Senators tweak bill repealing income tax

CHARLESTON — Senators have made changes to a bill that would repeal the state’s income tax and replace it with a consumption tax.

In a Saturday meeting of the Senate Select Committee on Tax Reform, members of the committee heard an update on the financial effects of the bill from Deputy Revenue Secretary Mark Muchow, before adjourning. Committee members did not vote on the bill Saturday.

Muchow told senators, “You’ve got a tough job,” after going over some of the changes in the committee substitute for Senate Bill 335 and the new accompanying fiscal note.

Under the new version of the bill, the personal income tax would decrease to 2.65 percent beginning in July 2018. Muchow said this would be the lowest in the nation of states that have not already eliminated their income tax.

Personal income tax would start to phase out in 2023, expiring completely in 2032 if certain ratios with the Rainy Day Fund are met.

Once the personal income tax expires and if the Rainy Day Fund is at that ratio, corporate net income tax would phase out over about seven years, Muchow said.

“If all that occurs successfully, then in 2039 or 2040, natural gas severance and other severance taxes, other than coal, would go to 3 percent,” Muchow said.

Beginning Oct. 1, as opposed to July 1, the current sales tax would go away and would be replaced by a consumption tax at a rate of 8 percent. Hotels and motels would see a higher rate at 11 percent, he said.

Muchow said the new version had a lot of technical corrections that were made. The bill also was changed to include cities into the local sales tax program so local sales tax could continue for municipalities, he said.

He said the bill enacts changes to the coal severance tax that would go into effect in July, that would reduce the coal severance tax overall from 5 percent to 3.25 percent.

There would be exemptions for professional services and/or advertising services. Professional services are restricted to individual purchases and not business purchases, Muchow said.

Muchow also went over the fiscal note, or anticipated financial effects of the bill. He said the first year would have a lower rate because of the consumption tax’s Oct. 1 effective date. He says the number goes from $750 million in the first year to $1.1 billion in the second year.

For income tax, he says the state would lose about $376 million in the first year of 2018 and would continue to decline through its elimination.

Coal severance, he said, would decrease by $30 million in 2018 and would continue to decrease after.

He said overall, there is a positive change of $324 million in 2018, representing a surplus without the need for budget cuts for that year. “The ‘19 fiscal year, it starts to come undone a bit,” Muchow said. “The increase falls in half and goes down through 2023.”

“This is a major, massive tax reform effort,” Muchow later said. “The full impact has not been appropriately addressed. I think a lot more needs to be put into it. … A lot more heavy-lifting needs to be done than shifting the consumption tax, comparative to the property tax burdens.”

He said other states have greater real estate taxes on residents and West Virginia has lower commercial tax burdens than the national average.

Before adjourning, Sen. Ryan Ferns, R-Ohio, successfully amended the bill to add an exemption for military retirement benefits, as recommended on Friday by Gov. Jim Justice.

Justice’s news release said this would amount to a $3.1 million tax break for military families. “I talked to a number of retired military in my district and they said a lot of states offer this exemption,” Ferns said. “It is a small amount of money but it’s good service to our military veterans to do that.”

Andrea Lannom is a reporter with The (Beckley) Register-Herald, a sister newspaper of the Times West Virginian.