West Virginia Would Have 10th Best Business Tax Climate Under HB 2933

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 tax 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 tax base and lowers its rate, and simplifies the individual income tax. 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 deduction 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 pyramiding” 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.

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.