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West Virginia Legislature Reaches Budget Agreement

4 min readBy: Jared Walczak

Update (6/21/2017): Gov. Jim Justice announced this morning that he would permit the budget to go into effect without his signature, though he lambasted it as an “absolutely terrible bill” and a “travesty.” West Virginia will avoid a government shutdown, and agencies should have time — though just barely — to implement the budget by July 1.

If the government of West Virginia had a nickel for each 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. and budget proposal unveiled this year, the state’s revenue problems would have been taken care of a long time ago. At times, even veteran legislators struggled to keep track of the flurry of bills and amendments, consulting notes and requesting forbearance as they attempted to distinguish the features of the legislation in front of them from those considered previously. The Department of Revenue flatly stated that it could not keep up with the constant stream of revisions and lacked the capacity to provide a revenue score for each new innovation.

When this all began, the State Senate coveted aggressive reductions in 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. , while the House was eager to broaden the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and use the additional revenue this would generate to pay down 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. rate reductions. Various hybrid plans were considered, prioritizing one goal or the other, but in the end the deal was a simpler one: they would do neither.

This evening, as the special session inched closer to key deadlines and ultimately a government shutdown, the two chambers came together on a $4.225 billion budget which contains no tax increases, cuts, or swaps, or for that matter, any semblance of tax reform. (The legislature did, however, approve a gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. increase for the transportation fund through separate legislation.) But the budget does ensure—should the governor sign it—that the state will meet its Monday deadline for processing state employee paychecks for the next pay period. It avoids furloughs. It keeps the government open. And in the end, that may have been enough.

Dreams of tax reform were derailed early on by projections of a budget shortfall and sharply contrasting priorities, and efforts to pair revenue increase proposals with structural reform never found significant bicameral support. A revised estimate, showing improving revenues, expanded the legislature’s options but failed to bridge the increasingly sharp divides, marked more by chamber than by party affiliation.

It would almost be easier to enumerate the taxes the legislature didn’t consider as possible solutions to the budget shortfall over the past few months. Governor Jim Justice (D) championed a gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. modeled on the Ohio commercial activity tax, and at times promoted a new high earners’ tax. A soda taxA soda tax is an excise tax on sugary drinks. Most soda taxes apply a flat rate per ounce of a sugar-sweetened beverage. was contemplated, as was an increase in the state’s cigarette tax, just hiked last year.

Sales tax rate increases and base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. (often to new business-to-business transactions rather than final consumer sales) figured in most plans emerging from the Senate, coupled with various proposals to bring down individual income tax rates. The House, to the extent that it contemplated new revenue (at least in the first year), preferred to provide it through sales tax base broadening alone, and to make the sales tax rate the primary focus of any future tax relief. And who even knows how many different revenue trigger designs were considered?

By this point, even those at the center of the action probably can’t remember every iteration.

For many, today’s budget vote is a frustrating result. Hopes for improving the state’s tax structure have been dashed, at least for this year. Still, after the drama of the past few months, walking away without adopting a new gross receipts tax—an antiquated form of taxation the state abandoned three decades ago—is a minor miracle.

The governor may yet veto this budget, but should he sign it into law, it is likely to represent a pause and little more. None of the concerns legislators and the governor brought into this debate—about tax structure, revenue needs, or economic growth—have been resolved. For now, though, it looks like West Virginia might just have a budget. It wasn’t pretty and no one is entirely happy, but through a mix of transfers and an improved revenue outlook, a deal was reached by the legislature tonight. Now it’s up to the governor to decide how to proceed.