West Virginia Lawmakers Taking More Subtle Approach to Tax Reform in 2022
CHARLESTON — If the 2021 legislative session was known for the battle over tax cuts, with competing plans between Gov. Jim Justice and Senate Republicans on one side and House Republicans on the other, then 2022 will be known for more incremental tax reform efforts.
The bill getting most of the attention now is House Bill 4007, a bill to reduce personal income tax rates for all income brackets. That bill passed the House of Delegates Friday afternoon in a 76-20 vote.
HB 4007 would cut the state personal income tax by 10%, spread out among all five tax brackets starting in tax year 2023. It would also create the “Stabilization and Future Economic Reform Fund” with half of all general revenue fund surpluses at the end of each fiscal year placed into the SAFER Fund to help cushion against fluctuations in tax revenue from year to year.
Residents earning more than $60,000 would see their tax rate decrease from 6.5% to 5.85%. Those making between $40,000 and $60,000 would see their rate reduce from 6% to 5.4%.
Those earning between $25,000 and $40,000 would see their rate drop from 4.5% to 4.05%. Those earning between $10,000 and $25,000 would see their rate drop from 4% to 3.6%. Those earning less than $10,000 would see their rates fall from 3% to 2.7%.
House Finance Committee Chairman Eric Householder, R-Berkeley, is the lead sponsor of HB 4007. The bill is a scaled-down version of House Bill 3300 introduced last year, which was an entire phase-out of personal income taxes. During an interview in his office Tuesday, Householder said his goal this year is to take a more incremental approach.
“The state has done such a good job with tort reform and labor reforms. I think the trifecta is tax reform,” Householder said. “Many of us on the House side and our Senate colleagues as well believe that there should be tax relief right now for all citizens. I think we’re going to accomplish that with the bill … It’s a modest, small incremental change that gets us on that path to providing tax relief for our citizens.”
According to a fiscal note from the Legislature’s Division of Regulatory and Fiscal Affairs, the cut would cost the state $109.5 million in tax revenue for the first half of fiscal year 2024, then cost $264.5 million starting in fiscal year 2025 beginning July 1, 2023.
According to the most recent tax revenue numbers reported by the state, year-to-date tax collections for the current fiscal year beginning in July 2021 were $3.1 billion — 20.7% more than the $2.6 billion revenue estimate. West Virginia is sitting on a $530.6 million surplus with five months to go in the current fiscal year. Householder said the surplus will keep growing.
“Most of us believe now’s the time to be bold, practical, yet cautious with a more moderate approach,” Householder said. “If we’re on target this year to have a $700 million surplus, let’s reward the citizens who helped get us there.”
Last year, Gov. Justice first proposed phasing out the personal income tax. According to West Virginia University’s Bureau of Business & Economic Research, the personal income tax accounts for 11% of West Virginia’s tax revenue.
Justice and Senate Republicans came to an agreement on a plan that would have phased out the personal income tax by 50% starting January, with reductions going forward. The cut would be paid for by increasing the consumer sales and use tax from 6% to 8% along with removal of multiple sales tax exemptions, increases in tobacco taxes, a new scratch-off lottery ticket, and tiered severance tax based on the price of coal and natural gas.
Republicans in the House chose to support the Householder plan in HB 3300. The Senate decided to amend their version of the personal income tax phase-out into the House bill. When the bill came back to the House, House Speaker Roger Hanshaw, R-Clay, and House leadership were determining what their next move would be when Justice accused them of sitting on the bill.
“They’re not even going to vote on it,” Justice said during a press conference last year. “They’re not going to vote on it because they’re afraid to vote on it … they’re not even going to vote on the most important thing this state has ever, ever had in front of it.”
Responding to the governor’s dare, the House unanimously voted against a motion to concur with the Senate’s changes to HB 3300, all 100 members, 78 Republicans and 22 Democrats, voting red for no. A photo of Hanshaw looking at the all-red voting board went viral.
“As relayed to me during his public comments, the governor asked or perhaps suggested that we were afraid to take a vote, so we were happy to do that, and we did,” Hanshaw said after the vote.
It’s unclear whether the wounds from last year’s personal income tax drama have healed. Senate Finance Committee Chairman Eric Tarr, R-Putnam, no longer does newspaper interviews, preferring to go on local talk radio.
One of Tarr’s tax reform bills passed the Senate Thursday unanimously. Senate Bill 533 would eliminate the state’s soda tax by July 1, 2024. Since 1951, West Virginia taxes 1 cent for every 16.9 fluid ounces of soda, along with 80 cents for every gallon of syrup and 1 cent for every ounce of dry mixture.
The tax once helped fund the construction of the West Virginia University School of Medicine, but the tax remains in place and continues to fund the school. SB 533 would eliminate the tax and replace that funding source with revenue from the insurance premium tax, with $14 million going to WVU’s medical school.
