FISCAL NOTE

Date Requested: March 06, 2017
Time Requested: 10:59 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
1440 Amendment HB2375
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Neither Program nor Fund



Fiscal Note Summary


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


The purpose of this bill is to create a program to provide tax relief to new businesses that hire West Virginia residents as at least fifty percent of their employees. The program allows new, small businesses and business owners to be taxed at an effective rate of one percent on income derived from the business and to receive a credit against business and occupation taxes and business franchise taxes equal to the amount of property tax paid during the tax year for the tangible personal property of the business (equipment, durable goods and business inventory). According to our interpretation, the provisions of this bill seek to establish reduced tax rates for a qualified “newly-established small business” for a period of up to five years. The bill defines “newly-established small business” as a West Virginia business with a business registration certificate obtained after July 1, 2017, employs no more than 250 employees, of which at least 50 percent are domiciled in West Virginia, and has no more than $15 million in annual gross receipts. These newly created tax rate reductions would expire December 31, 2028. The proposed rate reduction would allow a temporary five-year reduced tax rate for newly established small businesses. Qualified businesses would have their personal income tax liabilities eliminated for their first five years, instead of the standard rates of as high as 6.5 percent. For pass-through entities and sole proprietors subject to Personal Income Tax, the temporary lower tax rate would apply to the net income attributable to the activity of the newly established small business. Most new small businesses are pass-through entities. In the case of corporations, the tax rate is reduced from 6.5 percent to 0 percent for the first five years of qualification. The reduced tax rate would effectively apply to any West Virginia business entity with less than $15 million in annual gross receipts if the business was registered with the State after July 1, 2017. We are unable to readily determine either the level of utilization or potential cost of this proposed special temporary tax rate reduction program. However, the compliance costs associated with the added tax calculation complexities associated with this proposal would be high relative to the potential tax savings for the qualified business. The provisions of this bill might also result in a decrease in income tax receipts attributable to wage and salary income due to an incentive for individuals to shift their status from employee to self-employed contractor. Given that there is no internal effective date for these new tax rate reductions, the effective date would be the first taxable year beginning after the provisions of the bill go into effect in Tax Year 2018 for most business entities. Additional administrative costs would be $99,000 in FY2019 and $64,000 per year in fiscal years thereafter.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2017
Increase/Decrease
(use"-")
2018
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 64,000
Personal Services 0 0 64,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


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


According to our interpretation, the provisions of this bill seek to establish reduced tax rates for a qualified “newly-established small business” for a period of up to five years. The bill defines “newly-established small business” as a West Virginia business with a business registration certificate obtained after July 1, 2017, employs no more than 250 employees, of which at least 50 percent are domiciled in West Virginia, and has no more than $15 million in annual gross receipts. These newly created tax rate reductions would expire December 31, 2028. The proposed rate reduction would allow a temporary five-year reduced tax rate for newly established small businesses. Qualified businesses would have their personal income tax liabilities eliminated for their first five years, instead of the standard rates of as high as 6.5 percent. For pass-through entities and sole proprietors subject to Personal Income Tax, the temporary lower tax rate would apply to the net income attributable to the activity of the newly established small business. Most new small businesses are pass-through entities. In the case of corporations, the tax rate is reduced from 6.5 percent to 0 percent for the first five years of qualification. The reduced tax rate would effectively apply to any West Virginia business entity with less than $15 million in annual gross receipts if the business was registered with the State after July 1, 2017. We are unable to readily determine either the level of utilization or potential cost of this proposed special temporary tax rate reduction program. However, the compliance costs associated with the added tax calculation complexities associated with this proposal would be high relative to the potential tax savings for the qualified business. The provisions of this bill might also result in a decrease in income tax receipts attributable to wage and salary income due to an incentive for individuals to shift their status from employee to self-employed contractor. Given that there is no internal effective date for these new tax rate reductions, the effective date would be the first taxable year beginning after the provisions of the bill go into effect in Tax Year 2018 for most business entities. Additional administrative costs would be $99,000 in FY2019 and $64,000 per year in fiscal years thereafter.



Memorandum






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