FISCAL NOTE

Date Requested: March 29, 2017
Time Requested: 03:23 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2714 Comm. Sub2. Eng. SB409
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 (from the bill title) reads, in part: “[R]elating generally to the 2017 Tax Reform Act; to the repeal of certain procedures relating to increased tax assessments; to the prospective balancing of the rate of the severance tax on the production of coal; to the increase of the rate of the consumers sales and service tax; to the elimination of certain exemptions from the consumers sales and service tax; to the increase of the rate of the use tax; to the reduction of the rate of the personal income tax and establishing effective dates with respect thereto.”
    
    According to our interpretation, passage of this bill would have both short-term and long-term implications. In the short term, the proposed bill would result in a potential net gain of roughly $88.7 million in FY2018 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases three months prior to the implementation of significant Personal Income Tax rate reductions compared to current Law. Thereafter, State General Revenue Fund tax collections are expected to decrease by roughly $18 million in FY2019, by roughly $40 million in FY2020, by roughly $65 million in FY2021, and by roughly $83 million in FY2022 based on current projections. Deviations from anticipated growth could adversely affect these estimates, particularly in out years.
    
    The bill contains a trigger mechanism to phase-out the Personal Income Tax when Consumer Sales Tax collections exceed $1.8 billion. This reduction must be taken in the context of historical tax collection trends. The total combined yield of both the Personal Income Tax and the Consumer Sales Tax was more than $3.1 billion in FY2016. These two taxes accounted for roughly 80 percent of total General Revenue Fund tax collections and roughly 97 percent of the nearly $1.2 billion in total General Revenue Fund tax revenue growth between FY2001 and FY2016. During this 15-year period, the average annual growth rate for the Personal Income Tax exceeded 4 percent. The average annual growth rate for the Consumer Sales Tax was nearly 2 percent and would have been slightly above 3 percent if not for removal of groceries from the tax base. Volatile Severance Tax collections grew at an average annual rate of roughly 2.2 percent over this period and Tobacco Excise Tax collections grew at an annual average rate of nearly 8 percent. However, Tobacco Tax revenues growth was attributable to expansion of the base to other tobacco products in 2001 and a significant tax rate increase on cigarettes in 2003. Excise tax collections otherwise tend to decrease over time. Over this 15-year period, average annual growth in General Fund tax collections was 2.5 percent and average annual consumer price inflation was 2 percent.
    
    To approximate the potential long term impact, we considered the impact of these changes under three economic growth scenarios. Scenario 1 represents the baseline economic growth analysis and reflects a trend similar to current six-year revenue projections. Scenario 2 represents a more aggressive economic trend and reflects a growth pattern of accelerated economic expansion. Scenario 3 represents a slower trend and reflects sluggish growth and potential for economic constriction. Beginning in either TY2022 (Scenario 2) or TY2023 (Scenario 1) or as late as TY2024 (Scenario 3), State Personal Income Tax rates would begin phasing down by 0.1 percentage points on January 1 of any given year for each $50 million in State Consumer Sales and Service Tax collections in excess of $1.8 billion for the fiscal year ending six months prior.
    
    We modeled change in tax collections associated with the tax phase-out trigger in the proposed bill between current FY2018 projections, absent any potential revenue enhancements, and FY2030 under each of these scenarios. Under the assumption of Scenario 1 with average annual growth in the sales tax yield of 2.7 percent, nominal FY2030 revenues fall roughly $1 billion below FY2018 and approximately $2.5 billion below current projections. Under Scenario 2, if growth doubles to an average of 5.5 percent per year, nominal FY2030 revenues fall roughly $750 million below FY2018. Under Scenario 3, if growth in sales tax slows to just 1.3 percent per year, nominal FY2030 revenues actually rise by more than $500 million due to a very slow rate of phase-down in Personal Income Tax rates beginning around 2024. However, we note this lags current FY2030 projections by nearly $1 billion. Even much higher growth rates in economic activity and sales tax collections of nearly 10 percent per year would result in a sharp decrease in total tax collections of up to $1 billion from current yield by as early as FY2024. The trigger mechanism results in the elimination of the Personal Income Tax by roughly 2030 at a steep fiscal price. The fiscal consequences would weigh negatively on economic growth in the State and would pose a counterweight to any economic growth associated with the movement from income tax to consumption tax.
    
    Under the provisions of this bill, the State Consumer Sales and Service and Use Tax rate would increase from 6 percent to 7 percent effective October 1, 2017. During the first full year of effect, this change would yield roughly $200 million for the State General Revenue Fund and $4.6 million for the Sales Tax Increment Financing (STIF) Districts. The State sales tax rate on food for home consumption would rise from 0 percent to 3.5 percent for a net full-year gain of nearly $92 million to the State General Revenue Fund and more than $2 million for STIF Districts. The effective tax rate on mobile homes used for personal residence would rise from 3 percent to 7 percent for a net full-year gain of $5.8 million. The 7 percent sales tax would also apply to certain services currently exempted from taxation. These services and net full-year estimated gains are outlined below:
    
    • Telecommunications services for a net full-year gain of $69.3 million.
    • Barbering, manicuring, cosmetology, embalming and funeral directing, and non-medical personal care services not otherwise funded by Medicaid or Medicare for a net full-year gain of roughly $10.5 million.
    • Regulated solid waste disposal charges for a net full-year gain of $4 million.
    • Electronic data processing services for a full-year net gain of $5.8 million.
    • Summer camp tuition, health fitness services, primary opinion research, music instruction, artistic performances, newspaper delivery services, and travel agency commissions for a full-year net gain of nearly $4.0 million.
    
    The bill also eliminates the current exemption for interstate passenger travel by bus, airplane, or other means. However, there are federal prohibitions in place that might prevent taxation of those services. Given that the sales tax provisions take effect on October 1, 2017, total General Revenue Fund collections for the eight-month collection period in FY2018 are expected to increase by roughly $261 million. Assuming normal growth in the sales tax base, FY2019 tax receipts would rise by slightly more than $400 million.
    
    Within the past five years, authority was given to municipal governments to impose a local sales tax of up to 1 percent in addition to the State sales tax. Currently, 28 municipal governments, accounting for roughly 17 percent of the State’s population, impose a local sales tax with an annual yield of roughly $70 million. An additional 11 municipal governments are scheduled to add a local sales tax beginning July 1, 2017. When the sales tax base is broadened, these municipal governments also gain additional tax collections. Passage of this bill would effectively enhance local municipal sales tax collections by roughly $15 million per year.
    
    In addition to a current State refundable owner-occupied real property tax paid credit for certain lower income senior citizens age 65 or older, which averages slightly more than $200 per claim, the provisions of this bill would create an additional State refundable tax credit for certain lower income senior citizens with an initial maximum cap of $200 per claim beginning in TY2017. The proposed tax credit would equal 1 percent of qualifying low-income seniors’ Federal Adjusted Gross Income (AGI) for those with AGI not higher than 125 percent of the federal poverty guideline based on household size. In 2017, the AGI limit would be $14,850 for a single person, $20,025 for a two-person household, and an additional $5,175 for each additional person. The amount of tax credit would phase-out for AGI in excess of 125 percent of the federal poverty guideline at a rate of 4 percent for every 1 percentage point of income above the 125 percent income level limit. The credit reduces to $0 for AGI above 150 percent of the federal poverty guideline (i.e., $17,820 for a single person and $24,030 for a two-person household in 2017). This tax credit would not apply to any low-income senior citizen whose only source of income is nontaxable social security benefits. The projected cost of this new refundable tax credit is roughly $5.0 million per year beginning in FY2018.
    
    Beginning in TY2018, the provisions of this bill would implement a sizable reduction in State Personal Income Tax rates for all filers. The current five-bracket tax rate structure with rates ranging from 3.0 percent to 6.5 percent would be replaced with a three-bracket system with rates of 1.85 percent on the first $20,000 (the first $10,000 for those married filing separately), 3.65 percent on taxable income ranging between $20,000 and $35,000 (between $10,000 and $17,500 for those married filing separately), and 5.45 percent for taxable income in excess of $35,000 ($17,500 or more for those married filing separately). General Revenue Fund Personal Income Tax collections would decrease by roughly $154 million in FY2018 and by $384 million in FY2019, the first full year under the new tax rate structure.
    
    The anticipated decrease in General Revenue Fund tax receipts in the first few years beyond FY2018, but prior to FY2023, would be partially attributable to the impact of a five-year phase-down of the 5.0 percent coal severance tax rate to 2.5 percent beginning July 1, 2017. Total coal severance tax collections would decrease by roughly $13.3 million in FY2018, by $30.0 million in FY2019, by $48.5 million in FY2020, by $67.3 million in FY2021, and by $80.0 million in FY2022. The State currently shares 5 percent of its net proceeds from the 4.65 percent State tax with coal producing counties. Due to lower total tax receipts, coal producing counties would lose nearly $0.5 million in FY2018, $1.3 million in FY2019, $2.2 million in FY2020, $3.2 million in FY2021, and $4.0 million in FY2022 and each year thereafter.
    
    The provisions of this bill also repeal a number of sections relating to current policy regarding the setting of local property tax rates by various levying bodies, including provisions for an automatic rollback of tax rates when projected yield on existing property exceeds a certain growth rate target absent a required public hearing to set tax rates at higher levels. These changes provide many local governments, who currently impose regular levy rates below the maximum level permitted by the 1932 Tax Rate Limitation Amendment to the State Constitution, with some additional flexibility to increase their tax rates.
    
    The primary objective of this bill appears to be the elimination of the Personal Income Tax. An examination of the complete financial structure of those States that choose not to impose a Personal Income Tax might be helpful in this process. These other states tend to rely much more heavily upon local governments and real property tax collections to provide services. States relying on local taxes for a majority of total State and local government financial responsibilities tend to spend more conservatively than others. However, most government financial responsibility resides at the State level in West Virginia because the State imposes very low real property taxes on residents and lower than average real property taxes on commercial properties. Such policy is not likely to change due to Constitutional provisions enacted nearly a century ago that greatly limit the property tax.
    
    In addition to higher than average real property taxes, states without income taxes tend to impose special hybrid taxes to help fill the revenue void. Some of these taxes include the Business and Occupation Tax in Washington, the Commerce Tax in Nevada, the Gross Margins Tax in Texas, and both the Business Profits Tax and Business Enterprise Tax in New Hampshire. Texas also has a very broad property tax that includes personal property taxes on machinery equipment and inventories. Many of the states without income taxes also impose significantly greater sales tax burden on business inputs than West Virginia. These states include Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Two states without a Personal Income Tax, Alaska and Wyoming, are fortunate to have a very high ratio of mining output per resident with high natural resource related tax collections exported to nonresidents. However, Alaska is currently exploring the possibility of adopting an income tax because the State’s natural resources are depleting. Alaska and Wyoming also rank at the top of all States in terms of total per capita State and local government expenditures.
    
    Government services are not immune from the rules of economics. Government service demand is higher when the price of service (tax liability) is low and vice versa. Absent the adoption of additional tax options beyond the general sales tax, West Virginia would have to offer significantly less government services than our neighboring states and far less than currently offered if the income tax on individuals was eliminated.
    
    Additional administrative costs incurred by the State Tax Department would be $20,000 for the remainder of FY2017, $157,000 in FY2018, and $125,000 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 20,000 157,000 125,000
Personal Services 0 105,000 105,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 2,000 0
Other 20,000 50,000 20,000
2. Estimated Total Revenues 0 88,700,000 0


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


    According to our interpretation, passage of this bill would have both short-term and long-term implications. In the short term, the proposed bill would result in a potential net gain of roughly $88.7 million in FY2018 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases three months prior to the implementation of significant Personal Income Tax rate reductions compared to current Law. Thereafter, State General Revenue Fund tax collections are expected to decrease by roughly $18 million in FY2019, by roughly $40 million in FY2020, by roughly $65 million in FY2021, and by roughly $83 million in FY2022 based on current projections. Deviations from anticipated growth could adversely affect these estimates, particularly in out years.
    
