FISCAL NOTE

Date Requested: February 20, 2016
Time Requested: 01:33 PM

2782	Introduced	SB655
Agency:	Tax Department, State
CBD Number:	Version:	Bill Number:	Resolution Number:
CBD Subject:

FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Neither Program nor Fund

Fiscal Note Summary

Effect this measure will have on costs and revenues of state government.

The stated purpose of this bill is to reduce the severance tax on coal to 4 percent, eliminate the exception for professional services from the consumer use and sales tax, and provide an adjustment decreasing federal adjusted gross income of up to $20,000 in social security benefits. The proposed legislation would eliminate the professional service exemption within ninety days of passage, would reduce the overall severance tax rate on coal, limestone and sandstone for taxable years beginning on or after the effective date of the bill and would exempt the first $20,000 of gross social security benefits from state personal income tax beginning in CY2017. Under the provisions of this bill, West Virginia would become the first state with a consumer sales and use tax imposed on the consumer to attempt to tax professional services. Other states taxing one or more professional services (i.e., Hawaii, New Mexico, Ohio, South Dakota and Washington) impose a gross sales tax or business and occupation tax on the vendor of such services. In West Virginia, professional services are taxed under municipal business and occupation taxes and certain professional health services are taxed under state health care provider taxes. In addition to economic leakages, there would be several other revenue leakages associated with taxation of professional exemptions due to other sales tax exemptions in the Code, including exemptions for purchases by government, churches and other tax exempt organizations and direct use tax exemptions for various business groups. The provisions of the proposed bill would tax medical professional services as well as all other professional services. This fiscal note does not provide an estimate of tax revenue gain attributable to the taxation of medical services due to various compliance problems associated with attempts to tax consumers of such services, when payments for services are usually partially or fully paid by means of health insurance payers or government payers, including the Federal government via Medicare and Medicaid. Significant equity issues would also arise from attempts to tax these consumers. Based on a projected effective date of June 20, 2016 for the imposition of taxes on professional services, an effective date of January 1, 2017 for the reduction in severance tax rates and an effective date of January 1, 2017 for the exemption of some social security benefits from state taxation, provisions of this bill would result in a net gain of roughly $61.0 million in FY2017 and a net loss of roughly $15.0 million or more beginning in FY2018. The net revenue loss in FY2018 would include roughly $2.0 million in state severance tax revenue sharing payments with coal producing counties. When fully implemented, the revenue gain from taxation of professional services, other than medical services, would be roughly $87 million per year. The net loss of reduced severance taxes for coal, limestone and sandstone would be roughly $43.0 million per year. The net loss associated with a partial exemption of the first $20,000 of social security benefits would be at least $59 million in FY2018 with additional losses in future years due to expanding population receiving such benefits. Additional administrative costs to the State Tax Department would be $22,500 in FY2017 and $20,000 for each year thereafter. No additional costs are expected to be incurred in FY2016.

Fiscal Note Detail

Effect of Proposal	Fiscal Year
Effect of Proposal	2016 Increase/Decrease (use"-")	2017 Increase/Decrease (use"-")	Fiscal Year (Upon Full Implementation)
1. Estmated Total Cost	0	22,500	20,000
Personal Services	0	5,000	15,000
Current Expenses	0	0	0
Repairs and Alterations	0	0	0
Assets	0	0	0
Other	0	17,500	5,000
2. Estimated Total Revenues	0	61,000,000	-15,000,000

Explanation of above estimates (including long-range effect):

The proposed legislation would eliminate the professional service exemption within ninety days of passage, would reduce the overall severance tax rate on coal, limestone and sandstone for taxable years beginning on or after the effective date of the bill and would exempt the first $20,000 of gross social security benefits from state personal income tax beginning in CY2017. Under the provisions of this bill, West Virginia would become the first state with a consumer sales and use tax imposed on the consumer to attempt to tax professional services. Other states taxing one or more professional services (i.e., Hawaii, New Mexico, Ohio, South Dakota and Washington) impose a gross sales tax or business and occupation tax on the vendor of such services. In West Virginia, professional services are taxed under municipal business and occupation taxes and certain professional health services are taxed under state health care provider taxes. In addition to economic leakages, there would be several other revenue leakages associated with taxation of professional exemptions due to other sales tax exemptions in the Code, including exemptions for purchases by government, churches and other tax exempt organizations and direct use tax exemptions for various business groups. The provisions of the proposed bill would tax medical professional services as well as all other professional services. This fiscal note does not provide an estimate of tax revenue gain attributable to the taxation of medical services due to various compliance problems associated with attempts to tax consumers of such services, when payments for services are usually partially or fully paid by means of health insurance payers or government payers, including the Federal government via Medicare and Medicaid. Significant equity issues would also arise from attempts to tax these consumers. Based on a projected effective date of June 20, 2016 for the imposition of taxes on professional services, an effective date of January 1, 2017 for the reduction in severance tax rates and an effective date of January 1, 2017 for the exemption of some social security benefits from state taxation, provisions of this bill would result in a net gain of roughly $61.0 million in FY2017 and a net loss of roughly $15.0 million or more beginning in FY2018. The net revenue loss in FY2018 would include roughly $2.0 million in state severance tax revenue sharing payments with coal producing counties. When fully implemented, the revenue gain from taxation of professional services, other than medical services, would be roughly $87 million per year. The net loss of reduced severance taxes for coal, limestone and sandstone would be roughly $43.0 million per year. The net loss associated with a partial exemption of the first $20,000 of social security benefits would be at least $59 million in FY2018 with additional losses in future years due to expanding population receiving such benefits. Additional administrative costs to the State Tax Department would be $22,500 in FY2017 and $20,000 for each year thereafter. No additional costs are expected to be incurred in FY2016.

Memorandum

Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov