FISCAL NOTE
Date Requested: March 20, 2017
Time Requested: 02:47 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 3282 |
Introduced |
SB683 |
|
|---|
| CBD Subject: |
Taxation |
|---|
|
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 provide for a fiscally responsible budget through fair tax adjustments. The bill increases the tax on corporations holding more than 10,000 acres of land; increases the rate of the consumers sales and service tax; and increases the rate of the use tax. The bill provides effective dates for those rate changes and changes the words “six percent” to “the current consumers sales and service tax rate or use tax rate” where those terms are used. The bill imposes the consumers sales tax on telecommunications service and ancillary services and imposes the consumer sales and service tax on the sale of certain digital goods. The bill imposes the consumer sales and service tax on personal services. It adjusts the personal income tax rates to lower rates on taxable income between $10,000 and $150,000 for joint filers and between $5,000 and $75,000 for individuals filing separate returns. The bill creates new personal income tax rates for higher earners; exempting social security benefits from the personal income tax if the taxpayer’s total taxable income is below $50,000; amending the West Virginia exemption for residents such that it is reduced for residents with more than $100,000 in West Virginia taxable income. The bill exempts monetary benefits derived from military retirement from personal income tax obligations. The bill creates the West Virginia Earned Income Tax Credit and authorizes a refundable tax credit based upon the federal Earned Income Tax Credit. It determines eligibility for the credit the amount of the credit. It authorizes rule-making authority. The bill replaces the flat corporate net income tax rate with a tiered rate that is consistent with the personal income tax rates, thereby reducing the tax rate for businesses with lower annual income and increasing the tax rate for higher earning businesses and sets forth effective dates.
According to our interpretation, the proposed bill would (1) increase the Consumer Sales and Service Tax and Use Tax (sales tax) rate; (2) broaden the sales tax base; (3) alter the structure of Personal Income Tax brackets and change rates; (4) alter the structure of the Corporation Net Income Tax by implementing a bracket structure; and (5) raise the Excess Acreage Tax rate. Each of these changes are discussed in this analysis. We note that, due to potential behavioral shifts by affected Taxpayers, we anticipate a minimal revenue gain from the Excess Acreage Tax increase to $0.50 per acre.
The bill would increase the sales tax rate to 7 percent and broaden the sales tax base by subjecting telecommunications services, digital goods, and personal services to the tax effective July 1, 2017. Based on our understanding, the proposed bill would remove the exemption for non-medical personal services only. If the intent of the proposed bill was to include such services, the enclosed estimate would need to be revised. Timing of these changes would result in a partial-year of collections in FY2018, with the first full-year effect occurring in FY2019. We estimate that these gains could be $255.1 million and $285.1 million, respectively. These increases are largely driven by the increased sales tax rate.
Proposed changes to the current Personal Income Tax structure would result in revenue gains by broadening tax brackets, imposing higher rates on upper-tier incomes, and reducing the amount of allowable personal exemptions based on a tiered structure. However, these gains are largely offset by the inclusion of the West Virginia Earned Income Tax Credit (EITC) provision and changes to military retirement and taxable Social Security benefits modifications. With the exception of the adjustment for military retirement benefits, which is placed into effect for taxable years beginning on and after January 1, 2018, other changes in the proposed bill would be in effect for taxable years beginning on and after January 1, 2017. Changes to West Virginia Code §11-21-16, affecting the personal exemption, appear to make this change retroactive to personal income prior to January 1, 2017. We assume the intent of this section is to make these changes effective on and after January 1, 2017. The anticipated net revenue gain resulting from these changes to the Personal Income Tax could be approximately $5.1 million in FY2018 and $5.6 million in FY2019. We caution that establishing a State EITC based on the provisions of the EITC provided by the federal government could place West Virginia in a susceptible position if federal EITC provisions were to change. Such changes could place unexpected burdens on General Revenue Fund collections.
The proposed bill would replace the current tax rate on the taxable income of corporate Taxpayers with a tiered rate structure for taxable periods beginning on and after January 1, 2017. The current structure would generally increase Corporation Net Income Tax liabilities on corporations with higher taxable incomes and reduce liabilities for corporations with lower taxable incomes. However, revenue gains among higher income Taxpayers could be offset by subsequent increases in applicable credit amounts. Considering current projections and due to the volatility of Corporation Net Income Tax, we estimate annual General Revenue Fund gains of roughly $15 million to $20 million for FY2018 and FY2019.
In total, the estimated impact on the General Revenue Fund resulting from the changes in the proposed bill could result in revenue gains of $275.2 million in FY2018 and $308.3 million in FY2019. It is possible the proposed bill could result in some impact on FY2017 revenues; however, such impacts are expected to be minor.
Additional administrative costs incurred by the State Tax Department are $12,000 in FY2017, $127,000 in FY2018, and $75,000 for each year thereafter.
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 |
12,000 |
127,000 |
75,000 |
| Personal Services |
0 |
75,000 |
75,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
2,000 |
0 |
| Other |
12,000 |
50,000 |
0 |
| 2. Estimated Total Revenues |
0 |
275,200,000 |
308,300,000 |
Explanation of above estimates (including long-range effect):
According to our interpretation, the proposed bill would (1) increase the Consumer Sales and Service Tax and Use Tax (sales tax) rate; (2) broaden the sales tax base; (3) alter the structure of Personal Income Tax brackets and change rates; (4) alter the structure of the Corporation Net Income Tax by implementing a bracket structure; and (5) raise the Excess Acreage Tax rate. Each of these changes are discussed in this analysis. We note that, due to potential behavioral shifts by affected Taxpayers, we anticipate a minimal revenue gain from the Excess Acreage Tax increase to $0.50 per acre.
