FISCAL NOTE
Date Requested: January 13, 2022
Time Requested: 03:24 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1916 |
Introduced |
SB265 |
|
|---|
| 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 exempt certain irrevocable trusts created and administered in the State of West Virginia from the state income tax.
According to our interpretation, the bill would create a Personal Income Tax exemption for an Irrevocable Trust which is created under the laws of the State of West Virginia and administered by any West Virginia state chartered banking institution or a federally chartered banking institution with its corporate headquarters located in this state. The West Virginia Division of Financial Institutions currently lists forty-five state-chartered banks and six federally chartered banks with headquarters in West Virginia. According to the West Virginia Division of Financial Institutions, fifteen of the state-chartered banks are currently exercising Fiduciary powers. The bill, if passed, would be effective for taxable years beginning on or after January 1, 2023.
Based on our interpretation, the proposed legislation would decrease General Revenue Fund collections by $600,000 in FY2023, $1.9 million in FY2024, and by increasing amounts in subsequent fiscal years. Tax exemptions of this type have the potential to alter taxpayer behavior. It is possible that in future periods more trusts will be set up as Irrevocable Trusts in order to capture the tax benefits of the exemption.
Additional administrative costs incurred by the State Tax Department would be $5,000 in FY2023.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2022
Increase/Decrease
(use"-") |
2023
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
5,000 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
5,000 |
0 |
| 2. Estimated Total Revenues |
0 |
-600,000 |
-1,900,000 |
Explanation of above estimates (including long-range effect):
According to our interpretation, the bill would create a Personal Income Tax exemption for an Irrevocable Trust which is created under the laws of the State of West Virginia and administered by any West Virginia state chartered banking institution or a federally chartered banking institution with its corporate headquarters located in this state. The West Virginia Division of Financial Institutions currently lists forty-five state-chartered banks and six federally chartered banks with headquarters in West Virginia. According to the West Virginia Division of Financial Institutions, fifteen of the state-chartered banks are currently exercising Fiduciary powers. The bill, if passed, would be effective for taxable years beginning on or after January 1, 2023.
Based on our interpretation, the proposed legislation would decrease General Revenue Fund collections by $600,000 in FY2023, $1.9 million in FY2024, and by increasing amounts in subsequent fiscal years. Tax exemptions of this type have the potential to alter taxpayer behavior. It is possible that in future periods more trusts will be set up as Irrevocable Trusts in order to capture the tax benefits of the exemption.
Additional administrative costs incurred by the State Tax Department would be $5,000 in FY2023.
Memorandum
The stated purpose of this bill is to exempt certain irrevocable trusts created and administered in the State of West Virginia from the state income tax.
Article X of the West Virginia Constitution requires that taxation “be equal and uniform throughout the state…”. The proposed language in the bill may arguably violate Section 10 of Article III of the West Virginia Constitution, which is the state’s equal protection clause. 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.” Sylb. Pt. 5, United Fuel Gas Co. v. Battle, 153 W.Va. 222, 167 S.E.2d 890 (1969).
The bill also seems to present a possible violation of the dormant Commerce Clause. The dormant Commerce Clause precludes States from imposing a tax which discriminates against interstate commerce either by providing a direct commercial advantage to local business, or by subjecting interstate commerce to the burden of “multiple taxation.” Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 3L.E.2d.2d 421(1959).
The bill seems to present a prima facie constitutional violation of the dormant Commerce Clause by giving favorable tax treatment to trusts created and administered by West Virginia state chartered banks or by a federally chartered bank with its corporate headquarters in West Virginia. Whether a challenge would be successful is obviously unknown.
The bill does not give the Tax Commissioner authority to prescribe appropriate forms on which individuals claiming the exemption can document their qualification for the exemption; nor is any rule-making authority given.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov