FISCAL NOTE

Date Requested: February 03, 2022
Time Requested: 01:34 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2501 Introduced HB4007
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund Revenue Shortfall Reserve Fund, Stabilization and Future Economic Reform Fund

Legislation creates:

Decreases Existing Revenue, Increases Existing Expenses, Creates New Fund: Stabilization and Future Economic Reform Fund



Fiscal Note Summary


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


The stated purpose of this bill is to reduce personal income tax rates and to create a fund into which one half of each fiscal year’s general revenue surplus will be deposited to offset any loss of revenues determined by the Legislature to have resulted from this and any future reductions of those rates instead of using that portion of the surplus to fund the state’s Rainy Day Fund. Per our interpretation, the bill would reduce current Personal Income Tax rates by ten percent for Tax Years beginning after December 31, 2022. In addition, the bill establishes the “Stabilization and Future Economic Reform Fund” (SFER Fund). Within sixty days of the end of each fiscal year, the first fifty percent of all surplus revenues, if any, determined to have accrued during the fiscal year just ended, will be deposited into the SFER Fund. These surplus funds were previously deposited into the State’s Revenue Shortfall Reserve Fund. The Legislature may also appropriate additional moneys to be deposited to the SFER Fund. The moneys in the SFER Fund may be expended only by appropriation of the Legislature and solely for the purpose of further reducing the Personal Income Tax rates. When the Personal Income Tax rates have been reduced to zero, the SFER Fund shall be closed, and the balance of the fund shall be expended pursuant to appropriation by the Legislature. The transfer of fifty percent of surplus revenues generated during the Fiscal Year into the new Stabilization and Future Economic Reform Fund would be effective starting with FY2022. There is insufficient guidance provided in the bill to determine when or in what amount funds from the Stabilization and Future Economic Reform Fund would be transferred to the General Revenue Fund or when additional reductions of the Personal Income Tax rates would occur. Per our interpretation, the proposed ten percent reduction in Personal Income Tax rates would decrease General Revenue Fund collections by roughly $96 million in FY2023, $265 million in FY2024, $280 million in FY2025, and by increasing amounts in subsequent fiscal years. 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 5.2% 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 5.2% 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 the State Tax Department would be $30,000 in FY2023 and $35,000 in FY2024.



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 30,000 0
Personal Services 0 0 0
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 30,000 0
2. Estimated Total Revenues 0 -96,000,000 0


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


Per our interpretation, the bill would reduce current Personal Income Tax rates by ten percent for Tax Years beginning after December 31, 2022. In addition, the bill establishes the “Stabilization and Future Economic Reform Fund” (SFER Fund). Within sixty days of the end of each fiscal year, the first fifty percent of all surplus revenues, if any, determined to have accrued during the fiscal year just ended, will be deposited into the SFER Fund. These surplus funds were previously deposited into the State’s Revenue Shortfall Reserve Fund. The Legislature may also appropriate additional moneys to be deposited to the SFER Fund. The moneys in the SFER Fund may be expended only by appropriation of the Legislature and solely for the purpose of further reducing the Personal Income Tax rates. When the Personal Income Tax rates have been reduced to zero, the SFER Fund shall be closed, and the balance of the fund shall be expended pursuant to appropriation by the Legislature. The transfer of fifty percent of surplus revenues generated during the Fiscal Year into the new Stabilization and Future Economic Reform Fund would be effective starting with FY2022. There is insufficient guidance provided in the bill to determine when or in what amount funds from the Stabilization and Future Economic Reform Fund would be transferred to the General Revenue Fund or when additional reductions of the Personal Income Tax rates would occur. Per our interpretation, the proposed ten percent reduction in Personal Income Tax rates would decrease General Revenue Fund collections by roughly $96 million in FY2023, $265 million in FY2024, $280 million in FY2025, and by increasing amounts in subsequent fiscal years. 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 5.2% 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 5.2% 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 the State Tax Department would be $30,000 in FY2023 and $35,000 in FY2024.



Memorandum


The stated purpose of this bill is to reduce personal income tax rates and to create a fund into which one half of each fiscal year’s general revenue surplus will be deposited to offset any loss of revenues determined by the Legislature to have resulted from this and any future reductions of those rates instead of using that portion of the surplus to fund the state’s Rainy Day Fund. Under new §11B-2-33, the bill creates a Stabilization and Future Economic Refund Fund to be funded “in accordance with the provisions of this section, as may be required by other provisions of this code, and by any appropriation made to the fund by the Legislature.” The phrase “as may be required by other provisions of this code” is very vague. Moneys in the fund shall be made available to the West Virginia Board of Treasury investments and to the West Virginia Investment Management Board for management and investment of the moneys in accordance with the provisions of §12-6C-1 et seq. in such amounts as may be directed in the discretion of the Secretary of Revenue. Leaving the amount of money to be invested by the Board of Investments, and the Investment Management Board to the discretion of the Secretary of Revenue raises Constitutional concerns. This may be an unconstitutional delegation of Legislative powers. “As a general rule the Legislature, in delegating discretionary power to an administrative agency, such as a board or a commission, must prescribe adequate standards expressed in statute or inherent in its subject matter and such standards must be sufficient to guide such an agency in the exercise of such power conferred upon it.” Syl. Pt. 4. State ex rel. W.Va. Citizens Action Group v. W.Va. Econ. Dev. Grant Comm. 213 W.Va. 255 (2003). The money in the Stabilization and Future Economic Reform Fund may only be expended upon appropriation of the Legislature solely for the purpose of reducing the rates of personal income tax. The bill gives no direction or formula as to how the personal income tax rates are to be reduced with money from this Fund.



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