FISCAL NOTE

Date Requested: January 31, 2018
Time Requested: 01:15 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1641 Introduced HB4017
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Decreases Existing Revenue, Increases Existing Expenses



Fiscal Note Summary


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


    The stated purpose of this bill is to create a partial state income tax exemption for Social Security benefits received by taxpayers with federal adjusted gross income under $100,000 if married filing jointly, or under $50,000 if single or married filing separately. The exemption would be phased in to a full exemption over 3 years. For taxable years beginning in 2019, 25% of the Social Security benefits are exempt; in 2020, 50 percent; and in 2021 and thereafter, 100 percent.
    
    According to the provisions of this bill, a percentage of Social Security benefits would be subtracted from eligible taxpayers’ federal adjusted gross income for West Virginia Personal Income Tax purposes effective for taxable years beginning on and after January 1, 2019. The amount subtracted is based on the taxpayer’s Federal adjusted gross income and filing status and would be included in the calculation of the $8,000 senior citizen modification. Federal adjusted gross income limitations are $100,000 for married taxpayers who file a joint return and $50,000 for single filers or married individuals filing separate returns. The proposed bill would exempt 25 percent of taxable Social Security benefits from West Virginia Personal Income Tax in TY2019, 50 percent of such benefits in TY2020, and 100 percent of such benefits in TY2021 and each subsequent taxable period.
    
    According to our interpretation, passage of this bill would result in revenue losses of roughly $2.9 million in FY2020, $7.8 million in FY2021, and $34.3 million in FY2022. Smaller revenue losses in FY2020 and FY2021 are attributable to the limitation on the amount of social security benefits that can be deducted and the inclusion of this modification in the calculation for the $8,000 senior citizens’ modification. In addition, much of the losses in FY2020 and FY2021 stem from those aged 62 to 64 years. The value of this proposed modification will escalate over time as members of the baby boomer generation begin receiving Social Security benefits.
    
    It is also important to note the presence of a cliff in which Taxpayers with similar liabilities will receive different tax treatment. Significant inequity occurs when taxpayers slightly below the income cutoff are eligible to deduct taxable Social Security benefits while Taxpayers slightly above the cutoff are not eligible for the modification. For example, consider two West Virginia residents who are 62 years of age. Both received Social Security benefits of $14,000. Person A has total income, excluding Social Security benefits, of $38,000 for the year and Person B has total income, again excluding Social Security benefits, of $38,200. After completing the Social Security Benefits Worksheet provided by the IRS, Person A’s federal adjusted gross income is determined to be $49,900 and Person B’s federal adjusted gross income is determined to be $50,100.
    
    Under the proposed bill, Person A would qualify for the decreasing modification for excluding taxable Social Security Benefits while Person B would not. If we assume full exclusion of taxable Social Security benefits are in place, Person A will be able to reduce federal adjusted gross income by the amount of taxable Social Security benefits (e.g., $11,900) to determine West Virginia Taxable Income of $36,000 (after subtraction for one personal exemption). This individual’s tax due is $1,395. By comparison, Person B would not be able to reduce federal adjusted gross income by the amount of taxable Social Security benefits (e.g., $11,900), thus West Virginia Taxable Income is $48,100 (after subtraction for one personal exemption). Person B would pay an additional $668 of West Virginia Personal Income Tax on incremental income of just $200. This individual’s tax due is $2,063.
    
    Additional administrative costs incurred by the State Tax Department would be $20,000 in FY2020, FY2021, and FY2022.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2018
Increase/Decrease
(use"-")
2019
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 20,000
Personal Services 0 0 10,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 10,000
2. Estimated Total Revenues 0 0 0


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


    According to the provisions of this bill, a percentage of Social Security benefits would be subtracted from eligible taxpayers’ federal adjusted gross income for West Virginia Personal Income Tax purposes effective for taxable years beginning on and after January 1, 2019. The amount subtracted is based on the taxpayer’s Federal adjusted gross income and filing status and would be included in the calculation of the $8,000 senior citizen modification. Federal adjusted gross income limitations are $100,000 for married taxpayers who file a joint return and $50,000 for single filers or married individuals filing separate returns. The proposed bill would exempt 25 percent of taxable Social Security benefits from West Virginia Personal Income Tax in TY2019, 50 percent of such benefits in TY2020, and 100 percent of such benefits in TY2021 and each subsequent taxable period.
    
    According to our interpretation, passage of this bill would result in revenue losses of roughly $2.9 million in FY2020, $7.8 million in FY2021, and $34.3 million in FY2022. Smaller revenue losses in FY2020 and FY2021 are attributable to the limitation on the amount of social security benefits that can be deducted and the inclusion of this modification in the calculation for the $8,000 senior citizens’ modification. In addition, much of the losses in FY2020 and FY2021 stem from those aged 62 to 64 years. The value of this proposed modification will escalate over time as members of the baby boomer generation begin receiving Social Security benefits.
    
    It is also important to note the presence of a cliff in which Taxpayers with similar liabilities will receive different tax treatment. Significant inequity occurs when taxpayers slightly below the income cutoff are eligible to deduct taxable Social Security benefits while Taxpayers slightly above the cutoff are not eligible for the modification. For example, consider two West Virginia residents who are 62 years of age. Both received Social Security benefits of $14,000. Person A has total income, excluding Social Security benefits, of $38,000 for the year and Person B has total income, again excluding Social Security benefits, of $38,200. After completing the Social Security Benefits Worksheet provided by the IRS, Person A’s federal adjusted gross income is determined to be $49,900 and Person B’s federal adjusted gross income is determined to be $50,100.
    
    Under the proposed bill, Person A would qualify for the decreasing modification for excluding taxable Social Security Benefits while Person B would not. If we assume full exclusion of taxable Social Security benefits are in place, Person A will be able to reduce federal adjusted gross income by the amount of taxable Social Security benefits (e.g., $11,900) to determine West Virginia Taxable Income of $36,000 (after subtraction for one personal exemption). This individual’s tax due is $1,395. By comparison, Person B would not be able to reduce federal adjusted gross income by the amount of taxable Social Security benefits (e.g., $11,900), thus West Virginia Taxable Income is $48,100 (after subtraction for one personal exemption). Person B would pay an additional $668 of West Virginia Personal Income Tax on incremental income of just $200. This individual’s tax due is $2,063.
    
    Additional administrative costs incurred by the State Tax Department would be $20,000 in FY2020, FY2021, and FY2022.
    



Memorandum


    The stated purpose of this bill is to create a partial state income tax exemption for Social Security benefits received by taxpayers with federal adjusted gross income under $100,000 if married filing jointly, or under $50,000 if single or married filing separately. The exemption would be phased in to a full exemption over 3 years. For taxable years beginning in 2019, 25% of the Social Security benefits are exempt; in 2020, 50 percent; and in 2021 and thereafter, 100 percent.
    
    There is a title defect in this bill in that it refers to the “modification” as an “exemption.”
    
    Additionally, paragraph (E) of proposed subdivision (12) provides that, if any part of the subdivision is found to be unconstitutional, the “section” will become null and void. The intent may be to void the subdivision, not all of W.Va. Code §11-21-12. As written, voiding the section would remove other provisions for modifications than the one proposed by this bill.
    



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