Charleston Gazette – The centerpiece of the compromise tax plan currently under debate by the West Virginia Legislature is a major cut to the income tax rates paired with an increase in the sales tax. Since West Virginia’s current income tax is progressive, and based on the ability to pay, collapsing the brackets and reducing the rates benefits the wealthy far more than lower income earners, even as effective tax rates fall across all income levels.
A typical West Virginian making around $40,000 would see a tax cut of less than $250 under the proposed income tax rates.
A wealthier West Virginian, making around $200,000, would see a far bigger cut, $1,500. The wealthiest 1 percent in West Virginia would have their income tax cut by nearly $4,200, even with the temporary rate for incomes above $300,000.
The modest income tax reduction for low and middle income families in West Virginia is then easily offset by the proposed sales tax increase. The sales tax is most regressive tax that state and local governments use, falling heavier on low and middle income earners than wealthier earners. The reason for that is simple: spending as a share of income falls as income rises. Unlike the income tax, which generally applies to most income, the sales tax applies only to spent income and exempts saved income. Since high earners are able to save a much larger share of their incomes than middle-income families — and since the poor can rarely save at all — the tax is inherently regressive.
For middle income West Virginians, earning between $33,000 and $51,000, the proposed sales tax change sales tax increase would increase their taxes by an average of $270. This, combined with the proposed increases in motor fuel taxes and DMV fees, wipes out all of the savings from the personal income tax cut, leading to an overall tax increase.
One common argument given for this strategy is that lowering taxes on businesses and the wealthy will boost the state’s economy. However, this strategy is not supported by evidence from other states or mainstream economic research. Since 2010, more than a dozen states have cut their income tax rates, with Kansas, Maine, North Carolina, Ohio, and Wisconsin embracing the largest reductions in income taxes. Of these states, only North Carolina has experienced faster employment and income growth than the nation as a whole in the years immediately following their cuts. And while North Carolina experienced slightly higher income and job growth than the nation as a whole, the state is adding jobs more slowly than most of its neighboring states.
The mediocre results in states that have cut their income tax rates is aligned with the findings of mainstream academic research, which typically finds that income tax levels provide little to no impact on economic growth. Since 2000, for every one academic study that found personal income taxes boosted state economic growth, there were about four that found no significant effects.
Further, the plan under consideration by the legislature does little to solve the state’s budget crisis. The plan only increases General Revenue funds for one year, since the sales tax increases go into effective earlier than the income tax cuts. After that, the state would actually lose revenue, exacerbating our budget problems.
As the Governor and Legislature work out a compromise on the budget, including tax changes, they should keep in mind that setting West Virginia on a path of further cuts and just one year of revenue gain is not going to help build a stronger West Virginia where communities can thrive. Relying on false claims about trickle-down economic growth or gambling on sudden surge in coal mining or natural gas extraction, in order to provide tax cuts for the wealthy is not a plan for success. West Virginia needs a real plan that provides a reliable source of revenue that can pay our state’s debts and sustain public investments.
Sean O’Leary is a senior policy analyst for the West Virginia Center on Budget & Policy.
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