Over the course of a six-hour period, the West Virginia Senate unveiled their tax cut proposal, rushed it through committee (without a fiscal note, hearing testimony from a single witness, or any members asking any questions), and suspended the rules requiring three days of readings to pass it out of the chamber. While lawmakers repeatedly touted the bill as a safe approach to tax reform, the passed legislation contains triggers that would ultimately eliminate the personal income tax entirely — a provision that would overwhelmingly benefit the state’s wealthiest individuals and households, make the state far more reliant on the regressive sales tax, and likely lead to future budget crises or increases in other taxes.
Here is a full look at the provisions included in SB 424.
As expected, the personal income tax cuts in SB 424 overwhelmingly benefit the state’s wealthiest households, with two-thirds of the initial tax benefits going to the top 20 percent of households. The average West Virginia household would see a total annual tax cut of about $205, but the amount varies widely by income, with the bottom 20 percent of households seeing an average annual tax cut of just $12 per year, while the top 1 percent would see over $7,000 per year on average.
SB 424 contains automatic triggers to further reduce and ultimately eliminate the personal income tax, which brought in $2.5 billion in FY 2022, making it the state’s single largest general revenue source. This is the largest and costliest portion of the legislation. Beginning in 2025, if sales tax revenues grow by five percent from the previous year, the personal income tax is automatically reduced dollar-for-dollar by the amount the sales tax increased over a single year. For example, if sales tax revenues increase by $100 million—or from $2 billion to $2.1 billion—the personal income tax would be reduced by $100 million every year going forward until the trigger is hit again and the reduction grows. Over time, the income tax would be fully eliminated.
If these automatic provisions were in place over the last four years, they would have triggered an additional $400 million in reductions to the income tax annually. This would be despite the fact that federal COVID stimulus and inflation have been the key drivers of recent sales tax revenue growth and should not be considered sustainable once federal aid is expended and inflation subsides. This creates a scenario where a temporary or one-time sales tax revenue surge would trigger a permanent tax cut — which up until this point has been a no-go for the Senate.
The overall impact of the complete elimination of the personal income tax would be to make the state far more reliant on the regressive sales tax. Eliminating the personal income tax entirely based solely on one-time increases in sales tax revenue would further shift tax responsibilities onto low- and middle-income West Virginia households who already pay a higher share of their household incomes toward state and local taxes on average than higher-income households do.
If these automatic income tax reductions create an overall reduction in tax revenue—which they are likely to do since they would divert nearly all natural revenue growth to tax cuts instead of budget needs—future legislatures will find themselves forced to roll back the personal income tax cuts, raise other taxes that fall more heavily on average West Virginia families, or cut public services disproportionately impacting everyday families. In fact, SB 424 goes so far as to instruct the tax commissioner to propose to the Legislature a methodology for increasing the sales tax if necessary.
While using triggers to phase in tax cuts is often portrayed as fiscally responsible, it is far from it. West Virginia has already tied tax cuts to triggers with harmful effects. Between 2007 and 2015, the state phased in corporate net income tax cuts and business franchise tax cuts via trigger mechanisms. While proponents promised that the lost revenue would be made up through increased jobs and economic activity, what followed were significant revenue losses, little job growth, and deep cuts to higher education. Triggering mechanisms for tax cuts offer no inherent benefit compared with deferring action on tax cuts until closer to the implementation date when policymakers can make more informed decisions about their affordability.
SB 424 also contains provisions to have the state tax department provide rebates for personal property taxes paid under the six categories that were considered—and rejected by voters—in Amendment 2. If passed, taxpayers would be able to file at income tax time for a rebate of 100 percent of their local taxes paid on personal motor vehicles and businesses would be able to file for rebates of 50 percent of taxes paid toward the business personal property tax categories (machinery and equipment, inventory, leasehold investments, computer equipment, and furniture and fixtures).
While proponents framed SB 424 as limiting the personal property tax rebates to small businesses, the legislation does not define anywhere what constitutes a small business. Instead, it seeks to achieve that aim by limiting the ability to file for a rebate to those who file personal income tax returns in West Virginia. That explicitly means that C corporations would not be eligible for rebates, which is a good guardrail. However, many Limited Liability Companies (LLCs) and S corporations, which would presumably be eligible for rebates under SB 424, are not small businesses at all. Neither LLCs nor S corporations are restricted as to the number of owners or employees they can have, and S corporations can even have shareholders. All this is to say that many of these companies are likely not small businesses in the sense that legislators might be thinking of. A better way of ensuring that big, profitable businesses do not see disproportionate benefits that come at the cost of the state budget would be to cap the business tax rebates at a fixed dollar amount rather than a percentage.
Additionally, the rebate proposal would likely involve a significant amount of new intergovernmental coordination and administrative costs. While personal property taxes are paid to county governments, the state tax department would be issuing the rebates. It is unclear what the process would be by which the state tax department would have record of whether local property taxes collected by the counties were paid and in what amount, or what proof the taxpayer might have to show. And while the personal vehicle tax rebate is refundable, meaning a taxpayer could receive a rebate even if they did not have tax liability, the process by which they would apply for it if they do not normally file a state tax return is undefined in the legislation. Presumably, there would be somewhat significant state and local administrative costs to address these issues that were not carefully considered in the legislation due to lack of a fiscal note.
Proponents of the legislation also tout that SB 424 contains a fix to the “marriage penalty,” but according to the conservative Tax Foundation, West Virginia’s tax system does not currently have a marriage penalty, and the cost of changes in SB 424 related to this provision are unclear. Similarly, without a fiscal note from the state tax department, it is difficult to know how many taxpayers might benefit from the legislation’s real property tax rebate for veterans with full service disabilities.
While proponents of SB 424 framed the legislation as an approach that would benefit low- and middle-income families more than the governor’s tax proposal, HB 2526, that’s not really the case. The major provisions of the bill that kick in immediately—the 15 percent personal income tax cut across all rates and the business and personal property tax rebates—disproportionately benefit businesses and the state’s wealthiest households. Combined, the income tax cut for the top 20 percent of earners and the business property tax rebates make up about 61 percent of the cost of the tax plan, according to our estimates. Upon the eventual full elimination of the personal income tax, the package would be even more slanted toward the state’s wealthiest households.
While framed as a safer approach than the governor’s plan, the Senate tax plan creates many of the same concerns — namely permanently reducing state revenues, shifting tax responsibilities from the wealthy to low- and middle-income West Virginia families, and hamstringing the state’s ability to make new investments desperately needed after years of flat budgets and austerity. The House’s plan would simply bring on those dangerous impacts a little more quickly.
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