April 1, 2021

Senate Finance introduces yet another tax plan, and experiences some turbulence

Yet another tax plan, this one proposed by senators, is straining but advancing. The bill…

Yet another tax plan, this one proposed by senators, is straining but advancing.

The bill that would initially offset a big income tax cut with a variety of other taxes was voted out of Senate Finance narrowly, 9-8, on Tuesday evening.

Republican senators Patrick Martin and Eric Nelson voted against the bill. Senator Mike Maroney expressed deep reservations about it, prompting a call for a 15-minute recess that actually lasted for 40 minutes.

Mike Maroney

Maroney had a couple of intertwined concerns: how the tax bill would affect senior citizens and how the WVU Medical School would be affected financially by an aspect of the plan that would have diverted its longstanding benefit from the sales tax on beverages.

Maroney said he supports tax relief, but “It’s how you get there.”

“Taking away the money from our largest economic engine, WVU, is a big problem for me. What the heck are we thinking?”

After the recess, he offered an amendment to restore the beverage tax benefit to WVU Medicine. And he also said he’d been assured that other legislation up for passage would provide tax relief for seniors.

So Maroney, R-Marshall, provided the decisive vote to move the bill out of committee.

“You don’t have to be a former Math Day medaler to figure out how important my vote is,” Maroney said. “But this is something that I hope we can get a good bill across the finish line.”

Gov. Jim Justice

That was all happening at the same time Gov. Jim Justice was having yet another town hall to support his own plan.

Justice made reference to the Senate plan, saying he was seeing it for the first time. “From what I’ve been told, there’s some really good things in here,” he said.

“I think this will be a process and everything, and I hope we’ll keep an open mind. We’ll make the sausage as best we possibly can, and we’ll come to a plan that I can support.”

Today was Day 49 of the 60-day legislative session.

Governor Justice’s proposal would cut West Virginia’s personal income tax by 60 percent right away, while making up most of tax base with a variety of increases.

An outline of the governor’s plan estimates initial personal income tax reductions totaling $1,035,650,000 and rebates totaling $52 million for lower-income residents — but also tax increases of $902,600,000 to make up for most of those breaks.

The House of Delegates didn’t even consider the governor’s plan, saying there was no support because of objections over the offsetting tax increases. Instead, the House passed its own version.

The House plan would cut at least $150 million in income taxes a year until it’s eliminated. That proposal does not contemplate any other tax increases to make up for the cut and has already raised questions about how to sustain government services with compounding income tax cuts over the long haul.

In addition, the bill would set up a “personal income tax reduction fund” that would fill up with other sources, including Lottery proceeds. This is meant to accelerate the overall pace of income tax reduction.

A fiscal note from the state Department of Tax & Revenue today focused on several problems with the House plan. One is assigning the Tax Commissioner to recalibrate income tax rates based on the annual cut, which “raises Constitutional concerns and may be an unconstitutional delegation of Legislative powers.”

Also, “the bill creates at least a $150 million reduction in revenue every year until the Personal Income Tax is eliminated. However, the bill does not consider whether at some point the reductions will cause a deficiency in a fiscal year.”

So on Tuesday afternoon, the Senate introduced yet another option to West Virginia’s income tax reduction extravaganza. The Senate plan aims for some compromises but also has its own issues.

The national Tax Foundation received a draft of the Senate bill on Friday and had assessed it as part of a look at West Virginia’s proposals by today. The assessment credited West Virginia with vigorous discussion about its tax system, but its bottom line was a mixed review.

Jared Walczak

“The Senate plan shares some of the economically uncompetitive features of the governor’s plan, like the expanded taxation of business inputs and some unusually high excise taxes, but overall, the plan is more balanced, generating more revenue from broad-based consumption taxes,” wrote Jared Walczak, vice president of state projects.

“Unlike the House plan, moreover, it does not commit the state to large annual revenue reductions. Nevertheless, because it begins with a substantial tax swap, it would attempt full repeal of the income tax in a fraction of the time allotted by the House.”

The version introduced in Senate Finance would cut the personal income tax initially by $1.09 billion.

It would offset that cut with a variety of tax increases anticipated to be $890 million, although the mix is different.

There are several possible sticking points.

The Senate plan would raise the sales tax to 8.5 percent, which is even higher than the governor’s proposed 7.9 percent. The current rate is 6 percent.

And the plan would re-establish a food tax at 2.5 percent. West Virginia, pushed by Republicans who were then in the minority, did away with the food tax over a period of years.

Beverages would be taxed at the 8.5 percent rate. The beverage industry perceives itself as being subject to a double tax — the base sales tax plus the additional 1 percent tax that goes to WVU.

The Senate bill, like the governor’s, would expand sales taxes to “professional services,” including computer hardware and software, “digital goods,” advertising, electronic data processing and health and fitness memberships at the 8.5 percent rate. Legal, accounting, architectural and engineering services would be taxed at a 3 percent rate.

That got pushback from Sean Banks, the general manager at WOWK TV, who said the tax would be noncompetitive. “I would ask that you seriously consider removing the advertising from this bill,” Banks said.

The plan adds an occupancy tax of 4.3 percent to the total cost of bills for people staying at hotels or motels. The hospitality industry is unhappy.

The bill anticipates an annual $45 million from the legalization of marijuana. The bill envisions steps to prepare for legalization — but there are no actual steps toward recreational marijuana legalization in West Virginia.

Stephen Baldwin

“When I was reading this bill, I was surprised,” said Senate Minority Leader Stephen Baldwin, D-Greenbrier. “Nearly all of it is about cannabis.”

The bill does differ from Justice’s plan by not exempting businesses structured as pass-through organizations, like S corporations or C corporations. Justice envisions looping in those businesses in a couple of years, when the income tax is fully phased out. That difference earned the Senate bill some praise from lawmakers.

Gaylene Miller

In the broad view, AARP West Virginia put out a statement earlier on Tuesday, urging the various officials to tread carefully with their proposals.

“The latest research demonstrates no clear positive relationship between cutting income taxes and economic growth, and recommends well-balanced and broadly applied progressive taxation using a combination of income, sales, and property taxes to ensure that West Virginia can generate sufficient revenue to provide essential services,” stated AARP West Virginia state director Gaylene Miller.

“Experiences of other states offer a real-life cautionary tale: no measurable economic effect, but failure to provide essential, basic services that older West Virginians depend on. Initiatives to retain adequate revenue as part of any tax reform effort should not rest on the backs of those West Virginians who can least afford it.”