Governor Jim Justice Reveals Personal Income Tax Phase-Out Plan for West Virginia

West Virginia Gov. Jim Justice smiles during his annual State of the State address Feb. 10 at the Capitol in Charleston, during which he announced his desire to phase out the state's personal income tax. Details of his plan were released Thursday.

Read the abstract of Gov. Jim Justice’s income tax repeal plan by clicking here (if it doesn’t appear on your screen, please check your download folder)

CHARLESTON – Gov. Jim Justice revealed Thursday specific details about his personal income tax phase-out plan.

According to an abstract of Justice’s tax reform plan, which is currently being worked on by the West Virginia Legislature’s bill drafting department and likely set for introduction next week, Justice’s plan would cut the personal income rate by 60 percent for all filers starting in 2022.

“We have all the building blocks in our state,” Justice said in a statement Thursday announcing the plan. “The last piece of this puzzle is the elimination of our personal income tax. That’s why I am proposing a plan to make this dream a reality starting with a 60 percent reduction in state income tax for year one.”

A 60 percent cut to all five personal income tax rates – ranging from 1.2 percent to 2.6 percent under the proposal — would reduce tax revenue by $1.035 billion. The cut would come from personal income on wages and salaries, as well as pensions, annuities, IRAs, Social Security and unemployment.

The reduction excludes schedule C business profits, schedule E rents, royalties, and pass-through entity profits, schedule D capital gains, supplemental gains and losses, taxable interest income, dividend income, and miscellaneous income. The Justice proposal also includes a $53 million tax rebate for residents earning less than $35,000 per year. Total tax reductions, combining the personal income tax cut and the rebate, comes to $1.087 billion

To pay for the personal income tax cut and tax rebate, Justice proposes raising the consumer sales and use tax from 6 percent to 7.9 percent, raising $475 million in tax revenue. Tax consumer sales tax exemptions for professional services would bring in another $180 million.

“To truly make this work, we all need to pull the rope together as West Virginians,” Justice said.

Services losing exemptions include computer hardware and software, legal services, accounting services, selected advertising, electronic data processing, health and fitness memberships, sales of lottery tickets, and other professional services.

Justice’s proposal creates the state’s first luxury item tax, which would bring in an estimated $20 million. It was unclear what items would be considered luxury, but items between $5,000 and $10,000 would be taxed at 3 percent with tax rates decreasing as the cost increases, with items more than $1 million taxed at 1 percent.

Making good on an idea he first pitched in 2017, Justice would change the various severance taxes on coal, natural gas, and oil to a tiered system that would tax the fossil fuels more when prices are high and tax them lower when prices decrease.

Changing the natural gas severance tax from 5 percent to a tiered system would bring in $12.5 million, while increasing the severance tax on wet natural gas would increase from 5 percent to 6.5 percent, bringing in $5 million. Changing coal thin-seam severance tax to a tiered system could bring in $7.5 million, while changing to a tiered system for steam and metallurgical coal could bring in $16 million. A tiered oil severance tax could bring in $1 million.

Justice would also raise excise taxes on cigarette and tobacco products; e-cigarettes; beer, wine, and liquor, and soft drinks. The combined tax revenue is estimated at $185.6 million.

The combined total of proposed tax increases comes to $902.6 million. When factoring the $1.035 billion in decreased personal income tax revenue and the $52 million tax rebate, that leaves a $185.1 million gap. Justice has raised the possibility of cutting the state budget for fiscal year 2022 by $25 million.

He also estimated a reduction in payroll due to retirements and attrition of state employees for $10 million in savings, and a projected annual revenue growth of $60 million, reducing that $185.1 million hole to $90.1 million.

Advocates for tax reform have long called for eliminating the personal income tax. According to the nonpartisan Tax Foundation, eight states have no personal income tax, including the energy states of Texas and Alaska.

Jared Walczak, the vice president of state projects at the Tax Foundation’s Center for State Tax Policy, noted on Twitter that the sales tax increase still keeps West Virginia from having one of the highest sales tax rates, but many of the taxes fall heavy on small businesses.

“At first glance, this reduces liability for many (West Virginian) taxpayers, but shifts much of the burden onto businesses,” Walczak said. “That complicates the growth expectations … It’s genuinely exciting that (West Virginia) policymakers are interested in comprehensive tax reform and shifting to more of a consumption base is pro-growth and worth doing. It’s good to get this discussion going. But the tradeoffs … matter and merit consideration.”

Jessica Dobrinsky, policy development associate at the conservative Cardinal Institute for West Virginia Policy, said her organization was still reviewing the proposal but was happy that the conversation was starting.

“We applaud the Governor’s interest in tax reform and are eager to see Governor Justice’s plan’s details once the bill goes through the proper legislative process before introduction,” Dobrinsky said. “Economic data shows that states with no income tax experience more growth in wages and population. This can be the answer West Virginia has been looking for if it is executed responsibly.”

By contrast, the West Virginia Center for Budget and Policy, a progressive think tank, said the Justice plan simply shifts the tax burden away from the wealthy and to the middle class and poor.

“Governor Justice’s plan is as regressive as we feared it might be,” said Kelly Allen, executive director for WVCBP. “While it gives huge tax cuts to the wealthiest West Virginians, the tax shifts would fall most heavily on the vast majority of West Virginians who are low- and middle-income. The plan also fails to fully offset the revenue losses of reducing the personal income tax, which means inevitable cuts to public services in the midst of an ongoing pandemic.”

Justice said he submitted this plan to the West Virginia Legislature on Thursday, though a spokesperson for the House of Delegates said the plan must go through bill drafting first and be formally introduced by leaders in the House and Senate, putting possible introduction likely into next week before a bill number or bill language is available.

Justice first proposed a personal income tax phase-out in his Feb. 10 State of the State address to lawmakers. Since then, Justice has held three virtual town halls to promote parts of the plan and answer questions from the public. A virtual town hall scheduled for Thursday evening was postponed.


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