    The bill contains a trigger mechanism to phase-out the Personal Income Tax when Consumer Sales Tax collections exceed $1.8 billion. This reduction must be taken in the context of historical tax collection trends. The total combined yield of both the Personal Income Tax and the Consumer Sales Tax was more than $3.1 billion in FY2016. These two taxes accounted for roughly 80 percent of total General Revenue Fund tax collections and roughly 97 percent of the nearly $1.2 billion in total General Revenue Fund tax revenue growth between FY2001 and FY2016. During this 15-year period, the average annual growth rate for the Personal Income Tax exceeded 4 percent. The average annual growth rate for the Consumer Sales Tax was nearly 2 percent and would have been slightly above 3 percent if not for removal of groceries from the tax base. Volatile Severance Tax collections grew at an average annual rate of roughly 2.2 percent over this period and Tobacco Excise Tax collections grew at an annual average rate of nearly 8 percent. However, Tobacco Tax revenues growth was attributable to expansion of the base to other tobacco products in 2001 and a significant tax rate increase on cigarettes in 2003. Excise tax collections otherwise tend to decrease over time. Over this 15-year period, average annual growth in General Fund tax collections was 2.5 percent and average annual consumer price inflation was 2 percent.
    
    To approximate the potential long term impact, we considered the impact of these changes under three economic growth scenarios. Scenario 1 represents the baseline economic growth analysis and reflects a trend similar to current six-year revenue projections. Scenario 2 represents a more aggressive economic trend and reflects a growth pattern of accelerated economic expansion. Scenario 3 represents a slower trend and reflects sluggish growth and potential for economic constriction. Beginning in either TY2022 (Scenario 2) or TY2023 (Scenario 1) or as late as TY2024 (Scenario 3), State Personal Income Tax rates would begin phasing down by 0.1 percentage points on January 1 of any given year for each $50 million in State Consumer Sales and Service Tax collections in excess of $1.8 billion for the fiscal year ending six months prior.
    
    We modeled change in tax collections associated with the tax phase-out trigger in the proposed bill between current FY2018 projections, absent any potential revenue enhancements, and FY2030 under each of these scenarios. Under the assumption of Scenario 1 with average annual growth in the sales tax yield of 2.7 percent, nominal FY2030 revenues fall roughly $1 billion below FY2018 and approximately $2.5 billion below current projections. Under Scenario 2, if growth doubles to an average of 5.5 percent per year, nominal FY2030 revenues fall roughly $750 million below FY2018. Under Scenario 3, if growth in sales tax slows to just 1.3 percent per year, nominal FY2030 revenues actually rise by more than $500 million due to a very slow rate of phase-down in Personal Income Tax rates beginning around 2024. However, we note this lags current FY2030 projections by nearly $1 billion. Even much higher growth rates in economic activity and sales tax collections of nearly 10 percent per year would result in a sharp decrease in total tax collections of up to $1 billion from current yield by as early as FY2024. The trigger mechanism results in the elimination of the Personal Income Tax by roughly 2030 at a steep fiscal price. The fiscal consequences would weigh negatively on economic growth in the State and would pose a counterweight to any economic growth associated with the movement from income tax to consumption tax.
    
    Under the provisions of this bill, the State Consumer Sales and Service and Use Tax rate would increase from 6 percent to 7 percent effective October 1, 2017. During the first full year of effect, this change would yield roughly $200 million for the State General Revenue Fund and $4.6 million for the Sales Tax Increment Financing (STIF) Districts. The State sales tax rate on food for home consumption would rise from 0 percent to 3.5 percent for a net full-year gain of nearly $92 million to the State General Revenue Fund and more than $2 million for STIF Districts. The effective tax rate on mobile homes used for personal residence would rise from 3 percent to 7 percent for a net full-year gain of $5.8 million. The 7 percent sales tax would also apply to certain services currently exempted from taxation. These services and net full-year estimated gains are outlined below:
    
    • Telecommunications services for a net full-year gain of $69.3 million.
    • Barbering, manicuring, cosmetology, embalming and funeral directing, and non-medical personal care services not otherwise funded by Medicaid or Medicare for a net full-year gain of roughly $10.5 million.
    • Regulated solid waste disposal charges for a net full-year gain of $4 million.
    • Electronic data processing services for a full-year net gain of $5.8 million.
    • Summer camp tuition, health fitness services, primary opinion research, music instruction, artistic performances, newspaper delivery services, and travel agency commissions for a full-year net gain of nearly $4.0 million.
    
    The bill also eliminates the current exemption for interstate passenger travel by bus, airplane, or other means. However, there are federal prohibitions in place that might prevent taxation of those services. Given that the sales tax provisions take effect on October 1, 2017, total General Revenue Fund collections for the eight-month collection period in FY2018 are expected to increase by roughly $261 million. Assuming normal growth in the sales tax base, FY2019 tax receipts would rise by slightly more than $400 million.
    
    Within the past five years, authority was given to municipal governments to impose a local sales tax of up to 1 percent in addition to the State sales tax. Currently, 28 municipal governments, accounting for roughly 17 percent of the State’s population, impose a local sales tax with an annual yield of roughly $70 million. An additional 11 municipal governments are scheduled to add a local sales tax beginning July 1, 2017. When the sales tax base is broadened, these municipal governments also gain additional tax collections. Passage of this bill would effectively enhance local municipal sales tax collections by roughly $15 million per year.
    
    In addition to a current State refundable owner-occupied real property tax paid credit for certain lower income senior citizens age 65 or older, which averages slightly more than $200 per claim, the provisions of this bill would create an additional State refundable tax credit for certain lower income senior citizens with an initial maximum cap of $200 per claim beginning in TY2017. The proposed tax credit would equal 1 percent of qualifying low-income seniors’ Federal Adjusted Gross Income (AGI) for those with AGI not higher than 125 percent of the federal poverty guideline based on household size. In 2017, the AGI limit would be $14,850 for a single person, $20,025 for a two-person household, and an additional $5,175 for each additional person. The amount of tax credit would phase-out for AGI in excess of 125 percent of the federal poverty guideline at a rate of 4 percent for every 1 percentage point of income above the 125 percent income level limit. The credit reduces to $0 for AGI above 150 percent of the federal poverty guideline (i.e., $17,820 for a single person and $24,030 for a two-person household in 2017). This tax credit would not apply to any low-income senior citizen whose only source of income is nontaxable social security benefits. The projected cost of this new refundable tax credit is roughly $5.0 million per year beginning in FY2018.
    
    Beginning in TY2018, the provisions of this bill would implement a sizable reduction in State Personal Income Tax rates for all filers. The current five-bracket tax rate structure with rates ranging from 3.0 percent to 6.5 percent would be replaced with a three-bracket system with rates of 1.85 percent on the first $20,000 (the first $10,000 for those married filing separately), 3.65 percent on taxable income ranging between $20,000 and $35,000 (between $10,000 and $17,500 for those married filing separately), and 5.45 percent for taxable income in excess of $35,000 ($17,500 or more for those married filing separately). General Revenue Fund Personal Income Tax collections would decrease by roughly $154 million in FY2018 and by $384 million in FY2019, the first full year under the new tax rate structure.
    
    The anticipated decrease in General Revenue Fund tax receipts in the first few years beyond FY2018, but prior to FY2023, would be partially attributable to the impact of a five-year phase-down of the 5.0 percent coal severance tax rate to 2.5 percent beginning July 1, 2017. Total coal severance tax collections would decrease by roughly $13.3 million in FY2018, by $30.0 million in FY2019, by $48.5 million in FY2020, by $67.3 million in FY2021, and by $80.0 million in FY2022. The State currently shares 5 percent of its net proceeds from the 4.65 percent State tax with coal producing counties. Due to lower total tax receipts, coal producing counties would lose nearly $0.5 million in FY2018, $1.3 million in FY2019, $2.2 million in FY2020, $3.2 million in FY2021, and $4.0 million in FY2022 and each year thereafter.
    
