Tomorrow (Wednesday, March 29th) is the last day that legislation can pass its chamber of origin in West Virginia, and the vote on HB 2933 is coming down to the wire. Were it to be adopted in its current form, the state would improve from 18th to 10th (once reforms fully phase in) on our State Business Tax Climate Index, which measures taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. structure.
The Index is not a measure of tax collections, and although it does take tax rates into account, it is chiefly a measure of how well a state raises revenue. It rewards states that adopt tax codes which are pro-growth, simple, and transparent, and which emphasize neutrality rather than picking winners and losers.
West Virginia has long struggled economically, and a better tax code should not be mistaken for a silver bullet. But at the same time, reforming the tax code is something fully within the power of the state legislature which can play an important role in making the state more competitive.
In very general terms, HB 2933 broadens the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. base and lowers its rate, and simplifies the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. . It converts the current five-bracket graduated rate individual income tax, which has a top rate of 6.5 percent, into a 5.1 percent single rate income tax with a generous $10,000 standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for filers with adjusted gross incomes of $50,000 or less. (In an unusual feature, the standard deduction is not available for filers with higher incomes, a provision known as recapture which is designed to maintain progressivity for lower-income taxpayers.) It simultaneously broadens the base of the state’s sales tax to include a range of additional services and—at a 3 percent rate—groceries, while ultimately reducing the rate of the sales tax from 6.0 to 5.0 percent subject to revenue availability using what are known as revenue triggers.
The bill has shortcomings. While the intended purpose of the recapture provision on the standard deduction is quite understandable, the mechanism diverges from ideal tax policy. Similarly, while the bill largely avoids new taxation of business inputs, even at this late hour negotiations are still underway on an important provision to ensure that intermediate purchasers of professional services would not be subject to the sales tax. This provision would help avoid what is known as “tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. ” where the same tax is imposed multiple times across the production chain. Finally, while the bill’s treatment of groceries is better than under the existing tax code, where they are exempted outright, an ideal tax code would not distinguish between groceries and other purchases, taxing them at the standard rate.
Still, if enacted, it would represent a marked improvement in the state’s overall tax structure. Impressively, if the tax reforms embodied in HB 2933 had been fully phased in as of our 2017 State Business Tax Climate Index’s snapshot date, the state would have ranked 10th overall, leapfrogging all its regional competitors.
| Overall | PIT Component | Sales Tax Component | |
|---|---|---|---|
|
Current Tax Code |
18 | 26 | 15 |
|
HB 2933 Full Phase-In |
10 | 14 | 8 |
Should the House pass the bill tomorrow, some of the provisions are still likely to change once the legislation arrives in the Senate, which is advancing a competing set of tax reform proposals, but if tax reform is to happen in West Virginia in 2017, it will require a vehicle. Two Senate bills—SB 335 and SB 409—might fill that role, as could HB 2933, but should none of these bills pass their chamber of origin tomorrow, then it’s likely that tax reform will have to wait another year.
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