FISCAL NOTE
Date Requested: January 10, 2018
Time Requested: 03:01 PM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1267 |
Introduced |
SB125 |
|
|---|
| CBD Subject: |
Taxation |
|---|
|
FUND(S):
General Revenue Fund
Sources of Revenue:
General Fund
Legislation creates:
Increases Revenue From Existing Sources, 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 enact the 2018 Tax Reform Act.
According to our interpretation, passage of this bill would have both short-term and long-term implications. In the short term, the proposed bill would result in a potential net gain of roughly $76.9 million in FY2019 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases three months prior to the implementation of significant Personal Income Tax rate reductions compared to current Law. Thereafter, State General Revenue Fund tax collections are expected to decrease by roughly $ 37.5 million in FY2020, by roughly $61.3 million in FY2021, by roughly $138.1 million in FY2022, and by roughly $300.8 million in FY2023 based on current projections. Deviations from anticipated growth could adversely affect these estimates, particularly in out years.
The bill contains a trigger mechanism to phase-out the Personal Income Tax when Consumer Sales Tax collections exceed $1.8 billion. This reduction must be taken in the context of historical tax collection trends. The total combined yield of both the Personal Income Tax and the Consumer Sales Tax was more than $3.1 billion in FY2017. These two taxes accounted for roughly 72.8 percent of total General Revenue Fund tax collections and more than 75 percent of the nearly $1.4 billion in total General Revenue Fund tax revenue growth between FY2001 and FY2017. During this 16-year period, the average annual growth rate for the Personal Income Tax was nearly 3.7 percent. The average annual growth rate for the Consumer Sales Tax was nearly 1.8 percent and would have been slightly above 2.5 percent if not for removal of groceries from the tax base. Volatile Severance Tax collections grew at an average annual rate of roughly 4.3 percent over this period and Tobacco Excise Tax collections grew at an annual average rate of nearly 12 percent. However, Tobacco Tax revenues growth was attributable to expansion of the base to other tobacco products (2001) and e-cigarette liquids (2016), as well as significant tax rate increases in 2003 and 2016. Excise tax collections otherwise tend to decrease over time. Over this 16-year period, average annual growth in General Fund tax collections was 2.7 percent and average annual consumer price inflation was more than 2 percent.
To approximate the potential long-term impact, we considered the effect of these changes under various economic growth scenarios. Scenario 1 represents the baseline economic growth analysis and reflects a trend similar to current six-year revenue projections (average annual sales tax growth of 3.2 percent). Scenario 2 represents a more aggressive economic trend and reflects a growth pattern of accelerated economic expansion (average annual sales tax growth of 6.4 percent). Scenario 3 represents a slower trend and reflects sluggish growth and potential for economic constriction (average annual sales tax growth of 1.5 percent).
As specified in the proposed bill, Personal Income Tax rates would begin phasing down by 0.1 percentage points on January 1 of any given year for each $50 million in State Consumer Sales and Service Tax collections in excess of $1.8 billion for the fiscal year ending six months prior. Under any of the scenarios used in this analysis, phase down is expected to begin in either TY2022 or TY2023. Under Scenario 1, the Personal Income Tax rates is expected to be phased out for all income brackets by FY2030. This scenario would result in estimated losses in that year alone of more than $2.6 billion below current projections. By comparison, economic conditions similar to those in Scenario 2 would phase out the Personal Income Tax by FY2028 at the cost of $2.2 billion to the General Revenue Fund compared to current projections. Under Scenario 3, the Personal Income Tax would be expected to phase out by FY2031 at a cost of more than $2.8 billion.
The trigger mechanism incorporated in the proposed bill results in the elimination of the Personal Income Tax by roughly 2030 at a steep fiscal price. The fiscal consequences would weigh negatively on economic growth in the State and would pose a counterweight to any economic growth associated with the movement from income tax to consumption tax.
Under the provisions of this bill, the State Consumer Sales and Service and Use Tax rate would increase from 6 percent to 7 percent effective October 1, 2018. During the first full year of effect, this change would yield roughly $192.3 million for the State General Revenue Fund and $4.2 million for the Sales Tax Increment Financing (STIF) Districts. The State sales tax rate on food for home consumption would rise from 0 percent to 3.5 percent for a net full-year gain of nearly $89 million to the State General Revenue Fund and roughly $2 million for STIF Districts. The effective tax rate on mobile homes used for personal residence would rise from 3 percent to 7 percent for a net full-year gain of nearly $6 million. The 7 percent sales tax would also apply to certain services currently exempted from taxation. These services and net full-year estimated gains to the General Revenue Fund are outlined below:
• Regulated solid waste disposal services ($3.9 million);
• Barbering, manicuring, cosmetology, embalming and funeral directing, and non-medical personal care services not otherwise funded by Medicaid or Medicare ($10.1 million);
• Telecommunications services ($68.1 million);
• Electronic data processing services ($5.7 million); and
• Summer camp tuition, health fitness services, primary opinion research, music instruction, artistic performances, newspaper delivery services, and travel agency commissions ($4.0 million).
The bill also eliminates the current exemption for interstate passenger travel by bus, airplane, or other means. However, there are federal prohibitions in place that might prevent taxation of those services. Given that the sales tax provisions take effect on October 1, 2018, total General Revenue Fund collections for the eight-month collection period in FY2019 are expected to increase by nearly $257 million. Assuming normal growth in the sales tax base, FY2020 tax receipts are expected to rise by nearly $403 million.
Municipal governments in West Virginia have the authority to impose a local sales tax of up to 1 percent in addition to the State sales tax. Currently, 39 municipal governments impose a local sales tax with an annual yield of roughly $75 million. When the sales tax base is broadened, these municipal governments also gain additional tax collections. Passage of this bill would effectively enhance local municipal sales tax collections by roughly $14 million per year.
In addition to a current State refundable owner-occupied real property tax paid credit for certain lower income senior citizens age 65 or older, which averages slightly more than $200 per claim, the provisions of this bill would create an additional State tax credit for certain lower income senior citizens with an initial maximum cap of $200 per claim beginning in TY2018. The proposed tax credit would equal 1 percent of qualifying low-income seniors’ Federal Adjusted Gross Income (AGI). Low-income status is defined as those with household AGI of 150 percent or less of the Federal Poverty Guideline. Based on 2017 Federal Poverty Level guidelines, the AGI limit would be $18,090 for a single person, $24,360 for a two-person household, and an additional $6,270 for each additional person.
The amount of tax credit would phase-out for AGI in excess of 125 percent of the federal poverty guideline at a rate of 4 percent for every 1 percentage point of income above the 125 percent income level limit. The credit reduces to $0 for AGI above 150 percent of the federal poverty guideline. The projected cost of this new refundable tax credit is roughly $10.0 million per year beginning in FY2019.
Beginning in TY2019, the provisions of this bill would implement a sizable reduction in State Personal Income Tax rates for all filers. The current five-bracket tax rate structure with rates ranging from 3.0 percent to 6.5 percent would be replaced with a three-bracket system with rates of 1.85 percent on the first $20,000 (the first $10,000 for those married filing separately), 3.65 percent on taxable income ranging between $20,000 and $35,000 (between $10,000 and $17,500 for those married filing separately), and 5.45 percent for taxable income in excess of $35,000 ($17,500 or more for those married filing separately). General Revenue Fund Personal Income Tax collections would decrease by roughly $151 million in FY2019 and by $391 million in FY2020, the first full year under the new tax rate structure.
The anticipated decrease in General Revenue Fund tax receipts in the first few years beyond FY2019, but prior to FY2023, would be partially attributable to the impact of a five-year phase-down of the 5.0 percent coal severance tax rate to 2.5 percent beginning July 1, 2018. Total coal severance tax collections would decrease by roughly $18.8 million in FY2019, by $39.1 million in FY2020, by $59.0 million in FY2021, by $77.4 million in FY2022, and by $95.7 million in FY2023. The State currently shares 5 percent of its net proceeds from the 4.65 percent State tax with coal producing counties. Due to lower total tax receipts, coal producing counties would lose roughly $0.9 million in FY2019, $2.0 million in FY2020, $3.0 million in FY2021, $3.9 million in FY2022, and $4.8 million in FY2023 and each year thereafter.
The provisions of this bill also repeal a number of sections relating to current policy regarding the setting of local property tax rates by various levying bodies, including provisions for an automatic rollback of tax rates when projected yield on existing property exceeds a certain growth rate target absent a required public hearing to set tax rates at higher levels. These changes provide many local governments, who currently impose regular levy rates below the maximum level permitted by the 1932 Tax Rate Limitation Amendment to the State Constitution, with some additional flexibility to increase their tax rates.
The primary objective of this bill appears to be the elimination of the Personal Income Tax. An examination of the complete financial structure of those States that choose not to impose a Personal Income Tax might be helpful in this process. These other states tend to rely much more heavily upon local governments and real property tax collections to provide services. States relying on local taxes for a majority of total State and local government financial responsibilities tend to spend more conservatively than others. However, most government financial responsibility resides at the State level in West Virginia because the State imposes very low real property taxes on residents and lower than average real property taxes on commercial properties. Such policy is not likely to change due to Constitutional provisions enacted nearly a century ago that greatly limit the property tax.
In addition to higher than average real property taxes, states without income taxes tend to impose special hybrid taxes to help fill the revenue void. Some of these taxes include the Business and Occupation Tax in Washington, the Commerce Tax in Nevada, the Gross Margins Tax in Texas, and both the Business Profits Tax and Business Enterprise Tax in New Hampshire. Texas also has a very broad property tax that includes personal property taxes on machinery equipment and inventories. Many of the states without income taxes also impose significantly greater sales tax burden on business inputs than West Virginia. These states include Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Two states without a Personal Income Tax, Alaska and Wyoming, are fortunate to have a very high ratio of mining output per resident with high natural resource related tax collections exported to nonresidents. However, Alaska recently considered the possibility of adopting an income tax because the State’s natural resources are depleting. Alaska and Wyoming also rank at the top of all States in terms of total per capita State and local government expenditures.
Government services are not immune from the rules of economics. Government service demand is higher when the price of service (tax liability) is low and vice versa. Absent the adoption of additional tax options beyond the general sales tax, West Virginia would have to offer significantly less government services than our neighboring states and far less than currently offered if the income tax on individuals was eliminated.
Additional administrative costs incurred by the State Tax Department would be $25,000 for the remainder of FY2018, $168,000 in FY2019, and $95,000 for each year thereafter.
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 |
25,000 |
168,000 |
95,000 |
| Personal Services |
0 |
125,000 |
65,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
3,000 |
0 |
| Other |
25,000 |
40,000 |
30,000 |
| 2. Estimated Total Revenues |
0 |
76,900,000 |
0 |
Explanation of above estimates (including long-range effect):
According to our interpretation, passage of this bill would have both short-term and long-term implications. In the short term, the proposed bill would result in a potential net gain of roughly $76.9 million in FY2019 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases three months prior to the implementation of significant Personal Income Tax rate reductions compared to current Law. Thereafter, State General Revenue Fund tax collections are expected to decrease by roughly $ 37.5 million in FY2020, by roughly $61.3 million in FY2021, by roughly $138.1 million in FY2022, and by roughly $300.8 million in FY2023 based on current projections. Deviations from anticipated growth could adversely affect these estimates, particularly in out years.
The bill contains a trigger mechanism to phase-out the Personal Income Tax when Consumer Sales Tax collections exceed $1.8 billion. This reduction must be taken in the context of historical tax collection trends. The total combined yield of both the Personal Income Tax and the Consumer Sales Tax was more than $3.1 billion in FY2017. These two taxes accounted for roughly 72.8 percent of total General Revenue Fund tax collections and more than 75 percent of the nearly $1.4 billion in total General Revenue Fund tax revenue growth between FY2001 and FY2017. During this 16-year period, the average annual growth rate for the Personal Income Tax was nearly 3.7 percent. The average annual growth rate for the Consumer Sales Tax was nearly 1.8 percent and would have been slightly above 2.5 percent if not for removal of groceries from the tax base. Volatile Severance Tax collections grew at an average annual rate of roughly 4.3 percent over this period and Tobacco Excise Tax collections grew at an annual average rate of nearly 12 percent. However, Tobacco Tax revenues growth was attributable to expansion of the base to other tobacco products (2001) and e-cigarette liquids (2016), as well as significant tax rate increases in 2003 and 2016. Excise tax collections otherwise tend to decrease over time. Over this 16-year period, average annual growth in General Fund tax collections was 2.7 percent and average annual consumer price inflation was more than 2 percent.
To approximate the potential long-term impact, we considered the effect of these changes under various economic growth scenarios. Scenario 1 represents the baseline economic growth analysis and reflects a trend similar to current six-year revenue projections (average annual sales tax growth of 3.2 percent). Scenario 2 represents a more aggressive economic trend and reflects a growth pattern of accelerated economic expansion (average annual sales tax growth of 6.4 percent). Scenario 3 represents a slower trend and reflects sluggish growth and potential for economic constriction (average annual sales tax growth of 1.5 percent).
As specified in the proposed bill, Personal Income Tax rates would begin phasing down by 0.1 percentage points on January 1 of any given year for each $50 million in State Consumer Sales and Service Tax collections in excess of $1.8 billion for the fiscal year ending six months prior. Under any of the scenarios used in this analysis, phase down is expected to begin in either TY2022 or TY2023. Under Scenario 1, the Personal Income Tax rates is expected to be phased out for all income brackets by FY2030. This scenario would result in estimated losses in that year alone of more than $2.6 billion below current projections. By comparison, economic conditions similar to those in Scenario 2 would phase out the Personal Income Tax by FY2028 at the cost of $2.2 billion to the General Revenue Fund compared to current projections. Under Scenario 3, the Personal Income Tax would be expected to phase out by FY2031 at a cost of more than $2.8 billion.
The trigger mechanism incorporated in the proposed bill results in the elimination of the Personal Income Tax by roughly 2030 at a steep fiscal price. The fiscal consequences would weigh negatively on economic growth in the State and would pose a counterweight to any economic growth associated with the movement from income tax to consumption tax.
Under the provisions of this bill, the State Consumer Sales and Service and Use Tax rate would increase from 6 percent to 7 percent effective October 1, 2018. During the first full year of effect, this change would yield roughly $192.3 million for the State General Revenue Fund and $4.2 million for the Sales Tax Increment Financing (STIF) Districts. The State sales tax rate on food for home consumption would rise from 0 percent to 3.5 percent for a net full-year gain of nearly $89 million to the State General Revenue Fund and roughly $2 million for STIF Districts. The effective tax rate on mobile homes used for personal residence would rise from 3 percent to 7 percent for a net full-year gain of nearly $6 million. The 7 percent sales tax would also apply to certain services currently exempted from taxation. These services and net full-year estimated gains to the General Revenue Fund are outlined below:
• Regulated solid waste disposal services ($3.9 million);
• Barbering, manicuring, cosmetology, embalming and funeral directing, and non-medical personal care services not otherwise funded by Medicaid or Medicare ($10.1 million);
• Telecommunications services ($68.1 million);
• Electronic data processing services ($5.7 million); and
• Summer camp tuition, health fitness services, primary opinion research, music instruction, artistic performances, newspaper delivery services, and travel agency commissions ($4.0 million).
The bill also eliminates the current exemption for interstate passenger travel by bus, airplane, or other means. However, there are federal prohibitions in place that might prevent taxation of those services. Given that the sales tax provisions take effect on October 1, 2018, total General Revenue Fund collections for the eight-month collection period in FY2019 are expected to increase by nearly $257 million. Assuming normal growth in the sales tax base, FY2020 tax receipts are expected to rise by nearly $403 million.
Municipal governments in West Virginia have the authority to impose a local sales tax of up to 1 percent in addition to the State sales tax. Currently, 39 municipal governments impose a local sales tax with an annual yield of roughly $75 million. When the sales tax base is broadened, these municipal governments also gain additional tax collections. Passage of this bill would effectively enhance local municipal sales tax collections by roughly $14 million per year.
In addition to a current State refundable owner-occupied real property tax paid credit for certain lower income senior citizens age 65 or older, which averages slightly more than $200 per claim, the provisions of this bill would create an additional State tax credit for certain lower income senior citizens with an initial maximum cap of $200 per claim beginning in TY2018. The proposed tax credit would equal 1 percent of qualifying low-income seniors’ Federal Adjusted Gross Income (AGI). Low-income status is defined as those with household AGI of 150 percent or less of the Federal Poverty Guideline. Based on 2017 Federal Poverty Level guidelines, the AGI limit would be $18,090 for a single person, $24,360 for a two-person household, and an additional $6,270 for each additional person.
The amount of tax credit would phase-out for AGI in excess of 125 percent of the federal poverty guideline at a rate of 4 percent for every 1 percentage point of income above the 125 percent income level limit. The credit reduces to $0 for AGI above 150 percent of the federal poverty guideline. The projected cost of this new refundable tax credit is roughly $10.0 million per year beginning in FY2019.
Beginning in TY2019, the provisions of this bill would implement a sizable reduction in State Personal Income Tax rates for all filers. The current five-bracket tax rate structure with rates ranging from 3.0 percent to 6.5 percent would be replaced with a three-bracket system with rates of 1.85 percent on the first $20,000 (the first $10,000 for those married filing separately), 3.65 percent on taxable income ranging between $20,000 and $35,000 (between $10,000 and $17,500 for those married filing separately), and 5.45 percent for taxable income in excess of $35,000 ($17,500 or more for those married filing separately). General Revenue Fund Personal Income Tax collections would decrease by roughly $151 million in FY2019 and by $391 million in FY2020, the first full year under the new tax rate structure.
The anticipated decrease in General Revenue Fund tax receipts in the first few years beyond FY2019, but prior to FY2023, would be partially attributable to the impact of a five-year phase-down of the 5.0 percent coal severance tax rate to 2.5 percent beginning July 1, 2018. Total coal severance tax collections would decrease by roughly $18.8 million in FY2019, by $39.1 million in FY2020, by $59.0 million in FY2021, by $77.4 million in FY2022, and by $95.7 million in FY2023. The State currently shares 5 percent of its net proceeds from the 4.65 percent State tax with coal producing counties. Due to lower total tax receipts, coal producing counties would lose roughly $0.9 million in FY2019, $2.0 million in FY2020, $3.0 million in FY2021, $3.9 million in FY2022, and $4.8 million in FY2023 and each year thereafter.
The provisions of this bill also repeal a number of sections relating to current policy regarding the setting of local property tax rates by various levying bodies, including provisions for an automatic rollback of tax rates when projected yield on existing property exceeds a certain growth rate target absent a required public hearing to set tax rates at higher levels. These changes provide many local governments, who currently impose regular levy rates below the maximum level permitted by the 1932 Tax Rate Limitation Amendment to the State Constitution, with some additional flexibility to increase their tax rates.
The primary objective of this bill appears to be the elimination of the Personal Income Tax. An examination of the complete financial structure of those States that choose not to impose a Personal Income Tax might be helpful in this process. These other states tend to rely much more heavily upon local governments and real property tax collections to provide services. States relying on local taxes for a majority of total State and local government financial responsibilities tend to spend more conservatively than others. However, most government financial responsibility resides at the State level in West Virginia because the State imposes very low real property taxes on residents and lower than average real property taxes on commercial properties. Such policy is not likely to change due to Constitutional provisions enacted nearly a century ago that greatly limit the property tax.
In addition to higher than average real property taxes, states without income taxes tend to impose special hybrid taxes to help fill the revenue void. Some of these taxes include the Business and Occupation Tax in Washington, the Commerce Tax in Nevada, the Gross Margins Tax in Texas, and both the Business Profits Tax and Business Enterprise Tax in New Hampshire. Texas also has a very broad property tax that includes personal property taxes on machinery equipment and inventories. Many of the states without income taxes also impose significantly greater sales tax burden on business inputs than West Virginia. These states include Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Two states without a Personal Income Tax, Alaska and Wyoming, are fortunate to have a very high ratio of mining output per resident with high natural resource related tax collections exported to nonresidents. However, Alaska recently considered the possibility of adopting an income tax because the State’s natural resources are depleting. Alaska and Wyoming also rank at the top of all States in terms of total per capita State and local government expenditures.
Government services are not immune from the rules of economics. Government service demand is higher when the price of service (tax liability) is low and vice versa. Absent the adoption of additional tax options beyond the general sales tax, West Virginia would have to offer significantly less government services than our neighboring states and far less than currently offered if the income tax on individuals was eliminated.
Additional administrative costs incurred by the State Tax Department would be $25,000 for the remainder of FY2018, $168,000 in FY2019, and $95,000 for each year thereafter.
Memorandum
The stated purpose of this bill is to enact the 2018 Tax Reform Act.
The proposed bill would create W. Va. Code §11-13A-26 to reduce the Severance Tax rate on coal but does not amend language in W. Va. Code §11-13A-3, where such rates are also mentioned. Not changing all references to these rates could create difficulties if the older Code section was referenced by a Taxpayer.
The bill also proposes removing the exemption on transportation of passengers in interstate commerce. Imposing a state tax on this activity may raise federal constitutional issues.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov