CHARLES TOWN – The fresh Republican supermajorities controlling West Virginia’s legislature broadly agree that they want to significantly cut or phase out completely the state’s personal income tax.
But with one week remaining in the regular 60-day legislative session, how to achieve that goal to boost the state’s economy, jobs and waning population has no clear consensus among the lawmakers yet.
Two competing bills take different approaches, one aggressive and one more gradual. Both bills would rely on stimulating the state’s economy to eventually eliminate the tax. And both bills are considered negotiating starting points.
Gov. Jim Justice held town halls last week in Martinsburg and Berkeley Springs as part of a series of virtual and in-person forums he’s conducting to promote Senate Bill 600, his plan to drop income tax assessments by 60 percent in one dramatic swoop starting with the state’s next $4.5 billion 2022 fiscal budget beginning July 1.
Justice’s goal would be to put about $1.87 billion in extra cash annually in the pockets of all West Virginia households—given back in tangible checks every two or three months that state residents couldn’t ignore—to stimulate consumer spending.
Under his plan, Justice said, most households would have an average of $1,483 more to spend each year. “That’s just going to be at the 60 percent level,” of planning income tax trimming, he said.
Just as important, the governor said, his big-splash approach to slash income taxes in a big swoop should attract new residents and companies to the state. That, in turn, should generate even more sales tax revenue to eliminate income taxes completely within three or four years, the governor offered.
“We’ll let our growth extinguish the [income] tax,” he said during a town hall in Martinsburg.
The governor’s plan would also flatline state spending to reduce government spending relative to inflation over time, providing an added way to help reduce the income tax eventually, he said.
To achieve a balanced budget for the state government, Justice’s plan would simultaneously notch consumer sales taxes from 6 percent to 7.9 percent. His proposal would end sales tax exemptions for a variety of professional services and other items ranging from computer hardware and software to soft drinks and lottery tickets to broadcast advertising to gym memberships. It would establish a tiered set of new taxes for natural gas, oil and coal production that would rise and fall based on the market price of those commodities.
Groceries would be exempt from the sales tax hike while a new luxury tax for certain items costing over $5,000 would be added to the state’s revenue books.
Households earning less than $35,000 would receive more than $52 million in rebates to buffer them from a disproportionate bite extra sales taxes would take from their incomes.
“That in itself will stimulate our economy beyond belief,” Justice said.
Meanwhile, higher-income earners would benefit dollar for dollar from a sunsetting income tax if they become state residents, the governor said. Companies that move their operations and employees to the state would provide their employees an immediate boost in take-home pay without giving any pay raises, he reasoned.
“When you put that kind of money right here in our back door in everybody’s hand, they’re going to spend it in our businesses,” Justice said. “Our businesses are going to boom.”
“If we do this, people will come,” he continued. “Wages will go up. More job opportunities. Property values will go up. … Absolutely, it will happen.”
A competing plan introduced by Delegate Eric Householder (R-Berkeley), chairman of the House of Delegates Finance Committee, would trim income taxes by $150 million over as many as 12 years without raising other taxes, relying on economic growth to generate more taxes at current rates to make up budget needs.
His House Bill 3300 would also hold state government spending flat to generate budget spending reductions over time. The bill would also create a special set aside fund to divert and accumulate other growing revenues, such as lottery earnings, to accelerate the income tax’s projected wind-down.
The more incremental approach of HB 3300 would allow lawmakers to adjust for economic projections that land off the mark of future budget predictions.
Senator Patricia Rucker (R-Jefferson), who serves on eight Senate committees but not the finance committee, said she’s still reviewing both the governor’s and Householder’s bills.
Debate on a wide range of differing details has only just begun between Republicans in the state Senate and the House of Delegates. With time running out, Justice could call a special legislative session that would focus solely on working out a legislative path to reduce or eliminate the income tax. The debate could also extend to next year’s legislative session.
“I always prefer cutting government spending over raising taxes, but, ultimately, I understand there will probably be some compromise required in order to get personal income tax reduction or elimination,” Rucker wrote in an email. “The different opinions are still pretty far apart right now and we are running short on time.”
Delegates Paul Espinosa and Wayne Clark, Republicans representing Jefferson County districts, said they support reducing or eliminating the income tax. But they agreed that raising sales taxes under the governor’s plan would hurt businesses in border-state counties such as Jefferson. Espinosa, a House finance committee member, and Clark, a public golf course owner, echoed Chamber of Commerce concerns.
They agreed that higher sales taxes, on top of extra 1 percent sales taxes municipalities charge — raising many sales taxes to nearly 9 percent— would cause more county residents to shop in neighboring counties in Maryland and Virginia.
Pointing to the governor’s tax increases to offset an income tax drawdown, however, Clark called SB 600 “not tax reform but simply a tax swap.” He said the House would be a “more carefully, conservatively and, most importantly, more fairly” constructed income tax reduction plan.
Emphasizing his experience as a businessman rather than a politician, Justice disputes such fears of cross-border sales tax fleeing as faulty and short-sighted.
If a lowered income tax draws new residents to Jefferson, that will spawn a larger pool of customers for businesses to serve and generate more revenue, he said.
“If you’re a lawyer downtown, how are you going to grow your business?” he asked. “There’s only one way to grow your business. That’s to have more people come. Without any question [the state is] losing people.”
Justice said attempts in other states to significantly curtail a sales tax with at least some new or at least modestly higher taxes have failed, Justice said. Nearly all of the proposed sales tax increases in the governor’s plan amount to pennies that consumers won’t even notice, he also maintained some sales taxes proposed for professional businesses, for example, trade businesses like carpenters and plumbers already have to charge, he said.
Justice also highlighted an example that the proposed added sales tax for a shot of whiskey that sells for $7 at a West Virginia restaurant he knows would amount to 7 cents. “Would I rather have that restaurant with everybody around me with $1,483 that can come to that restaurant and buy whatever they want to buy, or would I rather sit and be worried about the 7 cents?”
Delegate John Doyle (D-Jefferson) proposed a one-time $150 income tax reduction for all state residents, an alternative proposal that went nowhere in the Republican-controlled legislature.
Doyle said a one-time tax reduction would allow lawmakers to provide some tax relief while determining how West Virginia can and should spend its $677 million share of the recent $1.9 trillion federal stimulus windfall from Congress.
Doyle agreed with Espinosa and Clark that higher sales taxes would harm Jefferson County businesses by leading their customers to spend their money in surrounding out-of-state counties. However, the Senate and House income tax bills were built on faulty and overly intricate assumptions, he maintained.
State spending can’t be cut without undermining state services or responsibilities over time, Doyle said. The tax cuts envisioned in both bills aren’t likely to stimulate enough economic growth to fully replace the state’s previous level of tax revenues, he also said.
“Economic growth never replaces a tax cut dollar for dollar,” he offered as a past House finance committee vice-chair with 25 years of experience in the statehouse. “Even in the best of circumstances it only replaces some of the money.”