Even though faced with a $600 million budget deficit, some West Virginia lawmakers are proposing reducing or eliminating the state’s income tax, and replacing that lost revenue with an increase in the sales tax. This plan is unlikely to produce the economic growth, instead it dramatically shifts tax responsibility responsibilities from the wealthy onto low and working class West Virginians. PDF of policy brief.
Other states have eliminated their income taxes with little or nothing to show, other than revenue erosion that brings cuts in support for schools, transportation and other true building blocks of broad prosperity. A better course for West Virginia is to reform the tax system in ways that would close our looming budget gap, tie what people owe more closely to their ability to pay, and help more hardworking men and women provide their families with a secure future.
Key Findings
- Income tax cuts are not a surefire way to grow the state’s economy. Of the five states that have done so recently, only one is experiencing better job and income growth — despite underperforming most of its neighboring states.
- There is no academic consensus that cutting income taxes grows a state’s economy. In fact, most academic studies since 2000 find little-to-no impact on economic growth from reducing state personal income taxes. Business investment and location decisions are determined by a myriad of factors, many of which make up a larger share of the cost of doing business.
- State income taxes only have a negligible impact on where people choose to live, according to most academic research. For every 10 people who have moved from West Virginia to Florida — a state that doesn’t have an income tax — eight people have moved from Florida to West Virginia. Most people moving out of West Virginia go to states that levy income taxes.
- While proponents of eliminating West Virginia’s income tax claim it leads to faster economic growth, over the last ten years states with the highest income tax rates have experienced faster economic growth. The nine states with the highest top income tax rates also have more Fortune 500 companies, higher median incomes, and a smaller share of residents without health insurance.
- Academic and real world experience show that the income tax is a more reliable source of revenue than the sales tax. Since 1990, income tax revenues grew by 249 percent in West Virginia while sales tax revenue only grew by 136 percent.
- The personal income tax is the only state tax based on the ability to pay. States that have a flat income tax tend to rely more heavily on low-and middle-income taxpayers for revenue, and less on the wealthy, than states with graduated income tax rates.
- Replacing West Virginia’s personal income tax with a higher sales tax would be a large tax cut for the top one percent of wage earner in West Virginia and a sizable tax increase for most families. If West Virginia eliminated its income tax and replaced with a sales tax that included more professional services, a taxpayer making $40,000 would see a tax increase of $728 (annually) while a taxpayer making $778,000 would see a tax cut of over $28,000 (on average).
- If West Virginia replaces the income tax with a sales tax increase, it would increase taxes paid by its businesses, resulting in more people buying more products in neighboring states, and possibly lower the purchasing power of its low- and middle-income families.
- A shift from a graduated income tax in West Virginia to a flat income tax rate of five percent would raise taxes on 80 percent of families while giving the top one percent a tax cut of over $7,000.
- Instead of cutting the income tax, lawmakers should pursue efforts to limit itemized deductions, modernize tax brackets, and create a refundable Earned Income Tax Credit.
