Blog Posts > When Would the Income Tax Phase Out in the Compromise Tax Plan Begin?
April 24, 2017

When Would the Income Tax Phase Out in the Compromise Tax Plan Begin?

One of the major aspects of the “compromise tax plan” between the governor and Senate leadership is the deep cuts to the personal income tax. The proposed tax compromise plan condenses the state’s five income tax brackets into three brackets and reduces the rates, a move that would reduce income tax revenue by $356-$380 million per year, with most of the savings favoring the wealthy. Even with those major cuts to the personal income tax, the compromise tax plan has the potential to make even further cuts, with the goal of eliminating the personal income tax altogether.

After the initial cuts to the personal income tax rate, the compromise tax plan calls for a further 0.1 percentage point reduction in each tax bracket’s rates if General Revenue tax collections are at a certain level. If general revenue tax collections in a particular tax year are higher than they were five years ago, after making a special inflation adjustment, then the personal income tax rates are reduced for that year. The special inflation adjustment, or “trigger index”, calculated by taking the percentage increase in that year’s June Consumer Price Index for all Urban Consumers (CPI-U) over the average June CPI-U of the past five years, and adding 0.5 percent to it.

Here’s how that would work. For FY 2019, June 2018’s CPI-U is projected to be 251.97. The average CPI-U for the five years prior to that is 239.57., for a 5.2 percent increase between the June 2018 CPI-U and the average of the previous five years. Add 0.5 percent to that, and you get the “trigger index” for FY 2019 of 5.7 percent.

Next, that “trigger index” of 5.7 percent would be applied to General Revenue collections from five years prior, in this case FY 2014. In FY 2014, general revenue collections were $4.104 billion. Increase that by 5.7 percent and you get $4.339 billion. If revenue collections in FY 2019 are greater than $4.339 billion, than the income tax rates would be lowered by 0.1 percentage points.

Based on current revenue and CPI-U projections, including the fiscal impact of the compromise tax plan, the personal income tax could potentially see further reductions as early as FY 2021, the first year projected revenues would exceed the General Revenue threshold to trigger a tax cut.

 

(Note: FY 2019-FY2022 revenue projections are the WV Budget Office adjusted to include the estimated fiscal impacts of the compromise tax plan. FY 2023 projections are based on historic General Revenue growth rates.)

Changes to the trigger index can result in different years that the income tax cuts occur in. For example, if the addition to the CPI-U increase is 1 percent rather than 0.5 percent, than the first year of income tax reduction is FY 2023 instead of FY 2021.

 

Further cuts to the personal income tax would make an already regressive tax system even more regressive, with the tax savings largely benefiting the wealthy. There is also little evidence that cuts to the income tax will boost economic growth, attract more people, or grow small businesses. Instead, more tax cuts will continue to undermine the state’s ability to invest in its public colleges, schools, public safety, and health-care services.

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