Today, the House approved a tax plan (SB 484) that broadens the sales tax base and lowers the rate to balance the House’s budget (HB 2018). Altogether, the tax plan is expected to increase tax revenue in its first two years, while lowering tax revenue by year three. This is because of revenue triggers in the bill that lower the sales tax rate each year based on the prior year’s revenue. If enacted, this legislation will mean more budget cuts or revenue increases next year because of the backed-in reductions of the sales tax. The bill also means that low- and middle-income West Virginians will pay more in taxes as a share of their income than higher income residents.
The House tax plan will drop the sales tax rate from 6.0 percent to 5.5 percent beginning next year on July 1, 2018, and then to 5.0 percent on July 1, 2019. Thereafter, the sales tax rate will continue to drop based on a revenue formula, but not drop below 4.75 percent.
Several services and goods that are currently exempt in the sales tax base would now become taxable. These include telecommunications, personal services (barbering, massaging, manicuring, hair setting, hair washing and dying, shoe-shining, and non-medical personal care services, contracting services (on first $40k), electronic data processing, and opinion research. The bill also lifts the direct use exemption for all sales, services machinery, supplies and materials directly used or consumed in transportation (except coal) and communications. Almost all states have broad direct use exemptions because of concerns about tax pyramiding and business-to-business taxation.
Though SB 484 faces an uncertain future, it is clear it is not enough revenue to stop large budget cuts in the House and Senate budget bills and it creates future budget gaps that could lead to even bigger budget cuts to important programs and services in the future. While SB 484 increases revenue by $138 million for FY 2018, revenue drops to $55 million in FY 2019, followed by a decrease of -$15 million by FY 2020. This creates a budget hole of $83 million in FY 2019 and $153 million by FY 2020 if the House passes it’s budget bill than already cuts millions from important program and services.