Today, the Senate Select Committee on Tax Reform will consider a joint resolution that calls for a constitutional amendment (SJR 8) that would transform the state and local tax system in West Virginia. Called the “Fair and Simple Tax Reform” amendment, it is part of an upside down tax package that includes SB 335 that creates a new eight percent sales tax while phasing out income taxes and reducing severance taxes.
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.
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