Getting West Virginia Tax Reform Across the Goal Line
April 6, 2017
West Virginia legislators are working against the clock to enact tax reform this session, and to adopt a budget without going into overtime (special session). If the legislature’s 60-day session were a football game, we would be in the waning minutes of the fourth quarter, with regulation ending on Saturday. (Though Gov. Jim Justice recently intervened to offer an untimed down, a one-day extension through Sunday.) In a state that could use an economic boost, meaningful tax reform is tantalizingly close, but coming away with the win will require a clutch performance on a final drive that appears frustratingly stalled.
When there were ten days left to go, two major tax reform bills (House Bill 2933 and Senate Bill 335) were benched, with only one bill expressly on tax reform (Senate Bill 409) remaining. The playbook narrowed—but there were still ways forward.
The House’s game plan called for broadening the sales tax base to include select services and (at a partial rate) groceries. The proposal would have used the additional revenue to pay for a lower sales tax rate and an overhaul of the individual income tax, which would have been converted into a 5.1 percent single rate tax with a generous $10,000 standard deduction only available to low- and middle-income filers.
The Senate, meanwhile, had lined up behind an aggressive plan that would have eventually replaced the state’s major taxes—individual income, corporate income, and sales—with a new, broad-based consumption tax at an 8 percent rate. With the clock winding down, however, Senate leaders called an audible, instead moving forward with Senate Bill 409.
As tax reform plans go, this is the spread formation, and there are two taxes in motion. First, the individual income tax is on the move: the plan would replace the current five-bracket individual income tax (which tops out at a 6.5 percent rate) with a simplified three-bracket tax with a top rate of 5.4 percent. Then the sales tax sweeps in another direction: the bill broadens the sales tax base and increases the rate to 7 percent, using the increased sales tax revenue to pay down income tax cuts.
Notably, the bill includes a revenue trigger mechanism, providing for further incremental across-the-board rate cuts of 0.1 percent any year in which state revenue grows by more than $50 million above inflation, essentially returning a portion of any future state revenue growth to the taxpayers.
Senate Bill 409 is still technically in the House awaiting action, though that chamber has not expressed much interest in the proposal and has not acted on it in any way. Instead, in the legislative equivalent of a trick play, the House gutted a separate piece of legislation, SB 484, and amended in the old language of HB 2933 with substantial revisions, most notably pulling back from the taxation of groceries and professional services and instead expanding to certain business inputs (direct business use of transportation and communications services), while scrapping the income tax changes. The playbook always takes hits during the two-minute drill.
Meanwhile, the governor would like to swap a soda tax into the lineup, an idea the Senate chose to set aside and which the House has largely disregarded. Soda taxes are regressive, since soft drink consumption is higher among young people, low-income earners, racial and ethnic minorities, and those without a college education. In West Virginia specifically, soda consumption is higher than average, with 45 percent of state residents (but only 26 percent of those with a college degree) consuming soft drinks at least once a day.
In a state where 28 of 55 counties border another state, a soda tax has the potential to encourage tax avoidance through cross-border shopping. Given overall soft drink consumption trends, it would also be a declining source of revenue over time. Adopting a soda tax provision would set back tax reform efforts.
The same can be said of any efforts to tax business-to-business transactions, something the governor has favored which unfortunately is now featured in the House’s offer. Liberal and conservative economists agree that these transactions should be exempt from the sales tax to avoid what is known as “tax pyramiding,” where the final price of a good or service contains the sales tax embedded within it several times over. A statewide gross receipts tax, like the one in the governor’s budget, would also constitute losing ground. Efforts to secure a little more revenue through poor tax policy should draw a penalty flag.
The Senate seems largely uninterested in the amended SB 484, preferring the House to advance SB 409, but many in the House have expressed opposition to its higher sales tax rate, even if it is more than offset by income tax cuts. If a deal is struck in the waning moments, there is considerable value in preserving some measure of income tax reform—maintaining revenue-dependent rate reductions in future years, for instance, even if reservations about the Senate’s sales tax proposals limit what can be done now.
Tax reform is very close, and that is extremely significant in and of itself. After all, tax reform is hard and taxpayers are not accustomed to getting a win. But close doesn’t win ballgames, and the legislature’s position is precarious, with every possibility that it will wind up a little short of the goal line as time expires. Even going into overtime is an uncertain prospect at best: should the legislature extend the session on its own prerogative, it is uncertain whether members have the wherewithal to put a deal together in time, and if called into special session by Governor Justice, the parameters he sets for that session could seriously limit their scope of action.
The past few days have been filled with false starts and dropped passes, and if tax reform fails, the governor’s proposals—which include a gross receipts tax, a higher sales tax rate, a soda tax, a cigarette tax hike, and other tax increases—instantly become more viable. A lot, therefore, is on the line, and time is running out. But if the legislature can deliver on tax reform before the session clock flashes zero, West Virginians will have something worth cheering.