    The provisions of this bill also repeal a number of sections relating to current policy regarding the setting of local property tax rates by various levying bodies, including provisions for an automatic rollback of tax rates when projected yield on existing property exceeds a certain growth rate target absent a required public hearing to set tax rates at higher levels. These changes provide many local governments, who currently impose regular levy rates below the maximum level permitted by the 1932 Tax Rate Limitation Amendment to the State Constitution, with some additional flexibility to increase their tax rates.
    
    The primary objective of this bill appears to be the elimination of the Personal Income Tax. An examination of the complete financial structure of those States that choose not to impose a Personal Income Tax might be helpful in this process. These other states tend to rely much more heavily upon local governments and real property tax collections to provide services. States relying on local taxes for a majority of total State and local government financial responsibilities tend to spend more conservatively than others. However, most government financial responsibility resides at the State level in West Virginia because the State imposes very low real property taxes on residents and lower than average real property taxes on commercial properties. Such policy is not likely to change due to Constitutional provisions enacted nearly a century ago that greatly limit the property tax.
    
    In addition to higher than average real property taxes, states without income taxes tend to impose special hybrid taxes to help fill the revenue void. Some of these taxes include the Business and Occupation Tax in Washington, the Commerce Tax in Nevada, the Gross Margins Tax in Texas, and both the Business Profits Tax and Business Enterprise Tax in New Hampshire. Texas also has a very broad property tax that includes personal property taxes on machinery equipment and inventories. Many of the states without income taxes also impose significantly greater sales tax burden on business inputs than West Virginia. These states include Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Two states without a Personal Income Tax, Alaska and Wyoming, are fortunate to have a very high ratio of mining output per resident with high natural resource related tax collections exported to nonresidents. However, Alaska is currently exploring the possibility of adopting an income tax because the State’s natural resources are depleting. Alaska and Wyoming also rank at the top of all States in terms of total per capita State and local government expenditures.
    Government services are not immune from the rules of economics. Government service demand is higher when the price of service (tax liability) is low and vice versa. Absent the adoption of additional tax options beyond the general sales tax, West Virginia would have to offer significantly less government services than our neighboring states and far less than currently offered if the income tax on individuals was eliminated.
    
    Additional administrative costs incurred by the State Tax Department would be $20,000 for the remainder of FY2017, $157,000 in FY2018, and $125,000 for each year thereafter.
    
    



Memorandum


    The stated purpose of this bill (from the bill title) reads, in part: “[R]elating generally to the 2017 Tax Reform Act; to the repeal of certain procedures relating to increased tax assessments; to the prospective balancing of the rate of the severance tax on the production of coal; to the increase of the rate of the consumers sales and service tax; to the elimination of certain exemptions from the consumers sales and service tax; to the increase of the rate of the use tax; to the reduction of the rate of the personal income tax and establishing effective dates with respect thereto.”
    
    The proposed bill fails to include in the bill title the purported new sections designated West Virginia Code §§ 11-13DD-1, 11-13DD-2, 11-13DD-3, and 11-13DD-4. Further, the bill is inconsistent as it lists those same new sections as “§11-13EE-1, §11-13EE-2, §11-13EE-3, and §11-13EE-4” in the enacting section (as opposed to “13DD”).
    
    The Fixed Income Credit for Low-Income Senior Citizens created in the proposed bill appears to be refundable but this provision is not explicitly stated. Also, the bill does not define the term “fixed income.” This term is not defined elsewhere in Article 11. Language for the proposed credit institutes a separate 90-day filing requirement, but it is unclear why this provision was included. If the intent was to tie this credit with the existing Senior Citizen Tax Credit, administration could be greatly enhanced by making both credits eligible at the same time.
    



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