FISCAL NOTE

Date Requested: February 09, 2017
Time Requested: 02:59 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1956 Introduced HB2307
CBD Subject: Municipalities


FUND(S):

Local governments

Sources of Revenue:

Other Fund local governments

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 terminate the Municipal Home Rule Pilot Program and the Municipal Home Rule Board, but allow municipalities the option to adopt any ordinance already enacted in another municipality through the Municipal Home Rule Pilot Program. There are numerous local program changes tied to the Municipal Home Rule Pilot Program (Home Rule). The content of this fiscal note only deals with the consequences of State and local finances associated with the provisions of this bill. The proposed bill would terminate the Municipal Home Rule Pilot Program effective July 1, 2017, but would allow all municipalities the same benefits as allowed to those previously qualifying under the Home Rule. The major fiscal benefit associated with Home Rule was the ability of qualifying municipal governments to impose a local sales tax at a small cost of some reduction in their local municipal business gross receipts tax (B&O Tax). Most qualifying municipalities added the local sales tax in exchange for mostly modest alterations to the local B&O tax structures, effectively allowing them to impose both taxes. Some cities made larger B&O Tax adjustments than others, but the amount of budgeted B&O Tax revenues in FY2017 for all 19 participating municipalities was still collectively greater than the amount budgeted in FY2016 and just 2.5 percent less than the amount collectively budgeted in FY2014. In addition to potentially further increasing the tax burden imposed in West Virginia, the automatic extension of the more limited local sales tax authority to all municipal governments currently imposing a local B&O Tax would add significant additional compliance costs for vendors as well as the Tax Department. There are 234 municipal governments representing less than 35 percent of the State’s residents in West Virginia, including 164 with budgeted B&O Tax collections for FY2017, an increase from 158 municipalities in 2004. As of July 1, 2016, Home Rule has allowed 19 of these municipalities, which account for nearly 17 percent of the State’s residents and 67 percent ($140 million) of all locally imposed B&O Tax, to also impose local sales taxes, generating an additional $66 million per year. Under current Law, an additional 11 cities will begin imposing local sales tax as of July 1, 2017, in addition to imposing local B&O Taxes of roughly $13 million per year. The provisions of this bill would potentially provide the same local sales tax authority to the remaining 134 municipalities with a local B&O Tax. In the near future, the number of local jurisdictions with a local sales tax in West Virginia could easily exceed the number of local jurisdictions imposing local sales tax in any of our contiguous states. As of July 1, 2017, the total number of municipal governments imposing a local sales tax in West Virginia will grow to 39. By comparison, only 38 cities have the authority to impose local sales tax in Virginia. All other local sales taxes imposed in Virginia, Pennsylvania, and Ohio are county sales taxes. West Virginia municipalities are relatively small in both population and geographical size and often unusually configured geographically in comparison to local sales tax jurisdictions in our contiguous states. The substantial increase in the number of municipalities that may elect to impose local sales taxes would result in an initial shock to both the State Tax Department and local vendors. Costs of this implementation to the Tax Department would be significant, but a portion would be offset by the administrative fee imposed for administering this tax. However, such offsets may occur after the fact and may not cover the full burden of the increase. The Tax Department notes that small municipalities tend to have greater costs than larger municipalities with respect to administration of local sales taxes, and anticipates smaller municipalities will comprise a significant portion of new local sales taxes should the provisions of the proposed bill take effect. Additional administrative costs incurred in FY2018 would be roughly $1.0 million. For each year thereafter, additional costs incurred by the Department would be nearly $400,000.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2017
Increase/Decrease
(use"-")
2018
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 1,000,000 390,000
Personal Services 0 280,000 280,000
Current Expenses 0 230,000 0
Repairs and Alterations 0 0 0
Assets 0 10,000 0
Other 0 480,000 110,000
2. Estimated Total Revenues 0 0 0


