continue to experience its economic decline.
By including both real and personal property, West Virginia maintains a broad property tax base. This in turn keeps rates low, and ensures property tax payments are directly proportional to the amount of property a taxpayer owns. Eliminating the tax on business personal property would dramatically narrow the state's property tax base, likely leading to higher rates and introducing more inequity into the system. The state's ability to generate revenue has been compromised by tax cuts, low energy prices, and a slow growing economy, resulting in multiple rounds of budget cuts. Further eroding state and local revenues can only have more detrimental effects.
For example, take West Virginia. West Virginia has seen its "business tax climate" go from 34th to 18th best from 2007 to 2017. The reason for this change has do with the major business tax cuts that were phased-in between 2007 and 2015. Altogether, the state reduced business taxes by at least $225 million annually in 2015. While this may have reduced business costs, it has led to large budget cuts to programs like higher education from which businesses directly benefit. What about business growth? Well, private-sector job growth has been abysmal. West Virginia had more private sector jobs in 2007 (619,000), than it does today (614,500).
The central reason why indexes such as this one, and business tax levels in general, fail to predict growth is that they are a small cost of the doing business - usually less than 2 percent. Other factors, such as the cost of labor, transportation, utilities, and occupancy are usually much bigger considerations.
Rational profit-maximizing businesses would also consider the level of public provisions (e.g. good schools, roads, etc.), the quality of life, the supply of qualified workers, and other state and local policies. Businesses might also look to national tax policies and national economic conditions when looking to expand and make a profit. All of these other considerations cast doubt on the theoretical argument that state taxation alone will have a large impact on economic growth.
Policymakers in West Virginia would be wise to listen to what Minnesota's Governor Mark Dayton's office recently said about its unfavorable ranking in the Tax Foundation's index: "The Tax Foundation has an anti-tax ideology and views lower taxes as desirable...For the past two years, Minnesota has ranked in the top five best states for business by CNBC, due to our highly-educated workforce, investments in infrastructure, and high quality of life with a lower cost of living, none of which the Tax Foundation factors into its rankings."
FY 2016 officially came to an end on June 30th, bringing to a close one of the most difficult budget years the state has faced in years. The final revenue report for the fiscal year showed revenue totaling $4.10 billion for the fiscal year, $203 million below the estimate. However, that number was inflated by actions taken during the 2016 legislative session, which included transferring funds that would have gone to pay down the workers compensation debt fund. Those transfers totaled $128 million. Without that additional revenue, general revenue would have fallen below $4.0 billion, putting revenue at its lowest point since the depths of the recession.
Adjusting for inflation, revenue has declined $368 million, or 8.5% in the past 10 years.
The General Revenue Fund has not kept pace with growth in the economy, shrinking as a share of personal income. General Revenue as a share of personal income has fallen from 7.3% in FY 2006 to just 5.8% in FY 2016.
FY 2016's poor revenue performance was due in large part to the severance tax. Severance tax collections were harmed by a rapid decline in natural gas prices, which fell 60%, and the continued struggles of the coal industry, with revenue for FY 2016 $195 million below estimates. Also missing revenue estimates were the sales tax ($39 million below), income tax ($57 million below), and the corporate net income/business franchise tax ($30 million below).
Of the state's major tax revenue sources, only the sales tax was above its FY 2015 collection levels for FY 2016, with an increase of $3 million. The personal income tax was down $38 million, corporate net income/business franchise tax was down $42 million, and the severance tax was down $137 million from FY 2015.