West Virginia Senate unveils compromise personal income tax phase-out
CHARLESTON — The Senate Finance Committee amended the House of Delegates personal income tax phase-out Tuesday in an effort to create a compromise between the House plan and Gov. Jim Justice’s plan.
The Senate Finance Committee adopted a strike-and-insert amendment to House Bill 3300 on Tuesday, relating to reducing personal income tax rates generally. The vote in committee was 9-8, with state senators Eric Nelson, R-Kanawha, and Patrick Martin, R-Lewis, voting no along with Democratic committee members.
The Senate version of the bill appears to combine parts of the House plan with House Bill 2027 and Senate Bill 600, Justice’s tax reform plan first unveiled during his State of the State address at the start of session on Feb. 10.
“We are at a critical time right now,” said Senate Finance Committee Chairman Eric Tarr, R-Putnam. “We see people who are wanting to move to places like West Virginia from across this country … this significantly cuts the tax burden on someone who wants to live and work in West Virginia.”
The Senate plan would reduce personal income tax rates by more than 50 percent, including for small businesses and sole proprietorships but not for investment income. The plan would reduce revenue from the personal income tax by $1.09 billion.
In comparison, the Governor’s plan would cut personal income tax rates by 60 percent for individuals but keep the tax rates the same for pass-through business income and investment income. It also includes a tax rebate for families and individuals making less than $35,000 per year.
The House plan phases out the personal income tax by $150 million in its first full year and annually until the tax is gone.
To pay for the personal income tax cut, the Senate version of HB 3300 would raise the consumer sales and use tax from 6 percent to 8.5 percent – more than Justice’s plan to raise the sales tax to 7.9 percent. Raising the sales tax to 8.5 percent would bring in more than $643 million per year.
Both the Senate and Governor’s plans would remove sales tax exemptions for services commonly used by businesses. The Senate amendment would remove exemptions from computer hardware Lottery ticket sales, software sales, downloaded digital products, electronic data processing, advertising, and health and fitness memberships.
It would also remove exemptions for legal services, accounting services, and architectural and engineering services, but tax those services at 3 percent. The food tax would be reinstated at 2.5 percent, with prepared food taxed at 8.5 percent. New taxes include a 4.3 percent tax on short-term lodging, an 8.5 percent tax on contingency-based legal settlements. A new Lottery scratch-off game would also be created, with revenue dedicated to income tax reduction.
The Senate version repealed the 1 cent tax on soft drinks, but an amendment offered by state Sen. Mike Maroney, R-Marshall, restored it. That tax, which amounts to $15 million annually, goes to the West Virginia University School of Medicine.
“The personal income tax reduction has the potential to be a huge population growth and economic stimulus for the State of West Virginia,” Maroney said. “I had concerns … one was addressed with the amendment. No bill is ideal for everybody … but this could be a big deal for West Virginia. I want to support this bill.”
The Senate amendment also creates a fund similar to the House’s Income Tax Reduction Fund, which would be called the Stabilization and Future Economic Reform (S.A.F.E.R.) Fund.
When the balance of the S.A.F.E.R. Fund reaches $100 million, $50 million is deposited into the general revenue fund, keeping the fund between $50 million and $100 million. The transfer would reduce personal income tax rates by 12.5 percent in the following fiscal year. The revenues to the S.A.F.E.R. Fund would come from increases in tobacco taxes, vapor and e-cigarette taxes, and other tobacco products. Those tax increases would raise more than $73 million for the fund.
The bill also anticipates the potential legalization of recreational cannabis, creating a tax structure for if the state or federal government take that action. The bill would move regulation of medical and recreational cannabis to the Department of Agriculture by July 1, 2021.
The Senate Finance Committee estimated that the additional tax increases would raise more than $932 million to offset the personal income tax cuts. The Tax Foundation, in a report released Tuesday morning, estimated that revenue would be closer to $890 million not counting revenue to the S.A.F.E.R. Fund. That leaves a $200 million gap, which could be filled by natural growth in state tax revenues.
“I think there is a lot of good in this bill,” said Jared Walczak, vice president of state projects for the Tax Foundation, attending the committee meeting by video conference. “I think there are things that merit further consideration. I do believe that trying to reduce the tax pyramiding associated with taxing business inputs is really important and that a slower phase-in of rate reductions may be a worthy trade-off for trying to address those things.”
Steven Allen Adams can be reached at email@example.com