For the first time, the state’s two other medical schools would receive a direct funding source through the insurance premium tax, with the Marshall University School of Medicine receiving $5.5 million, as well as $3.9 million for the West Virginia School of Osteopathic Medicine. The insurance premium tax brought in more than $118 million during the previous fiscal year.
“Senate Bill 533 provides dedicated funding sources for the state’s three medical schools,” Tarr said when explaining the bill on the Senate floor Thursday. “Marshall and the osteopathic school receive funding in the budget, but they don’t have a similar dedicated funding source as WVU. These figures represent about 40% of the state appropriation to each of the medical school programs at these two institutions.”
“There have been many in the Legislature for a long time who have recognized that singling out of a single product, like soda pop, for a special tax has been unfair,” said Senate Judiciary Committee Chairman Charles Trump, R-Morgan. “The use of which the money was put was something we all valued, but after years and years, really, of wrangling with this by the Legislature, (Tarr) figured out and negotiated a way to get it done.”
Members of the House and Senate Democratic caucuses presented their own tax reform plan at the beginning of the legislative session. Their plan, Senate Bill 457, would reduce the consumer sales and use tax from 6% to 4.75%, a 1.25% reduction and cost $312.5 million. It would be paid for out of surplus tax dollars. According to WVU, the sales tax accounts for 16% of the state’s tax revenue.
Once the fiscal year ends on June 30, if the state Rainy Day Fund hits $1 billion, that would trigger another 0.25% cut in the sales tax at a cost of $62.5 million, with those funds coming out of the Rainy Day Fund. Going forward, the sales tax would be reduced by 0.25% each fiscal year any time the Rainy Day Fund hits $1 billion, possibly phasing out the tax altogether.
Speaking Thursday during a press conference, Delegate Kayla Young, D-Kanawha, and Sen. Richard Lindsay, D-Kanawha, said their tax plan replaces the cut tax revenue, while the Householder plan doesn’t.
“Our sales tax plan reduces the sales tax, but only when the Rainy Day Fund is significant, which it is now, so it only reduces it when we have the money in the bank to pay for it,” Young said. “(HB 4007) reduces people’s income tax, but it doesn’t replace; it just creates a hole in the budget that we’re going to have to make up for in a few years.”
“The Democrat plan is responsible. The Democrat plan is a tax cut for all West Virginians.” Lindsay said. “Everyone would see a benefit of anywhere between $200 to $300 or even more than that, so that’s the difference.”
Lindsay believes when HB 4007 goes to the Senate from the House, it will just reopen the same personal income tax feud between Republicans that happened last year.
“If Delegate Householder’s bill comes across, there are folks here in the Senate chamber who just want to increase expenses for all West Virginians, and that we just don’t think that’s fair or right,” Lindsay said. “If you believe what the governor says about how prosperous the state is, then all West Virginians need to benefit from that prosperity. We believe our tax plan does that and does it in a responsible way.”
Householder said his personal income tax cut will benefit all West Virginia residents, while the Democratic sales tax cut proposal will cause the state to lose tax revenue from out-of-state travelers who stop in West Virginia and spend money.
“If you get a lot of travel from out-of-state participation, they’re taking advantage of a lower sales tax,” Householder said. “What (HB 4007) does is it gives everyone that has earned income tax relief. And that’s more beneficial I think in the long run than what a sales tax reduction would be.”
‘IT’S THEIR MONEY’
According to the Tax Foundation, 13 states have similar legislation to cut personal income tax rates, and five states have bills to cut sales tax rates.
One shadow hanging over efforts to cut taxes is the provision in last year’s $1.9 trillion American Rescue Plan Act that prohibits states from directly or indirectly offsetting reductions in net tax revenue with federal COVID-19 dollars. ARPA requires states to report to the U.S. Treasury Department any reductions in tax revenue, with the federal department empowered to recoup any funds if it believes were used to offset tax cuts.
Federal judges in three districts have granted injunctions that prevent the Treasury Department from enforcing the ARPA tax cut provision, including a case filed in Alabama federal court last fall by West Virginia Attorney General Patrick Morrisey and a 13-state coalition. The Treasury Department is appealing the injunctions.
Democratic lawmakers don’t believe their consumer sales tax cut violates ARPA. Householder also believes his personal income tax cut doesn’t violate the ARPA provision. He said state revenue officials estimate West Virginia’s natural tax growth to be around $150 million per year. He believes that is enough, combined with the SAFER Fund, to more than pay for a personal income tax cut.
“My argument is each and every time, let’s take that money and let’s reinvest it back instead of spending that money for some social welfare program or some other spending need that me or somebody else may not agree with,” Householder said. “I understand there’s some great needs that we have throughout the state, but I think it’s more beneficial if we can give the money back to the taxpayer. It’s their money. They’ve worked for it. They helped us get us where we’re at, and now we need to reward our citizens for all their hard work.”