Last night, on a narrow 18-16 vote, the Senate passed an amended version of HB 3300, making significant changes to the version of the bill that the Senate Finance Committee had introduced just days before. The amended bill was voted on mere hours after being introduced, and was passed without a full fiscal analysis. With that said, the bill is structured similarly to the version introduced in the Committee — with a large initial income tax cut, increases to the sales and tobacco taxes, and with future income tax cuts contingent on various funds and revenue levels. The results are also largely the same, creating 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. Further, the Senate’s plan would create an immediate $170 to $200 million gap in the budget, which would grow larger as more income tax cuts are enacted and the income tax is replaced with slower growing sources of revenue.
Highlights of the analysis of the Senate-amended version of HB 3300 include:
The biggest piece of the Senate’s proposal is an initial 40 percent, or $818 million, reduction in the state’s income tax. This is done in multiple ways. First, there is a “dollar for dollar” reduction in the income tax for any increase in general revenue over the previous year’s actual collections due to either increases to existing revenue sources or newly created revenue sources. Since the bill would increase the sales and tobacco tax rates and revenue in its first year, this would trigger an income tax cut.
In addition, like in the committee version, this plan creates an income tax reduction fund — the Stabilization and Future Economic Reform (SAFER) Fund — funded by the increase in tobacco taxes, and a new tax on legal settlements. The increase in tobacco tax revenue is estimated to be $78 million. There is no estimate for the revenue from the new tax on legal settlements.
When the SAFER Fund balance reaches $100 million, $50 million would be transferred to the General Revenue Fund, and the state’s personal income tax rates would be reduced by 12.5 basis points (roughly $50 million).
The latest version also incorporates a tiering of the severance tax on coal and natural gas, similar to the governor’s proposal, with new rates ranging from 4.0 percent to 7.0 percent, based on coal and gas prices, with reduced rates for steam and thin seam coal. Any increase in revenue from the new tiered rates would also be deposited into the SAFER Fund. However, according to the bill’s sponsor, the new rates would not generate any additional revenue at current energy prices.
In addition, any unappropriated revenues would be used to further cut the income tax. However, with no future budget outlooks, it is unclear how much or how often that would occur.
With no fiscal note or future budget projections, only the first year’s income tax cut is certain. The first reduction would be roughly $818 million. Seventy percent of the tax cut would go to the wealthiest 20 percent of households in West Virginia, even before the regressive tax increases are considered.
The reduction in the income tax is partially offset by a large increase and expansion in the sales tax. The Senate’s proposal raises the sales tax from 6.0 percent to 8.0 percent, which would give West Virginia the highest state sales tax in the country. Increasing the sales tax would increase revenue by $460 million.
The Senate’s plan also expands the sales tax base to include computer hardware and software, digital goods, advertising, electronic data processing, and health and fitness memberships. These services would be taxed at the full 8.0 percent. In addition, the sales tax base would be further expanded to include legal, accounting, architectural, and engineering services, which would be taxed at a rate of 3.0 percent. If enacted, West Virginia would be one of only four states that applies the sales tax to professional services. These expansions of the sales tax base would increase revenue by $100 to $130 million.
Overall, the tax increases both for the General Revenue Fund and the SAFER Fund proposed by the Senate total $666.4 million (not counting the revenue from the proposed tax on legal settlements), 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 low-income households paying more, on average, in tax increases than they save in income tax cuts.
In 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 Senate plan includes a sales tax relief credit for low-income households. The rebate is structured as a refundable rebate of $250 for households with incomes under $10,000, $140 for households with incomes between $10,000 and $20,000, $100 for households with incomes between $20,000 and $30,000, and $50 for households with incomes between $30,000 and $35,000. The total cost of the sales tax credit is $42.0 million.
According to remarks on the Senate floor from Senate Finance Chairman Eric Tarr, the sales tax relief credit would be removed once the income tax is fully eliminated.
Despite the sales tax credit for low-income households, the tax increases in the bill offset both the sales tax credit and the income tax savings for the average taxpayer in the bottom 60 percent of households in West Virginia. 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 $330 from the income tax cut, but would pay an extra $616 in increased sales and other taxes, for a net tax increase of $285.
Even with the income tax fully eliminated, low-income households would, on average, see a net tax increase, if the sales tax relief credit is repealed along with the elimination of the income tax, as the chart below shows. Even if the credit stays in place, low-income households would see an average net tax cut of only $24. The typical household in West Virginia would see an average net tax cut of only $201. In comparison, the wealthiest one percent of households would see an average net tax cut of over $34,000.
The top five percent of households would get 44 percent of the net tax savings from the Senate version of HB 3300 once the income tax is fully eliminated, an annual windfall of $636 million. This is a group with an average annual income of $346,000. Only three percent of the savings would go to households in the middle 20 percent, with households in the bottom 40 percent seeing no savings.
The latest Senate plan — as with the previous Senate plan, the House plan, and the governor’s plan — set the state up for large revenue losses and painful budget cuts. Any future revenue growth would be used to finance tax cuts rather than addressing the state’s pressing budget needs, such as the $153 million needed to keep Medicaid funded or the tens of millions of dollars needed each year to keep PEIA solvent.
The 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 the state’s past failures, as well as 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 further undermine the investments in education, infrastructure, and other public services that have been neglected in West Virginia for years.
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