FISCAL NOTE
Date Requested: February 10, 2023
Time Requested: 08:35 AM |
| Agency: |
Tax & Revenue Department, WV State |
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| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1846 |
Engrossed |
SB424 |
|
|---|
| CBD Subject: |
Governor -- Bills Requested By |
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|
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.
There is no stated purpose in the bill.
Based on our interpretation, the legislation would create a refundable Personal Income Tax credit based on certain qualified personal property taxes paid, create a refundable Personal Income Tax credit based on real property taxes paid by an eligible disabled veteran, reduce the Personal Income Tax rates, and provide for future Personal Income Tax rate reductions based on increases in Consumer Sales and Use Tax collections.
Effective January 1, 2024, an eligible taxpayer may receive a refundable personal income tax credit in the amount of fifty percent of qualified ad valorem personal property tax which are timely paid in the 2024 personal income tax year. Eligible taxpayers who pay the following types of Personal Property taxes could be eligible for the refundable credit: Manufacturing Machinery, Equipment, and Inventory; Qualified Leasehold Investment Property; Qualified Computer Equipment; Qualified Furniture, Fixtures, and Equipment; and Retail Inventory other than car dealer inventory.
Effective January 1, 2024, an eligible taxpayer who owns motor vehicles may receive a refundable personal income tax credit in the amount of 100 percent of qualified ad valorem personal property tax which are timely paid in the 2024 personal income tax year.
Effective January 1, 2024, a Disabled Veteran eligible taxpayer may receive a refundable personal income tax credit in the amount of 100 percent of the real property taxes paid which are timely paid in the 2024 personal income tax year. A “Disabled Veteran eligible taxpayer” means a person honorably discharged from any branch of the armed services of the United States who is considered ninety percent totally and permanently disabled due solely to service connected disabilities by the Department of Veterans Affairs.
Effective for all taxable years beginning on and after January 1, 2024, the following personal income tax rates will be effective: 2.55 percent on the first $10,000 of taxable income ($5,000 for married filing separate); 3.4 percent on taxable income ranging between $10,000 and $25,000 ($5,000 and $12,500 for married filing separate); 3.825 percent on taxable income ranging between $25,000 and $40,000 ($12,500 and $20,000); 5.1 percent on taxable income ranging between $40,000 and $60,000 ($20,000 and $30,000 for married filing separate); and 5.525 percent on taxable income in excess of $60,000 ($30,000 for married filing separate). In addition, effective January 1, 2024, the tax rate for nonresident composite and withholding obligations and withholding on gambling winnings will be 5.525 percent.
An additional provision of the bill provides for future personal income tax reductions based on percentage increases in Consumer Sales and Use Tax collections as compared to the previous fiscal year and the prior fiscal year’s enacted budget. The language in this section is vague and somewhat contradictory; therefore, it is not possible to determine the timing or amount of potential future personal income tax reductions.
According to our interpretation, business personal property tax data is not reported by business entity type. Therefore, it is not possible to accurately determine the impact of the personal income tax credit equal to 50 percent on the ad valorem personal property tax paid by businesses subject to the personal income tax. Some corporations are small in size and some limited liability companies and other pass-through entities are large in size. If such provision were to apply to both those subject to personal income tax and those subject to corporation net income tax, the 50 percent tax credit would amount to roughly $150 million.
According to our interpretation, the proposed 100 percent personal income tax credit for ad valorem property tax paid on motor vehicles would decrease General Revenue Fund collections by up to $157.9 million in FY2025.
According to our interpretation, the proposed 100 percent personal income tax credit for real estate taxes paid by Disabled Veterans, would decrease General Revenue Fund collections by up to $3.6 million in FY2025. Information on the service-connected disability level of Disabled Veterans is normally given in ranges. There is no data currently available on West Virginia Disabled Veterans with a 90 percent service-connected disability as outlined in the legislation. The estimate is based on data available for Disabled Veterans who are considered to have a 100 percent service-connected disability. The revenue impact of the tax credit could be less because some of these taxpayers may already be eligible for the Homestead Exemption which exempts the first $20,000 of assessed value from property tax.
According to our interpretation, the proposed personal income tax rate reduction, would reduce General Revenue Fund collections by $163.8 million in FY2024, $429.6 million in FY2025, and by increasing amounts in subsequent fiscal years.
Additional administrative costs incurred by the State Tax Department would be $10,000 in FY2023, $226,000 in FY2024, and $185,000 in subsequent fiscal years.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2023
Increase/Decrease
(use"-") |
2024
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
10,000 |
226,000 |
185,000 |
| Personal Services |
0 |
180,000 |
180,000 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
6,000 |
0 |
| Other |
10,000 |
40,000 |
5,000 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
Based on our interpretation, the legislation would create a refundable Personal Income Tax credit based on certain qualified personal property taxes paid, create a refundable Personal Income Tax credit based on real property taxes paid by an eligible disabled veteran, reduce the Personal Income Tax rates, and provide for future Personal Income Tax rate reductions based on increases in Consumer Sales and Use Tax collections.
Effective January 1, 2024, an eligible taxpayer may receive a refundable personal income tax credit in the amount of fifty percent of qualified ad valorem personal property tax which are timely paid in the 2024 personal income tax year. Eligible taxpayers who pay the following types of Personal Property taxes could be eligible for the refundable credit: Manufacturing Machinery, Equipment, and Inventory; Qualified Leasehold Investment Property; Qualified Computer Equipment; Qualified Furniture, Fixtures, and Equipment; and Retail Inventory other than car dealer inventory.
Effective January 1, 2024, an eligible taxpayer who owns motor vehicles may receive a refundable personal income tax credit in the amount of 100 percent of qualified ad valorem personal property tax which are timely paid in the 2024 personal income tax year.
Effective January 1, 2024, a Disabled Veteran eligible taxpayer may receive a refundable personal income tax credit in the amount of 100 percent of the real property taxes paid which are timely paid in the 2024 personal income tax year. A “Disabled Veteran eligible taxpayer” means a person honorably discharged from any branch of the armed services of the United States who is considered ninety percent totally and permanently disabled due solely to service connected disabilities by the Department of Veterans Affairs.
Effective for all taxable years beginning on and after January 1, 2024, the following personal income tax rates will be effective: 2.55 percent on the first $10,000 of taxable income ($5,000 for married filing separate); 3.4 percent on taxable income ranging between $10,000 and $25,000 ($5,000 and $12,500 for married filing separate); 3.825 percent on taxable income ranging between $25,000 and $40,000 ($12,500 and $20,000); 5.1 percent on taxable income ranging between $40,000 and $60,000 ($20,000 and $30,000 for married filing separate); and 5.525 percent on taxable income in excess of $60,000 ($30,000 for married filing separate). In addition, effective January 1, 2024, the tax rate for nonresident composite and withholding obligations and withholding on gambling winnings will be 5.525 percent.
An additional provision of the bill provides for future personal income tax reductions based on percentage increases in Consumer Sales and Use Tax collections as compared to the previous fiscal year and the prior fiscal year’s enacted budget. The language in this section is vague and somewhat contradictory; therefore, it is not possible to determine the timing or amount of potential future personal income tax reductions.
According to our interpretation, business personal property tax data is not reported by business entity type. Therefore, it is not possible to accurately determine the impact of the personal income tax credit equal to 50 percent on the ad valorem personal property tax paid by businesses subject to the personal income tax. Some corporations are small in size and some limited liability companies and other pass-through entities are large in size. If such provision were to apply to both those subject to personal income tax and those subject to corporation net income tax, the 50 percent tax credit would amount to roughly $150 million.
According to our interpretation, the proposed 100 percent personal income tax credit for ad valorem property tax paid on motor vehicles would decrease General Revenue Fund collections by up to $157.9 million in FY2025.
According to our interpretation, the proposed 100 percent personal income tax credit for real estate taxes paid by Disabled Veterans, would decrease General Revenue Fund collections by up to $3.6 million in FY2025. Information on the service-connected disability level of Disabled Veterans is normally given in ranges. There is no data currently available on West Virginia Disabled Veterans with a 90 percent service-connected disability as outlined in the legislation. The estimate is based on data available for Disabled Veterans who are considered to have a 100 percent service-connected disability. The revenue impact of the tax credit could be less because some of these taxpayers may already be eligible for the Homestead Exemption which exempts the first $20,000 of assessed value from property tax.
According to our interpretation, the proposed personal income tax rate reduction, would reduce General Revenue Fund collections by $163.8 million in FY2024, $429.6 million in FY2025, and by increasing amounts in subsequent fiscal years.
Additional administrative costs incurred by the State Tax Department would be $10,000 in FY2023, $226,000 in FY2024, and $185,000 in subsequent fiscal years.
Memorandum
The purposes of the bill are:
To authorize a refundable personal income tax credit of 50% of property tax paid on machinery, equipment and inventory “used in business”. Note that although the bill mentions the corporation net income tax, there is no application of the tax credit against corporation net income tax in the body of the bill.
To authorize a refundable personal income tax credit for 50% of property tax paid on leasehold improvements.
To authorize a refundable personal income tax credit for 50% of the property tax paid on certain computer equipment,
To authorize a refundable personal income tax credit for 50% of the property tax paid on certain furniture, fixtures, and equipment,
To authorize a refundable personal income tax credit for 50% of property tax paid on retail inventory.
To authorize a refundable personal income tax credit for 100% of property tax paid on specified motor vehicles.
To authorize a refundable personal income tax credit of 100% of property tax paid on real property by disabled veterans,
To immediately reduce the personal income tax rate,
To reduce withholdings on nonresident income,
To further reduce the personal income tax rate based upon future contingent increases in consumer sales and service tax and use tax collections.
The title of the bill contains the words “creating refundable tax credits on certain species of personal property tax”. These words arguably make the title to the bill defective. In addition, the bill Title says “providing that further action of the Legislature is necessary to raise the personal income tax following a reduction;” there is no such provision in the bill.
The numbering of the bill is unusual and not consistent with the legislative drafting manual or with customary legislative drafting practice. There are typographical errors and numbering and lettering errors in the bill. The construction “and/or” appears twice in the bill. Use of the term “and/or” has been historically disfavored in legislative drafting and in contract law due to its imprecise, ambiguous and uncertain meaning.
The bill purports to create several tax credits. However, each and every tax credit allowed in sections 302, 402, 502, 602, 702, 802 and 902 appears to have been drafted to apply for only one tax year (calendar year 2024) and then terminate. For example, the tax credit for machinery and equipment allowed under §11-13MM-302 contains the following language: “Effective January 1, 2024, an eligible taxpayer may receive a refundable tax credit in the amount of fifty percent of ad valorem personal property tax as set forth in this section which are timely paid in the personal income tax taxable year 2024. Thus, the tax credit is available to the Taxpayer for the tax year beginning January 1, 2024, and for no succeeding year.
Although definitions of the classes of motor vehicles and trailers are well defined and understood under Division of Motor Vehicles law, in referring to the classes of vehicle for which the bill authorizes a tax credit based on property tax paid, those definitions are not necessarily consistent with Integrated Assessment System (IAS) definitions. The result is that some programming and other expenditure of resources may be needed to reconcile the two definitional sources.
The bill gives a tax credit against personal income tax for property tax paid on “leasehold investments.” The definition of “leasehold investments” is imprecise and very broad. It addresses “improvements and/or modifications” in a leased property and would appear to include oil and gas lease investments, and indeed all commercial leasehold improvements. It appears from the context that the intention is to address property tax paid on leasehold improvements. However, the bill defines the term “leasehold investments” with essentially the same conceptual definition that would relate to leasehold improvements.
The credits in Sections 302, 402, 502, 602, and 702 all state that the credits are “against the ad valorem property taxation imposed pursuant to this chapter and pursuant to Article X of the Constitution of this state, as applicable…” However, related and succeeding sections of the bill make it clear that the tax credit is intended to apply only to income tax. The credits relating to property tax paid on vehicles and on the realty of disabled veterans clearly apply the tax credit against the personal income tax, and not against the property tax. The legal argument could well be asserted that the bill authorizes a tax credit against property tax, and then another tax credit against personal income tax in succeeding sections.
The disabled veteran’s credit is based upon property taxes paid on real property and does not limit the credit to a home owned and occupied by the taxpayer, like a homestead credit. It is based on all real property owned by the disabled veteran which could include multiple homes and commercial or business real property.
Section 11-21-4h purports to authorize future personal income tax rate reductions beginning January 1, 2025. Section 11-2-4h mandates that “The increase in the sales and service tax and the use tax shall trigger a dollar-for-dollar reduction in the personal income tax in the percentage amount of the increase in the sales and service tax and the use tax.” This language is ambiguous. It could mean the personal income tax should be decreased by a percentage, or by a “dollar for dollar” amount. Assuming the reference to “the percentage amount of the increase in the sales and service tax and the use tax” is a simple descriptor of the means whereby the “dollar for dollar” amount is to be derived, then it appears to say that the personal income tax reduction is mandated to be a “dollar for dollar” reduction, presumably with the personal income tax rate adjusted to produce a projected result equal to the “dollar for dollar” sales tax increment.
Section 11-21-4h also mandates that “The reduction set forth in this section shall be distributed proportionate to the personal property amounts collected in each income bracket. This amount shall be in lieu of the rates of taxation specified in §11-21-4g of this code.” Given that the immediately preceding language relates to a personal income tax rate reduction, not having any reference to, or relation to, the property tax, we have no interpretation as to the meaning of this language, and must presume that it is misplaced language, or language that was meant to be deleted, but was somehow overlooked. The Tax Department could not effectuate this “proportionate to the personal property amounts” language, given the context in which it appears.
The §11-21-4h personal income tax reduction is contingent upon the occurrence of an increase in collections of consumers sales and service and use tax, not adjusted for inflation, of more than 5% over the “prior year’s enacted executive budget.” This mandate is subject to a failsafe condition that an increase of more than 5% will not trigger a personal income tax reduction if, during the immediately preceding 3 fiscal years, there has been a 10 percent or more reduction in consumer sales and service tax and use tax collections.
Section 11-21-4h purports to mandate a personal income tax rate decrease without Legislative input and only based upon the “collections”. The bill is silent as to what agency, or official is to make that analysis. The provision is arguably void for vagueness. In addition to the potential constitutionality issues relating to a “void for vagueness” statue, this mandate is almost certainly an unconstitutional delegation of duties in violation of the principals established by the West Virginia Supreme Court of Appeals in State v. Grinstead, 157 W.Va. 1001, 206 S.E.2d 912 (1974)- Interpreting Article vi, Section 1 of the West Virginia Constitution: “The legislative power shall be vested in senate & house delegates.” While the bill Title states that further action of the Legislature is necessary to raise the personal income tax following a reduction, it manifestly does not say legislative action is contemplated in order to effectuate §11-21-4h.
The new article 11-13MM-1 et seq. should reference Article 11-10-1 et seq. the West Virginia Tax Procedure and Administration Act and Article 11-9-1 et seq. the Tax Crimes and Penalties Act for tax administration purposes.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov