Taxes were a major focus of the 2021 West Virginia legislative session, with the elimination of the state personal income tax a top priority for the governor as well as for House and Senate leadership. Fortunately for the state, all of the various proposals — which each would have devastated the state budget while shifting taxes away from the wealthy and onto low- and middle-income households — failed to pass this session. However, the threat remains.
While the personal income tax — and the critical public services and programs funded by its revenues — ultimately escaped the regular session unscathed, a number of other tax bills did make it through the legislative process. The impacts of the bills vary, with some having small, immediate impacts, and others having potentially large, future impacts. Here is a recap of those bills.
Aircraft Maintenance Tax Exemption (SB 305): SB 305 creates a sales tax exemption for purchases of certain services and tangible personal property sold for the repair, remodeling, and maintenance of aircraft. The bill reduces sales tax revenue by an estimated $450,000 in FY 2022 and by $600,000 per year beginning in FY 2023.
Exempting Unemployment Benefits from Income Taxes (SB 693): As part of the American Rescue Plan, federal income taxes on up to $10,200 in unemployment insurance benefits were waived for people who earn under $150,000 a year for the 2020 tax year. SB 693 adopts that same exemption for West Virginia state income taxes. West Virginia is one of several states that applies the income tax to unemployment benefits, and during the pandemic recession, nearly 200,000 West Virginians received over $1.3 billion in unemployment benefits throughout 2020. The exemption is only for tax year 2020, and the fiscal impact is unknown at this time.
Mobile Workforce Modernization (HB 2026): While marketed by the governor as a significant reform to attract remote workers to West Virginia, the major parts of this bill involve corporate tax changes long sought by industry. The bill makes four changes to state tax laws, some which could potentially raise revenue, while others could cause revenue losses. According to the fiscal note, the bill as a whole is expected to be revenue neutral, with the revenue increases and decreases offsetting.
First, the bill creates an income tax exemption for “non-resident mobile employees” who work in West Virginia for fewer than 30 days and have no other source of income from West Virginia. The exemption would only apply to those working in West Virginia temporarily, and would not apply to any remote worker who becomes a permanent state resident. According to the Tax Department, this provision would not affect revenue collections, likely due to its limited nature and the existing reciprocity agreements with border states.
The other provisions of the bill modify the definitions of business income for the corporate income tax. The bill eliminates the “throwout rule” which which required businesses to exclude sales from states in which they were not subject to tax from their West Virginia corporate income tax calculations. Eliminating the throwout rule decreases the amount of income subject to the corporate income tax relative to solely using the fraction of sales made in the state, and thus results in a reduction in corporate income tax revenue — or an effective tax cut for most businesses.
The bill also mandates that West Virginia begin using a “single sales apportionment formula” for determining the corporate income tax. Apportionment formulas are used when businesses have income from both inside and outside of West Virginia. Before HB 2026, West Virginia used a four-factor formula consisting of a property factor, a payroll factor, and a double weighted sales factor. Moving to a single sales apportionment formula would largely benefit businesses that export most of their sales but have large amounts of property in West Virginia, like manufacturers or coal and natural gas producers. Businesses that do most of their sales in-state, like retailers or service providers, would see less benefit, and may even see an overall tax increase.
Finally, the bill changes the apportionment of sales of services and intangible personal property to market sourcing instead of origin sourcing, which in effect would ensure that businesses selling services are taxed the same way as manufacturers or those selling physical products are taxed. This would likely increase corporate income tax revenue overall, offsetting some of the losses from eliminating the throwout rule and moving to single sales apportionment; however, there is much uncertainty regarding the overall fiscal impact.
Small Arms and Ammunition Sales Tax Exemption (HB 2499): This bill gives a preference to small arms manufacturers for the state manufacturing investment tax credit by increasing the value of the credit from five percent to 50 percent of qualified investment for small arms manufacturers, providing a 10-year tax credit against the state corporate income and personal income tax for federal excise taxes imposed upon small arms manufacturers, lowering the threshold for salvage valuation treatment for qualified capital additions from $50 million to $2 million for small arms manufacturers, and exempting sales of small arms and small arms ammunition from the state sales tax. While the changes to the manufacturing tax credit and qualified capital additions treatment result in little change in revenue due to the narrow application, the sales tax exemption will reduce state revenue by $1.4 million in FY 2022 and by $1.5 million per year beginning in FY 2023.
Natural Gas Property Valuation (HB 2581): This bill will eventually change how natural gas property is valued for property tax purposes, by allowing companies to take more deductions on the property taxes they owe. Previous versions of the bill could have potentially cost local governments over $50 million in reduced property tax revenue. The fiscal note on the introduced version of this year’s bill put the cost at $9.1 million. However, the final version of the bill makes no direct changes, and instead directs the Tax Commissioner to develop a new method of valuing natural gas property, leaving the fiscal impact unknown for the time being.
Business Personal Property Tax Elimination (HJR 3): House Joint Resolution 3 proposes a constitutional amendment to give the legislature the authority to exempt business machinery and equipment, business inventory, and personal vehicles from property taxation. This exemption could potentially cost local governments $378 million in lost property tax revenue, or 19.5 percent of all property tax revenue. The resolution will go on the ballot to be voted on in the 2022 general election.
Tax policy will be particularly important as West Virginia emerges from the pandemic. Without sufficient revenue, West Virginia would be forced to make even further budget cuts, endangering our recovery and neglecting the state’s long-term needs.
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