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


There are numerous local program changes tied to the Municipal Home Rule Pilot Program (Home Rule). The content of this fiscal note only deals with the consequences of State and local finances associated with the provisions of this bill. The proposed bill would terminate the Municipal Home Rule Pilot Program effective July 1, 2017, but would allow all municipalities the same benefits as allowed to those previously qualifying under the Home Rule. The major fiscal benefit associated with Home Rule was the ability of qualifying municipal governments to impose a local sales tax at a small cost of some reduction in their local municipal business gross receipts tax (B&O Tax). Most qualifying municipalities added the local sales tax in exchange for mostly modest alterations to the local B&O tax structures, effectively allowing them to impose both taxes. Some cities made larger B&O Tax adjustments than others, but the amount of budgeted B&O Tax revenues in FY2017 for all 19 participating municipalities was still collectively greater than the amount budgeted in FY2016 and just 2.5 percent less than the amount collectively budgeted in FY2014. In addition to potentially further increasing the tax burden imposed in West Virginia, the automatic extension of the more limited local sales tax authority to all municipal governments currently imposing a local B&O Tax would add significant additional compliance costs for vendors as well as the Tax Department. There are 234 municipal governments representing less than 35 percent of the State’s residents in West Virginia, including 164 with budgeted B&O Tax collections for FY2017, an increase from 158 municipalities in 2004. As of July 1, 2016, Home Rule has allowed 19 of these municipalities, which account for nearly 17 percent of the State’s residents and 67 percent ($140 million) of all locally imposed B&O Tax, to also impose local sales taxes, generating an additional $66 million per year. Under current Law, an additional 11 cities will begin imposing local sales tax as of July 1, 2017, in addition to imposing local B&O Taxes of roughly $13 million per year. The provisions of this bill would potentially provide the same local sales tax authority to the remaining 134 municipalities with a local B&O Tax. In the near future, the number of local jurisdictions with a local sales tax in West Virginia could easily exceed the number of local jurisdictions imposing local sales tax in any of our contiguous states. As of July 1, 2017, the total number of municipal governments imposing a local sales tax in West Virginia will grow to 39. By comparison, only 38 cities have the authority to impose local sales tax in Virginia. All other local sales taxes imposed in Virginia, Pennsylvania, and Ohio are county sales taxes. West Virginia municipalities are relatively small in both population and geographical size and often unusually configured geographically in comparison to local sales tax jurisdictions in our contiguous states. The substantial increase in the number of municipalities that may elect to impose local sales taxes would result in an initial shock to both the State Tax Department and local vendors. Costs of this implementation to the Tax Department would be significant, but a portion would be offset by the administrative fee imposed for administering this tax. However, such offsets may occur after the fact and may not cover the full burden of the increase. The Tax Department notes that small municipalities tend to have greater costs than larger municipalities with respect to administration of local sales taxes, and anticipates smaller municipalities will comprise a significant portion of new local sales taxes should the provisions of the proposed bill take effect. Additional administrative costs incurred in FY2018 would be roughly $1.0 million. For each year thereafter, additional costs incurred by the Department would be nearly $400,000.



Memorandum


The stated purpose of this bill is to terminate the Municipal Home Rule Pilot Program and the Municipal Home Rule Board, but allow municipalities the option to adopt any ordinance already enacted in another municipality through the Municipal Home Rule Pilot Program. The proposed bill title fails to note the internal effective date for these changes. Further, title does not state that the bill provides steps for passing an ordinance under this section, that the bill makes Legislative Findings, or address that the four initial participants in the Program are authorized to retain the ordinances enacted under the Municipal Home Rule Pilot Program. The use of the phrase “municipalities participating in the Municipal Home Rule Pilot Program” is vague and confusing as the proposed bill terminates this Program. The proposed bill is also unclear as to whether any new ordinances must be identical to the ones already submitted by the cities now participating in the Program, or if all cities now can pass any ordinance so long as it meets the criteria in this bill. The bill continues to impose certain restrictions on municipalities despite also removing the Municipal Home Rule Board. Without the Board’s oversight, it is unclear who is to determine if a municipality has complied with these requirements (exclusive of the municipal sales and use taxes authorized in this section, which must still be administered, enforced, and collected by the Tax Commissioner). To that end, the proposed bill could allow a large and rapid increase in the number of municipalities participating; due to timing shock, it is likely such an event would overwhelm the Tax Department’s current resources.



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