Governor Justice has finally unveiled his proposal to make sweeping changes to the state’s tax system, including a substantial cut to the state’s personal income tax, while raising a variety of sales and other taxes. The tax reform would create a dramatic change in who pays state taxes in West Virginia, shifting the responsibility onto working families to make room for tax breaks for the wealthy. Altogether, these changes would lower General Revenue Fund collections by an estimated $185 million in the first full year of implementation, all but guaranteeing that the state will have to make painful budget cuts, while increasing overall taxes on the average taxpayer in the bottom 60 percent of households in West Virginia.
The biggest piece of the governor’s proposal is an immediate 60 percent reduction in the state’s personal income tax rates. This is done by simply slashing the state’s personal income tax rates. The tax rate on the first $10,000 of taxable income would go from 3.0 percent to 1.2 percent, from 4.0 percent to 1.6 percent on the next $15,000, from 4.5 percent to 1.8 percent on the next $15,000, from 6.0 percent to 2.4 percent on the next 20,000, and from 6.5 percent to 2.6 percent for every dollar of income above $60,000. The total cost of the rate reductions is $1.036 billion.
In addition to the income tax reduction, the governor is also proposing a “sales tax relief credit” for low income households, to offset the increased sales and other taxes that are part of his proposal, an acknowledgment of the impossibility of paying for an income tax cut with a sales tax increase without raising taxes on low and middle income households. The credit is structured as a refundable rebate of $350 for households with incomes under $10,000, $200 for households between $10,000 and $20,000, $100 for households between $20,000 and $30,000, and $50 for households between $30,000 and $35,000. The total cost of the sales tax credit is $52.0 million.
Despite the sales tax credit for low income households, over 62 percent of the governor’s proposed tax cuts will go to the wealthiest 15 percent of West Virginians, even before the regressive sales tax increases are accounted for.
The total $1.088 billion in tax reductions are offset by a total of $902.6 million in tax increases in the governor’s proposal. The largest of these new revenues is an increase in the state sales tax from 6.0 percent to 7.9 percent, which would give West Virginia the highest state sales tax in the country. In addition, the sales tax base would be expanded to include computer hardware and software, legal services, accounting services, certain advertising, electronic data processing, health and fitness memberships, lottery tickets, and other professional services. The increases and expansions of the sales tax increase revenue by $655 million.
An additional sales tax is also created on certain “luxury goods,” including jewelry, clothing, artwork, watches and timepieces, furniture, electronic equipment, appliances, boats, ATVs, airplanes, yachts, snowmobiles, and “collections.” The luxury goods tax rates are 3.0 percent for items between $5,000 and $10,000, 2.75 percent for items between $10,000 and $30,000, 2.5 percent for items between $30,000 and $100,000, 2.25 percent for items between $100,000 and $500,000, 1.75 percent for items between $500,000 and $1 million, and 1.0 percent for items over $1 million. The luxury goods tax increases revenue by $20 million.
The governor’s proposal also includes increases to the state’s tobacco taxes. The tax on cigarettes increases from $1.20/pack to $2.25/pack, the tax on other tobacco products increases from 12 percent of wholesale price to 19.5 percent, and the tax on e-cigarettes increases from $0.075 per milliliter to $0.75 per milliliter. The tobacco tax increases increase revenue by $86.2 million.
The governor’s proposal also increases the state’s taxes on beer, wine, and liquor. The beer tax would increase from $5.50 per barrel to $29.25 per barrel, the wine tax would increase from $1.00 per gallon to $4.00 per gallon, and the liquor wholesale markup would increase from 28 percent to 39.25 percent. The increases on beer, wine, and liquor taxes would increase revenue by $36.9 million.
Also increasing in the governor’s proposal are the state’s taxes on soft drinks and other sugary beverages. The tax on soft drinks would increase from $0.01 per 16.9 ounces to $0.06 per 16.9 ounces, the tax on soft drink syrup would increase from $0.80 per gallon to $4.00 per gallon, and the tax on dry mixes would increase from $0.01 per 28.35 grams to $0.05 per 28.35 grams. The increases on soft drink taxes would increase revenue by $62.5 million.
Finally, the governor proposes changes to the state’s severance tax on coal and natural gas. The current tax rates are a flat 5 percent on the production value of natural gas, oil, and met coal, 3 percent on steam coal, and 1 percent to 2 percent on thin-seam coal. The governor’s proposal would change the rates to a tiered system based on the price of coal and natural gas, with natural gas, oil, and met coal rates ranging from 4 percent to 7 percent, thin seam coal rates ranging from 0.75 percent to 5 percent, and steam coal rates ranging from 2 percent to 7 percent. At current prices, these changes would increase revenue by an estimated $42 million.
However, if prices fall, the proposal could end up creating a loss of revenue for the state. What’s more, the $42 million in increased revenue is smaller than the $64 million in lost revenue from recent cuts to the coal severance tax.
Overall, the tax increases proposed by the governor total $902.6 million, with most of the revenue coming from the increase in the sales tax. While the tax cuts heavily favor the wealthy, the proposed tax increases are overall regressive, with the bottom 85 percent of households in West Virginia paying 88 percent of the increase.
The regressive tax hikes combined with the tax cuts that largely favor the wealthy in the governor’s tax proposal would create a dramatic shift in state taxes away from the wealthy and onto low- and middle-income households.
The average taxpayer in the bottom 60 percent of households in West Virginia would see a net tax increase from the governor’s proposal. Only households with incomes above $55,000 would see a net tax cut on average. The typical household in West Virginia, with an average income of $43,000 would save $458 from the income tax cut, but would pay an extra $736 in increased sales and other taxes, for a net tax increase of $278.
With $1.088 billion in tax reductions and $902.6 million in tax increases, the governor’s proposal falls short of the promise to be “revenue neutral.” Instead, the plan would create a $185 million hole in the budget in the upcoming fiscal year, requiring immediate cuts. And as we know, despite the lack of a six year plan in the governor’s budget proposal, the state is likely already facing significant budget gaps in the future before any tax cuts, needing $153 million to keep Medicaid funded, as well as tens of millions per year to keep PEIA solvent.
The governor’s tax proposal would be a major step backward for West Virginia. The plan ignores all of the evidence that cutting the income tax fails to boost the economy, and instead doubles down on the state’s past failures, and the failures of other states. Instead of promised growth, the people of West Virginia will get regressive tax increases that fall heavily on low- and middle-income families, while the wealthy few enjoy the bulk of the tax cuts. Meanwhile, the substantial revenue losses would undermine the investments in education, infrastructure, and other public services that have been neglected in West Virginia for years.
Note: Proposed tax increases on e-cigarettes, beer, wine, liquor, and luxury goods were unable to be modeled. These new taxes will also represent an additional increase in the net tax change on households.
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