FISCAL NOTE
Date Requested: January 20, 2022
Time Requested: 02:36 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 2176 |
Introduced |
SB457 |
|
|---|
| 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 reduce the consumer sales and service tax from six percent to five percent as well as establish a process which continues to gradually reduce the consumer sales and service tax every time the combined balance of the Rainy Day Fund reaches $1,100,000,000.
Per our interpretation, the bill would reduce the State Consumer Sales and Service Tax from the current rate of 6% to 4.75% effective January 1, 2023. The bill excludes gasoline and special fuel sales which remain at 5%. The bill would further reduce the Consumer Sales and Service Tax by 0.25%, after June 30, 2022 and annually thereafter, when the combined balance of funds in the Revenue Fund Shortfall Reserve Fund and the Revenue Fund Shortfall Reserve Fund -Part B exceeds $1,100,000,000. The effective date of the additional 0.25% reductions would be January 1st of the following year. In addition, effective June 30, 2022, if the combined balance in the Revenue Shortfall Reserve Funds is equal to or greater than $1,100,000,000 at the end of any fiscal year, then $62,500,000 is transferred to the General Revenue Fund until the combined balance of the funds is equal to or greater than $1,037,500,000 but less than $1,100,000,000. Under current law, the combined balance of the Revenue Shortfall Reserve funds will likely exceed $1.1 billion as of the fiscal year ending June 30, 2023. The effect of multiple tax reductions of 0.25% over time would be cumulative, and the transfers into the General Revenue Fund provided for in the bill would be limited by the combined balance of the Revenue Shortfall Reserve Funds. The trigger provisions would contribute to additional revenue volatility in future years with both major spikes and troughs in annual revenue for the General Revenue Fund. Such instability would create future budget challenges.
Based on our interpretation, the reduction of the State Consumer Sales and Service Tax from 6% to 4.75% would decrease General Revenue Fund collections by $135.0 million in FY2023, $332.0 million in FY2024, and by increasing amounts in subsequent fiscal years.
In addition, revenue collections for Special Districts imposing the Special District Excise Tax would also decrease over time due to the proposed tax rate reductions. The initial decrease would be more than $5.0 million per year.
In the American Rescue Plan Act of 2021, Congress added a maintenance of effort (MOE) requirement for State source revenues for purposes of using State Fiscal Recovery Fund allocations to replace lost revenues. The MOE generally provides for minimum State-source revenue growth of 4.1% per year in comparison with Fiscal Year 2019 baseline revenues. For measurement purposes, actual baseline Fiscal Year 2019 revenue is subject to annual compounded growth of 4.1% to arrive at minimum revenue requirements in future years. If actual revenue growth falls below the MOE required revenue growth, then there is a risk of a claw back of federal funds to the extent such funds were used for revenue replacement, but only if a State enacted a tax reduction after March 3, 2021, of some significance. Any such claw back risk only increases with the size of the actual enacted tax reduction. U.S. Treasury has not yet supplied complete reporting requirements for States regarding this MOE requirement.
Additional administrative costs incurred by State Tax Department would be $15,000 in FY2023, and $15,000 in subsequent fiscal years.
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 |
15,000 |
15,000 |
| Personal Services |
0 |
5,000 |
5,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
10,000 |
10,000 |
| 2. Estimated Total Revenues |
0 |
-135,000,000 |
-332,000,000 |
Explanation of above estimates (including long-range effect):
Per our interpretation, the bill would reduce the State Consumer Sales and Service Tax from the current rate of 6% to 4.75% effective January 1, 2023. The bill excludes gasoline and special fuel sales which remain at 5%. The bill would further reduce the Consumer Sales and Service Tax by 0.25%, after June 30, 2022 and annually thereafter, when the combined balance of funds in the Revenue Fund Shortfall Reserve Fund and the Revenue Fund Shortfall Reserve Fund -Part B exceeds $1,100,000,000. The effective date of the additional 0.25% reductions would be January 1st of the following year. In addition, effective June 30, 2022, if the combined balance in the Revenue Shortfall Reserve Funds is equal to or greater than $1,100,000,000 at the end of any fiscal year, then $62,500,000 is transferred to the General Revenue Fund until the combined balance of the funds is equal to or greater than $1,037,500,000 but less than $1,100,000,000. Under current law, the combined balance of the Revenue Shortfall Reserve funds will likely exceed $1.1 billion as of the fiscal year ending June 30, 2023. The effect of multiple tax reductions of 0.25% over time would be cumulative, and the transfers into the General Revenue Fund provided for in the bill would be limited by the combined balance of the Revenue Shortfall Reserve Funds. The trigger provisions would contribute to additional revenue volatility in future years with both major spikes and troughs in annual revenue for the General Revenue Fund. Such instability would create future budget challenges.
Based on our interpretation, the reduction of the State Consumer Sales and Service Tax from 6% to 4.75% would decrease General Revenue Fund collections by $135.0 million in FY2023, $332.0 million in FY2024, and by increasing amounts in subsequent fiscal years.
In addition, revenue collections for Special Districts imposing the Special District Excise Tax would also decrease over time due to the proposed tax rate reductions. The initial decrease would be more than $5.0 million per year.
In the American Rescue Plan Act of 2021, Congress added a maintenance of effort (MOE) requirement for State source revenues for purposes of using State Fiscal Recovery Fund allocations to replace lost revenues. The MOE generally provides for minimum State-source revenue growth of 4.1% per year in comparison with Fiscal Year 2019 baseline revenues. For measurement purposes, actual baseline Fiscal Year 2019 revenue is subject to annual compounded growth of 4.1% to arrive at minimum revenue requirements in future years. If actual revenue growth falls below the MOE required revenue growth, then there is a risk of a claw back of federal funds to the extent such funds were used for revenue replacement, but only if a State enacted a tax reduction after March 3, 2021, of some significance. Any such claw back risk only increases with the size of the actual enacted tax reduction. U.S. Treasury has not yet supplied complete reporting requirements for States regarding this MOE requirement.
Additional administrative costs incurred by State Tax Department would be $15,000 in FY2023, and $15,000 in subsequent fiscal years.
Memorandum
The stated purpose of this bill is to return to reduce the consumer sales and service tax from six percent to five percent as well as establish a process which continues to gradually reduce the consumer sales and service tax every time the combined balance of the Rainy Day Fund reaches $1,100,000,000.
The text of the bill provides for a new sales tax rate of 4.75%, rather than the 5.0% stated in the stated purpose.
New subdivision 11-15-3(b)(4) in the bill refers to what will happen once the tax is “repealed;” but this is a misnomer- the tax is not repealed, although the rate may eventually be reduced to zero. Any tax liabilities attributable to periods before the rate goes to zero are to be determined, administered, assessed, and collected as if the tax had not been “repealed,” with the rights and duties of the taxpayers and the state fully and completely preserved.
Current section 11-15-3(f) imposes the sales tax at a rate of 6% of 50% of the sales price of a mobile home. Because of the deletion of subsection (c), current subsection (f) is redesignated as subsection (e), and the rate is reduced from 6% to 5%. Besides rendering the rate applicable to mobile homes (5%) different from the general rate (4.75%), it is unclear whether the provisions of the bill that may reduce the general sales tax rate in future years will apply to the sales tax as it applies to mobile homes.
The bill requires the Tax Department to prepare an annual report to the Joint Committee on Government and Finance detailing “any changes” to the sales tax. The Tax Department is also instructed to annually notify taxpayers of “any changes” in the sales tax structure. The bill does not specify a means of notification to taxpayers, and the term “any changes” is potentially overbroad.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov