|Date Requested: March 26, 2021
Time Requested: 09:54 AM
||Division of Regulatory and Fiscal Affairs|
General Revenue, All Special Revenues
Sources of Revenue:
Decreases Existing Revenue, Creates New Fund: Income Tax Reduction Fund
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
NOTE: This is the second revision of this Fiscal Note. It is current as of approximately 10:00am on Friday, March 26.
House Bill 3300 intends to reduce, and eventually eliminate, West Virginia’s personal income tax (PIT). The process to do so involves decreasing each of the state’s five marginal PIT rates in a series of steps over the course of an indeterminable number of years until each rate is completely phased out. The bill instructs the Tax Commissioner to use the previous calendar year’s PIT receipts to calculate reductions in the marginal PIT rates that would have reduced last calendar year’s PIT receipts by $150 million. This process repeats for as many years as necessary (with a few caveats that we detail further on) until all rates equal zero. Should this $150 million decrease be enacted in each calendar year going forward, assuming a 2 percent per year growth in personal income, the tax would be completely phased out around Fiscal Year 2038. For Fiscal Year 2022, the Governor has provided an official estimate in his Executive Budget Report of $2,041,300,000 in PIT receipts. This represents the eventual cost per fiscal year to the state, holding all else constant, of H.B. 3300.
In the first year of implementation (FY 2022), the total reduction in PIT receipts would be $75 million. This is due to a decrease of $75 million (rather than $150 million) in mandated marginal PIT rate reductions as a result of the differences in calendar and fiscal years. In FY 2023, these costs increase to approximately $186 million; this figure comes from the $75 million decline in PIT receipts from FY 2022 compounding with an additional $150 million in cuts and $39 million in growth based on historical trends. This process occurs annually until the entire PIT is eliminated.
A new Special Revenue fund created by H.B. 3300, the Income Tax Reduction Fund (ITR), takes a portion of several different revenue sources with the intention of providing an avenue for an acceleration of the PIT’s elimination. Once this fund reaches $400 million, a one-time transfer of $100 million from this Special Fund to the General Fund occurs to provide a cushion for an additional permanent $150 million in personal income tax reductions (for a total of $300 million in one calendar year). The intended purpose of the additional $300 million remaining in the fund is to serve as a safeguard in case of slow or negative economic growth. In addition to the cuts from the stipulated reductions in PIT rates, the ITR Fund represents an additional reduction in the General Revenue Fund of at least $61.9 million per fiscal year. Although not a fiscal cost per se, this provision would require an offsetting revenue increase or spending decrease. In the first year (FY 2022), due to the staggered nature of the calendar and fiscal years, this amount is approximately half ($31 million). Compared to the increasing PIT reductions, the adjustment necessary to account for this decrease in the General Revenue Fund would be much more stable over time. Taking the ITR into account and projecting that it will receive $69.4 million per fiscal year ($7.5 million per fiscal year comes from special revenues), we project this would accelerate the complete phasing out of the PIT to Fiscal Year 2033. The projection of Fiscal Year 2038 in the first paragraph assumes that this automatic acceleration provision is never triggered.
Fiscal Note Detail
|Effect of Proposal
|1. Estmated Total Cost
|Repairs and Alterations
|2. Estimated Total Revenues
Explanation of above estimates (including long-range effect):
Table 1: Current and Proposed Marginal Personal Income Tax Rates, Calendar Year 2022
Head of Household or Married Filing Jointly Single or
Married Filing Separately Current Rate New Rate (CY 2022) Difference
$0 to $10,000 $0 to $5,000 3.0% 2.8% -0.2 pp
$10,001 to $25,000 $5,001 to $12,500 4.0% 3.7% -0.3 pp
$25,001 to $40,000 $12,501 to $20,000 4.5% 4.2% -0.3 pp
$40,001 to $60,000 $20,001 to $30,000 6.0% 5.6% -0.4 pp
$60,001+ $30,001+ 6.5% 6.0% -0.5 pp
Note: Dollar figures in the first two columns represent West Virginia taxable income.
In the first calendar year of implementation (CY 2022), the bill stipulates a decrease in marginal personal income tax (PIT) rates that would decrease the previous calendar year’s PIT revenue by approximately $150 million. These rates are shown in Table 1 above.
After the reduction in marginal tax rates for calendar year 2022 shown in Table 1, the bill instructs the Tax Commissioner in each subsequent calendar year to, based on the prior year’s collections, calculate what uniform reduction in rates would have achieved an additional $150 million decline in PIT receipts in the previous calendar year. Once these rates are calculated, they shall be published by administrative order no later than the 1st of March and become effective the following calendar year. This process will repeat until all the rates are eliminated by being reduced to zero.
For example, in early 2022 the Tax Commissioner shall use the available information from calendar year 2021 to calculate what reduction in marginal tax rates would have produced a decrease in PIT revenue of $150 million in calendar year 2021. By March 1, 2022, the Tax Commissioner shall publish this information by administrative order and the rates published will become effective for calendar year 2023. Furthermore, the bill stipulates that these reductions shall be as uniform as possible but, if not possible, the reductions shall be adjusted to reduce the rates of lower income taxpayers in a more accelerated method.
The Tax Department calculated the rates in the above table to produce a $150 million decrease in PIT revenue in calendar year 2021 and we utilize that estimate as given. Note that the six-month offset between the calendar and fiscal year results in only half of the initial stipulated revenue decrease of $150 million occurring in Fiscal Year 2022. As a result, the provisions of this bill would not have an impact on the state’s finances until the second half of FY 2022. The other half of the initial $150 million PIT revenue decrease occurs in the first half of FY 2023. From FY 2023 onwards, we assume that the Tax Commissioner will successfully choose rates that reduce PIT revenues by an additional $150 million per calendar year.
This means that the total decline in revenue to the state, under existing conditions, compounds by an additional $150 million per year until the personal income tax is eventually eliminated. For Fiscal Year 2022, the PIT collection projections provided by the Governor which the Legislature must use in completing its budget total $2,041,300,000; this figure serves as the baseline in our proceeding calculations. This figure also represents the eventual cost of H.B. 3300 to the state per fiscal year, holding all else constant. If there were to be no growth in personal income and the conditions for accelerated cuts we discuss below were to never be met, we would anticipate that the personal income tax would be completely phased out starting in FY 2036. If this were the case, the fiscal cost in the FY 2022 would be ($75,000,000), the fiscal cost in FY 2023 would be ($225,000,000) and so on, increasing by $150 million per fiscal year.
However, the assumption of zero growth is not accurate according to current data and is why the additional decline in revenue each fiscal year beyond FY 2022 is less than $150 million. Based on figures provided by the Department of Revenue, from 2008 to 2018 personal income tax receipts in the state of West Virginia grew by approximately 2 percent per year. Assuming similar levels of growth in PIT receipts going forward, this would counteract part of the $150 million PIT receipt reduction each year. In the initial year (FY 2022), we do not calculate any increase in revenues as the number set forth by the Governor already accounts for this. However, in subsequent years, the Tax Commissioner’s marginal PIT rate reductions to yield a decrease of $150 million based on the previous calendar year’s receipts would be partially undone by an increase in the baseline driven by typical, historic levels of economic growth. This slows down the process of income tax elimination, with a constant 2 percent per year growth yielding elimination of the personal income tax in Fiscal Year 2038. To be clear, the eventual cost to the state of $2.04 billion per fiscal year remains unchanged, as would the need for either offsetting revenue increases or spending decreases, but it is not reached for an additional three years.
Thus, each fiscal year’s cost beyond FY 2022 is calculated assuming a 2 percent per year growth in the baseline PIT receipts from the previous year and includes the net of that growth alongside the current and all previous mandated PIT phase-outs. In FY 2023, the growth is nearly $39 million. This is calculated by taking the difference between the current official estimate from the Governor of $2,041,300,00 and the $75 million in cuts from the second half of FY 22. Then, we take 2 percent of that number. Going forward, however, the reduction is the full $150 million. Putting this additional approximate $111 million reduction on top of the reduction from FY 2022 leads to a decrease in PIT receipts in FY 2023 of approximately $186 million relative to current code. These revenue decreases continue to compound over time until, upon full implementation, the effect is the full amount of current PIT revenue, around $2.04 billion per fiscal year.
In practice, the phase-out of the PIT as proposed in H.B. 3300 could occur sooner, although how much sooner is difficult to determine since the rate at which this occurs is contingent on various factors. H.B. 3300 would also establish a Special Revenue Fund, the Income Tax Reduction (ITR) Fund, which could provide an avenue through which the $150 million per fiscal year reductions in PIT receipts could be accelerated. The sources of these funds include, but are not limited to, PIT receipts, sales and service tax receipts, various lottery products including sports wagering at racetracks and interactive gaming, sales tax on internet sales from out of state vendors who have newly registered (on or after January 1, 2021) in West Virginia, and severance taxes. In addition, 0.5 percent of all special revenues would be diverted to the ITR Fund. The state brings in approximately $1.5 billion per fiscal year in special revenues, with 0.5 percent of that equaling $7.5 million per fiscal year. Combining this $7.5 million with the other sources of funds listed above which include specific dollar amounts in the text of the bill yields $69.4 million per fiscal year. Those which do not include specific dollar amounts are the various lottery sources of revenue and the 50 percent of general revenue surplus at the end of the fiscal year. Given the potentially volatile nature of these figures from year to year, especially the general revenue surplus, it is difficult to pinpoint with a degree of certainty how often this provision would come into effect.
Nevertheless, we wish to provide a reasonable scenario outlining automatic acceleration of the PIT elimination under H.B. 3300. Once the amount in the ITR Fund reaches $400 million, two things occur. First, a one-time transfer of $100 million from the ITR Fund to General Revenue occurs. Second, that calendar year’s personal income tax reduction increases from $150 million to $300 million. Thus, the one-time transfer of $100 million occurs is intended to offset part of the first-year costs of an additional $150 million phase-out of the personal income tax. If we assume no revenue from the sources that do not have dollar amounts specified (that is, the amount going into the ITR fund is $69.4 million per fiscal year), the first $300 million PIT receipt reduction in a single year would occur in FY 2028. From there, three of the next four fiscal years would experience $300 million reductions and the PIT would completely phase out in Fiscal Year 2033.
Additionally, it should be noted that, although not a fiscal cost per se, as it is a movement from the General Revenue Fund to the ITR Fund, the diversions of revenue to the ITR fund do decrease the amount of funds left in the General Revenue Fund to be appropriated for other uses. That is, every dollar diverted to the ITR Fund is a dollar that cannot be used elsewhere. These funds are intended to be eventually released back into the General Revenue Fund once the ITR Fund reaches a balance of $400 million, but this occurs at a ratio of $1 in one-time released funds to $1.50 in additional permanent tax cuts. However, unlike the costs associated with the PIT elimination, this would represent a (relatively) flat per fiscal year decrease in funds in the General Revenue Fund as most of these funds, as described above, are capped. Again, the total of the capped funds equals $61.9 million per fiscal year, with an amount of half that (approximately $31 million) applying to FY 2022, again due to the staggered fiscal and calendar years. The remaining sources of funds for the ITR fund include the various lottery provisions and the provision requiring 0.5 percent of any Special Revenue Funds to be diverted into the ITR Fund, the latter equaling (at present) approximately $7.5 million per fiscal year.
The Tax Department projects average annual growth in personal income tax (PIT) receipts from 2018 to 2026 to be 3 percent per year, based on information presented to the House Finance Committee on February 11, 2021. If growth were to average 3 percent per year, the PIT would be eliminated around FY 2039, a year later than under a growth of 2 percent per year. Taking into account the Income Tax Reduction Fund and our anticipated $69.4 million per year growth, the PIT would be eliminated in FY 2034.
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