Senate Republicans unveiled their latest proposal to eliminate the business personal property tax this week, passing the proposal out of the Senate Finance Committee. The plan, which builds upon an earlier proposal to eliminate the property tax on manufacturing equipment, machinery, and inventory, would blow a nearly $100 million hole in the state budget, introduce inconsistency in the property tax system, and make West Virginia’s upside down tax system even more regressive.
The Senate proposal starts with SJR 9, a constitutional amendment to allow the legislature to exempt from or reduce property taxes on different types of personal property, and does away with constitutional requirement that property taxes must be uniform across different types of personal property. Since the proposal amends the constitution, it would have to be voted on by the public during the next election.
Senate Tax Proposal Would Jeopardize Future Budgets
Under the assumption that the constitutional amendment passes, companion legislation would then take affect. A bill originating in the Senate Finance Committee would enact a six-year phase out of the property tax on manufacturing equipment, machinery, and inventory, retail inventory, and business and personal vehicles, at a total cost of $294 million when fully enacted, accounting for about 16% of all property tax revenue.
The lost revenue would be partially offset by an increase in the sales tax, from 6% to 6.5%, as well as an increase in the tobacco products tax. The revenue from these tax increases, approximately $180 million would be placed in a special revenue account to replace the revenue lost by schools, counties, and municipalities.
However, the revenue raised from the new taxes, $180 million, is less than the revenue lost from the proposed tax cuts. While the current proposal gives a three-year head start to the new taxes to build up in the special revenue fund before the property tax cuts begin to be phased in, that only serves to push the budget problems they create down the road. Once the tax cuts are fully phased in, the special revenue fund will be depleted, and there will be a $88.5 million shortfall. This means that eventually the state will either have to raise taxes or cut services to make the local governments whole, or the local governments themselves will have make cuts or raise taxes on their own.
Senate Tax Proposal Makes WV’s Tax System More Regressive
West Virginia already has an upside down tax system, where low and middle income families pay more of their income in state in local taxes than wealthier taxpayers. This is in large part due to the state’s reliance on the sales tax as a source of revenue. In general, low- and middle- income families and individuals spend a greater share of their income than the wealthy, so they pay a larger share of their income in sales tax. In West Virginia, the poorest 20% of households pay an average of 2.8% of their income in sales taxes, compared to just 0.6% for the wealthiest 1% in the state.
The taxes being cut – retail inventory, and manufacturing machinery, equipment, and inventory – not only mainly benefit the wealthy, they are highly exportable, meaning the tax is largely paid for by out-of-state consumers, corporations, and shareholders.
That is why, even with the elimination of the property tax on vehicles, the Senate’s tax proposal overwhelmingly benefits the wealthy. When fully enacted, 80% of West Virginians would see a net tax increase, as savings from the property tax cut would be wiped out by the increases in sales and tobacco taxes. Only the wealthiest 5% would get a substantial net tax cut.
The lowest income West Virginians would be hit the hardest, with the proposal raising their taxes by an average of $43, while middle-income West Virginians would see an overall tax increase of $39.
Those increases on low and middle income West Virginians are helping to pay for a substantial tax cut for the wealthiest in the state. The top 1% of taxpayers in West Virginia, those with an average income of $842,000 per year, would get a tax cut of $1,201 under the Senate’s proposal, once fully enacted.
West Virginians deserve a tax system that helps our state both produce a stable budget and achieve a fairer and more equal economy. Instead, the state Senate has taken the opposite approach, producing a plan the widens income inequality while weakening the state’s ability to invest in its people and its future.