Tag: Senate Select Committee on Tax Reform

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.

Editor’s Note: This bill was revised by the Senate Select Committee on Tax Reform Monday, March 13. The revisions are explained in a new story on this website. 

Over the weekend, members of the Senate’s Select Committee on Tax Reform were presented with the latest version of a bill to overhaul West Virginia’s tax structure.

This is the third version of the legislation the 7 member committee has seen, but they’ve yet to take a vote on the measure. That vote, however, expected to come Monday.

Still, the new version of the bill is rather complicated and contains several provisions that are tied to the economic growth of the state. That and the newly floated idea of protecting the changes with a Constitutional amendment.

Credit Will Price / West Virginia Legislative Photography

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West Virginia Legislative Photography

Below are the ten things you need to know about the newest version of Senate Bill 335.

1. The bill would set an across-the-board, reduced personal income tax for all West Virginians beginning January 1, 2018.

• West Virginia’s current personal income tax is a graduated tax rate- or the more money a West Virginian makes, the larger their tax rate is. Those taxes currently range from 3 percent for earnings less than $10,000 per year to 6.5 percent if you make more than $60,000 per year.

• The bill would set the income tax rate at 2.65 percent for all income brackets effective January 1, 2018.

 
2. That tax rate would take effect, but it wouldn’t always stay that way.

• After the effective date, the personal income tax rate would be reduced by 0.1 percent for each $50 million the state brings in over $2.5 billion with the new general consumption tax (which is explained in #4 on the list). That reduction in rate, however, can only occur if the Rainy Day Fund, both Rainy Day A and Rainy Day B, equal 15 percent of the state’s general revenue budget for that fiscal year.

• The 15 percent mark for revenue shortfall reserve funds (rainy day funds) is a marker national ratings agencies, like Moody’s and Fitch’s– which have both downgraded West Virginia’s bond rating in the past year– prefer states to maintain.

 
3. Whether the provisions to step down the income tax rate are met or not, the personal income tax would begin to be phased out in 2023.

• Beginning January 1, 2023, the bill would begin to phase out the personal income tax, reducing the tax rate of 2.65 percent by 0.27 percent each year until it is fully repealed in 2032.

 
4. A general consumption tax would take effect in 2017 to replace the income tax revenue, resulting in a surplus in 2018.

• The bill repeals the current 6 percent sales tax and replaces it with an 8 percent general consumption tax, or tax on goods and services, beginning October 1, 2017.

• The consumption tax would also apply to some things that are currently exempt from a sales tax: groceries, utilities, hair cuts, and gym memberships, to name a few.

• As a result, West Virginians would pay a higher rate of taxes for three months, October, November and December 2017, until the new lower, flat rate personal income tax kicks in in January.

• Those higher collections would result in an $8 million surplus in FY 2018, according to the West Virginia Department of Revenue. Without any changes to the state’s tax structure or tax increases, Gov. Jim Justice’s Office has predicted a $497 million deficit for that same budget year.

 
5. Once the personal income tax has been repealed, the state will begin to repeal its corporate net income tax, with some fiscal benchmarks of its own.

• Once the personal income tax repeal is complete in 2032, or sooner should the state’s general consumption tax revenue drastically increase, the bill would repeal the corporate net income tax by one percentage point per year until it reaches zero.

 
6. The bill reduces the severance tax rate on coal immediately and the severance tax rate on natural gas if the corporate net income tax rate reaches zero.

• 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 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.

 
7. State revenue officials think the bill will still result in a large budget deficit for West Virginia.

• The original version of Senate Bill 335 would have resulted in an estimated $610 million deficit upon the full implementation of its provisions in 2021. This version the state Revenue Office says will initially have a positive effect on state revenues, but will create massive budget deficits down the line. Below is the overview provided to the Senate’s Committee on Tax Reform by the Revenue Department:

8. Senators want to take on the state’s personal property tax and low real estate tax rates through a Constitutional amendment.

• Select Committee Chair Sen. Robert Karnes says his committee will also look at a proposed Constitutional amendment to 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.

• That increased real property tax would be used to replace the loss of income from the repeal of the personal property tax.

Credit Perry Bennett / West Virginia Legislative Photography

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West Virginia Legislative Photography

9. The proposed Constitutional amendment would also attempt to protect the tax changes implemented under Senate Bill 335.

• Republican Senators want to protect the changes to the income tax, consumption tax, severance tax, and corporate net income tax as provided by their latest version of Senate Bill 335 by amending them into the state’s Constitution.

• Both adding them to the Constitution and changing them in the future would take a vote of the people.

 
10. Revenue officials say the changes are still happening too quickly.

• Even though the newest version of the Senate’s tax reform bill doesn’t immediately result in a loss of revenues, Deputy Revenue Secretary Mark Muchow told members of the committee Saturday that they should allow an outside agency with more precise measurement tools to consider the bill before putting it in place, a process Muchow said could take months.

• Muchow said his estimates cannot properly account for potential “leakage,” or for the amount of money the state may lose in its consumption tax for people who travel outside of West Virginia to avoid the 8 percent tax rate, which would be the highest in the country.

The Senate’s Select Committee on Tax Reform has started discussing the latest version of its bill to repeal West Virginia’s personal income tax and replace it with an expanded consumption tax. 

The income tax provides nearly $2 billion in annual revenue for the state, but supporters of the provision say a broader sales tax on goods and services at a higher rate could replace that revenue, encouraging economic growth in the state. 

The committee discussed the bill for a second time Monday morning, but still have not been presented with a fiscal note detailing the shift of revenues. 

Overall, the updated version of Senate Bill 335 presented to Senators on the committee Monday would still repeal the state’s 6 percent consumer sales tax and replace it with an 8 percent general consumption tax—what’s essentially a sales tax on almost all good and services. 

That includes reinstating the food tax, or taxes you pay on groceries, and also adding taxes to professional and personal services, like lawyers’ fees or haircuts and gym memberships.

The committee substitute also includes some clarifications for municipalities. 

Some cities have implemented an additional sales tax under home rule legislation to get rid of their B&O taxes. Others have implemented sales taxes to help pay off unfunded worker’s pension debts. Both of those types of municipal sales taxes would remain intact under the updated bill. 

Sales taxes on gasoline that are dedicated to funding roads are also largely not impacted by the legislation, but the tax on an automobile purchases would increase from 4 to 8 percent on the first $10,000 of value, and 6 percent for any cost above that. 

Senate Bill 335 still includes 31 areas of exemptions. They include exemptions for churches and nonprofits, wholesalers, aircraft repair services, and tuition charged at colleges and universities, just like under the current sales tax.

The bill’s lead sponsor and the chair of the select committee, Sen. Robert Karnes, has said the bill is intended to be a revenue neutral measure–  meaning it won’t make or lose any revenue, but shift the income sources.

A revenue neutral bill would not help close the estimated $497 million budget gap in the 2018 fiscal year.

In the process of repealing the personal income tax, the bill also would phase out the corporate net income tax, or the tax placed on business profits, and decrease the severance tax on both coal and natural gas from its current 5 percent to 2.5 percent over several years.