FISCAL NOTE

Date Requested: February 01, 2019
Time Requested: 09:39 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2021 Introduced HB2001
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 2020, 25 percent of the Social Security benefits are exempt; in 2021, 50 percent, and in 2022 and thereafter, 100 percent.
    
    The bill proposes a decreasing modification for social security income when the federal adjusted gross income of a married couple filing a joint return does not exceed $100,000 or when a single individual or a married individual filing a separate return does not exceed $50,000. The proposed decreasing modification will be phased in over three years. For taxable years beginning on and after January 1, 2020, 25 percent of social security benefits are allowed as a decreasing modification from federal adjusted gross income. For taxable years beginning on and after January 1, 2021, 50 percent of social security benefits are allowed as a decreasing modification from federal adjusted gross income. For taxable years beginning on and after January 1, 2022, 100 percent of social security benefits are allowed as a decreasing modification from federal adjusted gross income. Additionally, according to the provisions of the bill, a taxpayer that claims the proposed decreasing modification for social security income will reduce or no longer qualify for the $8,000 senior citizen modification.
    
    According to our interpretation, passage of the bill would reduce General Revenue Fund collections by roughly $2.0 million in FY2021, $5.8 million in FY2022 and $25.2 million in FY2023. The value of the proposed tax exclusion will grow over time as the population ages and the number of individuals receiving social security benefits increases.
    
    The Governor’s official revenue estimate incorporates the assumption that the legislature would enact the Governor’s proposed bill to exempt taxable social security benefits from state taxation beginning in tax year 2019. Given that the provisions of this bill would not be in effect until TY2020 or FY2021, actual estimated revenues would be nearly $50 million higher for FY2020 relative to the official estimated under the assumption that this bill would pass in lieu of the Governor’s proposed bill.
    
    Additional administrative costs incurred by the State Tax Department would be $51,000 in FY2021, $50,000 per year in FY2022 and FY2023, and $40,000 in subsequent fiscal years.
    
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 40,000
Personal Services 0 0 40,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 -25,200,000


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


    The bill proposes a decreasing modification for social security income when the federal adjusted gross income of a married couple filing a joint return does not exceed $100,000 or when a single individual or a married individual filing a separate return does not exceed $50,000. The proposed decreasing modification will be phased in over three years. For taxable years beginning on and after January 1, 2020, 25 percent of social security benefits are allowed as a decreasing modification from federal adjusted gross income. For taxable years beginning on and after January 1, 2021, 50 percent of social security benefits are allowed as a decreasing modification from federal adjusted gross income. For taxable years beginning on and after January 1, 2022, 100 percent of social security benefits are allowed as a decreasing modification from federal adjusted gross income. Additionally, according to the provisions of the bill, a taxpayer that claims the proposed decreasing modification for social security income will reduce or no longer qualify for the $8,000 senior citizen modification.
    
    According to our interpretation, passage of the bill would reduce General Revenue Fund collections by roughly $2.0 million in FY2021, $5.8 million in FY2022 and $25.2 million in FY2023. The value of the proposed tax exclusion will grow over time as the population ages and the number of individuals receiving social security benefits increases.
    
    The Governor’s official revenue estimate incorporates the assumption that the legislature would enact the Governor’s proposed bill to exempt taxable social security benefits from state taxation beginning in tax year 2019. Given that the provisions of this bill would not be in effect until TY2020 or FY2021, actual estimated revenues would be nearly $50 million higher for FY2020 relative to the official estimated under the assumption that this bill would pass in lieu of the Governor’s proposed bill.
    
    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, upon full implementation of this bill, 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 different West Virginia taxpayers who are 65 years of age and filing a joint return. Both received taxable Social Security benefits of $23,000. Person A’s federal adjusted gross income is determined to be $99,999 and Person B’s federal adjusted gross income is determined to be $100,001.
    
    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 ($23,000) to determine West Virginia Taxable Income of $72,999 (after subtraction for two personal exemption). This individual’s tax due is $3,619. By comparison, Person B would not be able to reduce federal adjusted gross income by the amount of taxable Social Security benefits, thus West Virginia Taxable Income is $ 88,001 (after subtraction for two personal exemption and the full $8,000 senior modification). Person B would pay an additional $976 of West Virginia Personal Income Tax on incremental income of just $1. This individual’s tax due is $ 4,595.
    
    Additional administrative costs incurred by the State Tax Department would be $51,000 in FY2021, $50,000 per year in FY2022 and FY2023, and $40,000 in subsequent fiscal years.
    



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 2021, 50 percent; and in 2021 and thereafter, 100 percent.
    
    The bill does not define “social security benefits.” While the bill specifically mentions that it includes Old Age, Survivors and Disability Insurance Benefits and Supplemental Security Income, the proposed bill covers all the benefits received under 42 U.S.C., Chapter 7, which is the Social Security Act. This appears to include retirement benefits, disability insurance benefits, dependent benefits, survivor benefits, supplemental security income benefits, child’s disability benefits, disabled widow/widower benefits, and disabled adult child benefits. However, there are a few items in 42 U.S.C., Chapter 7, which may not be typically thought of as social security benefits, such as providing funds to assist the States in the administration of their unemployment compensation laws. 42 USCS §501. Also, there is no mention of the numerous federal regulations on the subject. Therefore, some definition of what benefits are included in this proposed modification would be useful to avoid confusion and possible litigation.
    
    Furthermore, the benefits provided under that federal Code section may change and, as a result, this bill may run into issues with Syl. Pt. 1, State v. Grinstead, 157 W.Va. 1001, 206 S.E.2d 912 (1974), which provides that “[a]lthough statutes adopting laws or regulations of other states, the federal government, or any of its agencies, effective at the time of adoption, are valid, attempted adoption of future laws, rules or regulations of other states, or of the federal government, or of its agencies, is unconstitutional as an unlawful delegation of the legislative power.”
    
    There are also Constitutional concerns regarding the bill. Certain taxpayers will be unable to take the modification on their social security benefits based upon their federal adjusted gross income. It is also possible that a taxpayer may raise an equal protection argument under Section 10 of Article III of the West Virginia Constitution. The state legislature “may make reasonable classifications in enacting statutes provided the classifications are based on some real and substantial relation to the objects sought to be accomplished by the legislation, and any person who assails any such classification has the burden of showing that it is essentially arbitrary and unreasonable.” Syl. Pt. 5, United Fuel Gas Co. v. Battle, 153 W. Va. 222, 167 S.E.2d 890 (1969).
    
    The bill title fails to include that there are internal effective dates in the bill.
    
    



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