Governor Justice’s Tax Plan: Who Pays?

Governor Jim Justice has not introduced any tax measures yet, but in his State of the State Address and his executive budget  there are plans to enact several tax increases to close the Fiscal Year 2018 budget gap of $500 million and address the state’s declining road fund that pays for highway construction, maintenance, and road repairs. This includes an estimated $450.2 million in the proposed general revenue fund revenue enhancements and $177 million in new revenue for the state road fund. While Governor Justice should be commended for putting forth much-needed revenue to address the state’s growing budget crisis, the combined impact of his tax increases will fall harder on low-income West Virginians. Instead of just relying on regressive tax measures, Governor Justice should include revenue enhancements that ask a little more from the folks that have received most of the income gains in the state over the last several decades.

Governor Justice’s proposed revenue enhancements for FY 2018 include:

General Revenue Fund Revenue Enhancements

• Increasing the Sales & Use Tax from 6 percent to 6.5 percent ($92.7 million).
• Broadening the Sales Tax base to include some professional services ($82 million) and advertising services ($5.6 million).
• Enacting a new Commercial Activity Tax (gross receipts tax) on businesses of 0.2 percent ($214 million).
• Raising Beer Barrel Tax from $5.50 to $8.00 ($2.8 million) and Wholesale Liquor from 28 percent to 32% ($2.8 million).
• Repealing Film Tax Credit ($2.5 million in FY19), modifying Excess Acreage Tax to 5 cents per acre (unknown), and a new tiered Severance Tax rate (unknown).
• Ending a general revenue fund transfer to Division of Highways ($11.7 million) and re-directing Workers’ Compensation Debt Fund revenue (onetime money) to general revenue fund in FY 2017 ($25.5 million) and FY2018 ($38.25).

State Road Fund Enhancements

• Raising the excise motor fuel tax from 20.5 cents per gallon to 30.5 cents per gallon ($144 million)
• Raise Division of Motor Vehicle registration fees from $30 to $50 ($33 million)
• Implementing a $1 toll increase on the West Virginia Turnpike ($500 million) to fund a Turnpike Bond, a voter approved general obligation bond ($400 million), and legislative approval for increasing GARVEE capacity (bond) ($500 million).

The specifics of the revenue enhancements listed above are unknown, but it is clear that the brunt of the changes will fall harder on low-income West Virginians compared to those with higher incomes. The chart below illustrates this point by looking at the tax impact of the proposed sales tax changes, enactment of a new commercial activities tax, and the 10 cent gas tax increase. For West Virginians that only make $11,000 annually (lowest 20 percent), they will pay on average 1.3 percent more of their income in additional taxes or $133 dollars. For West Virginians in the top one percent who make on average $778,000, they will pay an additional 0.2 percent of their income in taxes under Justice’s revenue plan. While the amount of taxes paid by income group increases with income, the tax change as a share of income decreases – meaning that it takes a larger bit out of low and middle income taxpayers than higher income West Virginians.

Until Governor Justice’s revenue plan is introduced, it will be difficult to measure exactly how it will impact working families in the state. That said, it is clear that it would fall hardest on low-income people in the state. There are number of options that exist to make his plan more balanced. This could include reinstating the business franchise tax and raising the corporate net income tax to their 2006 levels, increasing the severance tax on natural gas from 5 percent to 6.5 percent, enacting a three percent income tax surcharge on incomes above $200,000, and creating a refundable state Earned Income Tax Credit that is available in 26 other states. Lawmakers could also include expanding the sales tax base to include digital downloads and other personal services. 

Though Justice’s tax plan is not perfect, it offers a real opportunity for lawmakers to include more progressive revenue enhancements that will ensure that state addresses its huge budget crisis while ensuring that it takes a balanced approach to tax increases that is more closely aligned with the ability to pay.