The 10 Things You Need to Know about the Senate's Latest Tax Reform Plan
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.
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to phase out the personal income tax, reducing the tax rate of 2.65 percent by 0.27 percent each year until it is fully repealed in 2032.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.
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.