This week, the Senate Finance Committee took up HB 3300, the House’s income tax cut plan, and made significant changes before quickly passing it out of committee. Unlike the House plan, which phased out the income tax over time with no revenue offsets, the Senate’s plan is more similar to the governor’s proposal, making a substantial cut to the income tax while raising a variety of sales and other taxes. Like the governor’s plan, the Senate’s plan would create 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. The Senate’s plan would also create an immediate $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 version of HB 3300 include:
The biggest piece of the Senate’s proposal is in effect a five-year phase out of the state’s income tax. This is done by creating an income tax reduction fund — the Stabilization and Future Economic Reform (SAFER) fund — similar to the fund created by the House plan. The SAFER Fund would be funded with tax increases on cigarettes, from $1.20/pack to $2.20/pack; on other tobacco products, from 12 percent of wholesale price to 19.5 percent; and on e-cigarettes, from $0.075 per milliliter to $0.35 per milliliter; as well as a new 8.5 percent tax on contingency-based legal settlements. The tobacco tax increases would deposit $80.75 million into the fund, with the tax on legal settlements depositing another $21 million.
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 bill anticipates this trigger being met every year.
In addition, the bill calls for any future unappropriated revenues and any revenue increases to be used for further rate reductions. Any future revenue growth would not be invested in health care, education, or any other state budget need, but instead would result in further tax cuts until the income tax is fully eliminated.
According to the Senate Finance Committee, the various provisions of the bill would result in a $1.047 billion reduction in the income tax in the first year, and fully eliminate the tax within 4 to 5 years.
Over 70 percent of each year’s proposed rate reductions will go to the wealthiest 15 percent of West Virginians, even before the regressive sales tax increases are accounted for.
The overall $2.05 billion in tax reductions to the General Revenue Fund are partially offset by a total of $929 million in tax increases in the Senate’s proposal. Like in the governor’s proposal, the largest of these new revenues is an increase in the state sales tax. While the governor proposed increasing the sales tax from 6.0 percent to 7.9 percent, the Senate’s proposal raises it even higher to 8.5 percent, which would give West Virginia the highest state sales tax in the country. Increasing the sales tax would increase revenue by $625 million.
As did the governor’s proposal, the Senate’s plan would expand 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 8.5 percent. In addition, the sales tax base would be 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 $98 million.
The sales tax base would also be expanded to include groceries, at a rate of 2.5 percent. West Virginia had previously repealed its grocery tax in 2013. If enacted, West Virginia would be one of fourteen states with a grocery tax. The grocery tax would increase revenue by $67 million.
The Senate plan also enacts a 4.3 percent state hotel occupancy tax, on top of the existing local hotel tax and state sales tax. Combined with an 8.5 percent sales tax, this would give West Virginia one of the highest hotel taxes in the country. The state hotel occupancy tax would increase revenue by $25 million.
Finally, the bill would allow for the legalization and taxation of recreational marijuana, if first legalized by federal government. If this were to occur, revenue would increase by $45 million.
Overall, the tax increases both for General Revenue Fund and the SAFER Fund proposed by the Senate total $895.8 million (not counting the potential $45 million from legalized marijuana), 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 the save in income tax cuts.
The regressive tax hikes combined with the tax cuts that largely favor the wealthy in the Senate’s tax proposal would create a dramatic shift in state taxes away from the wealthy and onto low- and middle-income households.
The average taxpayer in the bottom 60 percent of households in West Virginia would see a net tax increase from the Senate’s proposal in its first year. 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 $421 from the income tax cut, but would pay an extra $790 in increased sales and other taxes, for a net tax increase of $369.
Even with the income tax fully eliminated, low income households would, on average, see an overall tax increase. The typical household in West Virginia would see an average net tax cut of only $27. In comparison, the wealthiest 1 percent of households would see an average net tax cut of nearly $34,000. A household in the top 1 percent in West Virginia would receive a tax cut that is 1,252 times as large as that of a household in the middle 20 percent.
Also like the governor’s proposal, the Senate’s plan would create an immediate hole in the budget, with the proposed tax increases falling $152 million short of the proposed tax cut. That revenue gap will grow substantially larger in future years as the SAFER Fund quickly triggers additional tax cuts and with any future revenue growth leading to even more tax reductions.
By year five, personal income tax revenue would be down by $2.0 billion compared to current levels, and only offset by $1.0 billion in new revenue, creating a $1.0 billion hole in the budget. The hole is even bigger when you account for the lost growth in income tax revenue, which would have been projected to grow by $413 million during that time frame, resulting in a $1.4 billion loss compared to current law.
This magnitude of revenue losses will put tremendous pressure on future legislatures to make painful budget cuts or raise other taxes — likely both. But even steep across the board budget cuts would not be enough to offset the lost revenue.
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 needed each year to keep PEIA solvent.
Like the House and the governor’s proposal, the Senate tax plan would be major step back for West Virginia. The plan ignores all of the evidence that cutting the income tax fails to boost the economy, 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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