Last week the West Virginia Legislature introduced a bill to cut and eventually eliminate the state’s personal income tax. This week, the House Finance Committee voted to advance that bill to the House floor with no discussion or questions asked. Like previous attempts to eliminate the state’s income tax, HB 4007 would lead to major revenue losses for the state, while giving most of the tax cuts to high income West Virginians.
The personal income tax is the state’s largest source of tax revenue, providing the state with $2.25 billion in FY 2021 and accounting for 45 percent of the state’s general revenue fund. The income tax is also the state’s fairest source of revenue. West Virginia has progressive income tax rates, meaning that it is structured such that higher-income residents pay a larger share of their income in personal income taxes compared to low- and middle-income residents. This structure helps ensure that wealthier taxpayers pay their fair share, allows for lower rates on low- and middle-income families, and provides a counterweight to more regressive taxes, such as the sales tax.
HB 4007 starts the process of eliminating the state’s income tax in two ways. First, there is a proposed 10 percent reduction to the state’s current income tax rates which would go into effect on January 1, 2023. The initial cut would cost the state an estimated $264.5 million in its first full fiscal year.
Next, HB 4007 creates an income tax reduction fund – the Stabilization and Future Economic Reform Fund – similar to the funds proposed in last year’s failed income tax cut bills. Under current law, 50 percent of any budget surplus at the end of the fiscal year is deposited into the state’s Rainy Day Fund. HB 4007 would change that provision so that 50 percent of any budget surplus is instead deposited into the Stabilization and Future Economic Reform Fund, rather than the Rainy Day Fund. Funds in the Stabilization and Future Economic Reform Fund may be appropriated by the Legislature, but only for the purpose of further cuts to the income tax. The fund would be closed once the income tax is fully eliminated. According to the bill’s fiscal note, further tax cuts triggered by the Stabilization and Future Economic Reform Fund cannot be predicted, due to it relying on budget surpluses and legislative actions that cannot be predicted. However, the fiscal analysis does note that by diverting allocations away from the state’s Rainy Day Fund and into a fund dedicated for tax cuts, the state’s bond ratings as well as its ability to meet current and future financial obligations could be negatively affected.
The fiscal note makes clear that HB 4007’s income tax reduction plan shares the same flaw as versions that failed to pass last year: relying on a one-time source of revenue – in this case a one-year budget surplus – to fund a permanent, ongoing tax cut. As the fiscal note states, it is unclear exactly how the Stabilization and Future Economic Reform Fund offsets would work, but that despite any one-time offset, “a permanent reduction in PIT rates would create a reduction in revenues for each subsequent fiscal year.” This proposal flaw is of particular concern this year – while West Virginia has a sizable revenue surplus, that “surplus” is the result of lowered revenue estimates, a strong national recovery from the pandemic, and billions in federal aid.
As Secretary of Revenue Dave Hardy told legislators in his budget presentation to the Senate Finance Committee, the state’s current revenue surplus is the result of “surprising inexplicable patterns” in revenue collections due to the pandemic and its “ongoing unpredictability,” and that an abundance of federal aid has “blown up the model.” As a result, revenue estimates are being set low, and the state’s budget is being kept flat. As Secretary Hardy described, this would allow the state to use surpluses to “go back and do one-time things that need to be done,” but warned to be conservative and cautious. This recommendation echoes Governor Justice’s FY 2021 budget message that future surpluses, “be cautiously used mostly for one-time needs or held for use to assist in offsetting possible future requirements.” Instead of using surpluses cautiously for one-time needs or future requirements, like looming shortfalls in Medicaid, HB 4007 would require that the surplus be used only for reducing the income tax, setting the state up for major budget problems in the future. Also of note, legislators would be cutting taxes without a complete picture of the state’s future budget requirements, as the governor did not include a six-year plan in his budget for the second year in a row.
Unlike the past personal income tax cut proposals, HB 4007 does not include any offsetting revenue to replace the revenue lost from the income tax, aside from the appropriations from the Stabilization and Future Economic Reform Fund, which would only offset revenue loss in the year it is appropriated. As the income tax is cut, even steep across-the-board budget cuts would not be enough to offset the lost revenue, meaning future Legislatures would have to consider both budget cuts and tax increases. As outlined in an internal memo from House Republicans during last year’s attempt to eliminate the personal income tax, the budget cuts required to eliminate the income tax include eliminating the PROMISE scholarship, eliminating all funding for WVU and Marshall, and 10-20 percent across-the-board cuts to all state agencies including public education, higher education, and the Department of Health and Human Resources, with the elimination of public services.
In addition to the budget cuts, the necessary tax increases would likely take the form of those proposed by the governor in his income tax cut plan last year, including increasing the sales tax to the highest rate in the country, expanding the sales tax to professional and personal services, and significantly increasing the tobacco, alcohol, and soda taxes. This is largely how state’s without income taxes make up the difference. The fiscal note for last year’s income tax elimination bill reviewed the tax systems of the state’s with no income taxes, finding higher sales, property, and business taxes in those states, leading to low-income households paying more in taxes in states without an income tax than they do even in the states with the highest income taxes.
And while the budget cuts and potential tax increases impact low- and middle-income households the most, those same households get the smallest savings from the personal income tax cut. The bill’s initial rate reduction generates the greatest savings for the state’s highest income earners, with relatively meager savings for middle- and low-income households in West Virginia. Middle income West Virginians, with incomes between $35,000 and $55,000, would receive an average tax cut of just $88, compared to an average tax cut of $3,880 for the wealthiest one percent of West Virginians, or those with incomes over $443,000. On average, the wealthiest 20 percent of West Virginians would receive 70 percent of the initial tax cut, with the wealthiest one percent of West Virginians receiving 16 percent of the tax cut.
Further reductions of the personal income tax would necessarily follow the same pattern, as the state’s progressive income tax rate structure means that the cuts to the tax would overwhelmingly favor the wealthy, while undermining state investments in education, infrastructure, health, and other public services that benefit everyone. Even fully eliminated, 70 percent of the $2 billion tax cut would go to the wealthiest 20 percent of households in the state. A household in the top one percent in West Virginia would receive a tax cut that is 44 times as large as that of a household in the middle 20 percent.
While eliminating the personal income tax would disproportionately benefit the wealthy, there is little evidence to suggest that it would boost the state’s economy. Despite large differences in tax rates and structures, states with no income taxes have slightly underperformed states with the highest income taxes over the past decade. States with no income taxes also have seen lower overall revenue growth than states with the highest income taxes. West Virginia’s income tax revenue has also grown faster than revenue in states with no income taxes. Further, there is almost no connection between income tax rates and domestic migration, and there is little evidence that population growth is driven by tax policy. Even for millionaires – the group with the most to gain by not having to pay income taxes on their sizeable incomes – differences in taxes have little to no effect on migration. Instead, housing prices, warm weather, and birth rates are all stronger explanations for population trends than tax policy.
The House personal income tax cut plan ignores all of the evidence that cutting the income tax fails to boost the economy or lead to increased migration, and instead doubles down on West Virginia’s past failures, as well as the failures of other states. Instead of promised growth, the people of West Virginia would likely see increases to regressive taxes that fall most heavily on low- and middle-income families, while the wealthy few reap the benefits of the income tax cut. Meanwhile, the substantial revenue losses would further undermine investments in education, infrastructure, health, and other public services that have been neglected in West Virginia for years.