The bill would increase the sales tax rate to 7 percent and broaden the sales tax base by subjecting telecommunications services, digital goods, and personal services to the tax effective July 1, 2017. Based on our understanding, the proposed bill would remove the exemption for non-medical personal services only. If the intent of the proposed bill was to include such services, the enclosed estimate would need to be revised. Timing of these changes would result in a partial-year of collections in FY2018, with the first full-year effect occurring in FY2019. We estimate that these gains could be $255.1 million and $285.1 million, respectively. These increases are largely driven by the increased sales tax rate.
Proposed changes to the current Personal Income Tax structure would result in revenue gains by broadening tax brackets, imposing higher rates on upper-tier incomes, and reducing the amount of allowable personal exemptions based on a tiered structure. However, these gains are largely offset by the inclusion of the West Virginia Earned Income Tax Credit (EITC) provision and changes to military retirement and taxable Social Security benefits modifications. With the exception of the adjustment for military retirement benefits, which is placed into effect for taxable years beginning on and after January 1, 2018, other changes in the proposed bill would be in effect for taxable years beginning on and after January 1, 2017. Changes to West Virginia Code §11-21-16, affecting the personal exemption, appear to make this change retroactive to personal income prior to January 1, 2017. We assume the intent of this section is to make these changes effective on and after January 1, 2017. The anticipated net revenue gain resulting from these changes to the Personal Income Tax could be approximately $5.1 million in FY2018 and $5.6 million in FY2019. We caution that establishing a State EITC based on the provisions of the EITC provided by the federal government could place West Virginia in a susceptible position if federal EITC provisions were to change. Such changes could place unexpected burdens on General Revenue Fund collections.
The proposed bill would replace the current tax rate on the taxable income of corporate Taxpayers with a tiered rate structure for taxable periods beginning on and after January 1, 2017. The current structure would generally increase Corporation Net Income Tax liabilities on corporations with higher taxable incomes and reduce liabilities for corporations with lower taxable incomes. However, revenue gains among higher income Taxpayers could be offset by subsequent increases in applicable credit amounts. Considering current projections and due to the volatility of Corporation Net Income Tax, we estimate annual General Revenue Fund gains of roughly $15 million to $20 million for FY2018 and FY2019.
In total, the estimated impact on the General Revenue Fund resulting from the changes in the proposed bill could result in revenue gains of $275.2 million in FY2018 and $308.3 million in FY2019. It is possible the proposed bill could result in some impact on FY2017 revenues; however, such impacts are expected to be minor.
Additional administrative costs incurred by the State Tax Department are $12,000 in FY2017, $127,000 in FY2018, and $75,000 for each year thereafter.
Memorandum
The stated purpose of this bill is to provide for a fiscally responsible budget through fair tax adjustments. The bill increases the tax on corporations holding more than 10,000 acres of land; increases the rate of the consumers sales and service tax; and increases the rate of the use tax. The bill provides effective dates for those rate changes and changes the words “six percent” to “the current consumers sales and service tax rate or use tax rate” where those terms are used. The bill imposes the consumers sales tax on telecommunications service and ancillary services and imposes the consumer sales and service tax on the sale of certain digital goods. The bill imposes the consumer sales and service tax on personal services. It adjusts the personal income tax rates to lower rates on taxable income between $10,000 and $150,000 for joint filers and between $5,000 and $75,000 for individuals filing separate returns. The bill creates new personal income tax rates for higher earners; exempting social security benefits from the personal income tax if the taxpayer’s total taxable income is below $50,000; amending the West Virginia exemption for residents such that it is reduced for residents with more than $100,000 in West Virginia taxable income. The bill exempts monetary benefits derived from military retirement from personal income tax obligations. The bill creates the West Virginia Earned Income Tax Credit and authorizes a refundable tax credit based upon the federal Earned Income Tax Credit. It determines eligibility for the credit the amount of the credit. It authorizes rule-making authority. The bill replaces the flat corporate net income tax rate with a tiered rate that is consistent with the personal income tax rates, thereby reducing the tax rate for businesses with lower annual income and increasing the tax rate for higher earning businesses and sets forth effective dates.
The proposed bill contains a title defect. With respect to West Virginia Code §11-12-75, the title states that the acreage tax is to be applied annually, but there is no language in the body of the bill imposing the annual assessment.
The proposed bill removes the exemption of sales tax from digital goods. West Virginia Code §11-15-3d purports to “clarify” the sales tax on certain digital goods but would be better described as “imposing” the tax. The bill does not define such terms as “electronically or digitally delivered, streamed or accessed,” which could make this bill difficult to administer and could result in litigation, nor does the bill specifically provide that the use tax also applies. Further, the bill does not comport with the language of the Streamlined Sales and Use Tax Agreement (SSUTA), of which West Virginia is a member state.
The proposed bill changes the effective date in subsection (c) of West Virginia Code §11-21-4e but fails to provide for that section of Code having been deleted. These rates are needed for TY2016. This proposal would benefit from a new section for rates beginning on and after January 1, 2017. Further, given that one quarter of TY2017 has already passed, this effective date could cause issue with withholding and estimated payments under the current structure.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov