Senate Committee Approves Tax Reform Plan with New Revisions

Mar 13, 2017

Members of the Senate Select Committee on Tax Reform have approved their bill to restructure the state's tax code. 

The committee substitute for Senate Bill 335 was passed out of the committee Monday morning, the first step in its process to completion.

That bill had been reworked over the weekend, but was revised once again before its passage Monday to include not just committee changes but also changes proposed by some members.

Below is a list of what the bill, as passed out of the committee, would do:

1. Senate Bill 335 still repeals the state's current graduated income tax and replaces it with a lower, across-the-board rate.

  • Beginning Jan. 1, 2018, all West Virginians would be subject to a 2.5 percent income tax.
  • The state's current income tax rate is based on the amount of money a person makes and ranges from 3 percent for earnings less than $10,000 per year to 6.5 percent for earnings more than $60,000 per year.

2. The bill triggers an income tax repeal now based solely on economic drivers and no longer contains the automatic phase out.

  • The 2.5 percent personal income tax would be incrementally decreased by 0.1 percent for every $50 million the state takes in from the general consumption tax (explained in #3 of this list) in a single year above the $2.4 billion mark.
  • That step can also only take place if the state’s Rainy Day Fund contains 15 percent of the general revenue budget for that fiscal year.

3. The legislation will still repeal the current 6 percent sales tax and replace it with an 8 percent general consumption tax on Oct. 1, 2017.

  • The newer consumption tax, along with being a higher rate, also gets rid of some exemptions in current code. West Virginians will have to pay the 8 percent tax on groceries, utilities and some personal services, like haircuts and gym memberships.
  • The bill does, however, reinstate some exemptions, including those on professional services, medical services and devices, and nonprofit and government purchases, among others. It also exempts e-cigarettes and the nicotine liquids used in the products.
  • It protects the 1 percent sales taxes many cities, like Charleston, Huntington and Parkersburg, have put in place under home rule.
  • The overlap results in a higher tax rate for West Virginians three months before the lower income tax rate takes effect.

4. The 8 percent grocery tax will not take effect until Jan. 1, 2018.

  • The 8 percent tax would be the highest statewide grocery tax in the nation.
  • The change aligns the grocery tax with the decrease of the personal income tax rate.

5. The bill includes new tax credits and tax exemptions for working families, seniors and members of the military.

  • The committee as a whole amended the bill to include an Earned Income Tax Credit, funded through the federal TANF (Temporary Assistance for Needy Families) program.
  • It contains a fixed income tax credit for West Virginians over the age of 65.
  • The bill also increases the historic rehabilitation tax credit from 10 to 25 percent beginning July 1, 2017, a provision that was introduced by Democratic Senators through a separate piece of legislation.
  • Senate majority Leader Ryan Ferns amended the bill to include an exemption for military retirement benefits under the income tax. That amendment was unanimously accepted and will cost the state and estimated $3 million.
  • Sen. Ed Gaunch’s amendment to provide an income tax exemption on Social Security was also accepted by the committee. That exemption will cost the state an additional $90 million annually.

6. To partially offset the Social Security tax exemption, the bill now includes new tax increases.

  • Gaunch replaced an estimated $73 million of that $90 million tax credit with three tax increases that were accepted by the committee.
  • They include: raising the tax on soda to 5 cents, preserving the 1 cent that funds West Virginia University’s Medical School, raising the beer barrel tax from $5.50 to $11, and raising the wholesale markup on liquor from 28 to 36 percent.

7. The committee-approved version preserves the changes to the coal severance, natural gas severance and corporate net income tax from the previous version of the bill.

  • Effective July 1, 2017, the severance tax on thin-seam coal would reduce to 2.75 percent and on all other coal to 3.75 percent from its current 5 percent rate.
  • The corporate net income tax will begin to phase out incrementally year to year if the personal income tax is fully phased out.
  • The severance tax rate on natural gas would reduce from its current 5 percent by one percentage point for two consecutive years to 3 percent if and only if the state is able to meet the provisions to phase out its corporate net income tax.

8. The seven member committee voted to advance the bill to the Finance Committee without seeing a final fiscal note.

  • A fiscal note, or an analysis of the overall financial impact of the bill, was not presented to the committee for the changes made Monday, both in the newly presented committee substitute and in the member-added amendments.
  • Sen. Robert Karnes, chair of the committee, said after the vote he believes those changes are not large enough to ask for a new report, but that the committee’s intent is for the bill to be revenue neutral and he expects it to stay in that range.

9. Sen. Karnes says the committee does intend to move forward with its proposal to amend the state constitution.

  • The amendment would repeal the state’s personal property tax. That tax is currently paid by businesses on machinery and equipment and by the average citizen on some property, like their vehicles. It’s used, largely, to pay for public schools.
  • The amendment will propose with the repeal, an increase to the state’s real estate tax, the tax paid on actual buildings and homes. West Virginia’s real property tax is one of the lowest in the nation and revenue officials say even doubling West Virginia’s current rate would still keep the state below the national average.
  • The amendment would also protect the changes made to the personal income and general consumption tax as outlined in Senate Bill 335.

The bill now goes to the Senate Finance Committee for further consideration.

Correction: This story was changed on 3/14/17 to reflect the fact that in the version of the bill reflected in this story, the 8 percent grocery tax will not take effect until Jan. 1, 2018.