By JAKE ZUCKERMAN
Charleston Gazette-Mail
CHARLESOTON, W.Vva. — Moving forward with a plan to scrap personal income taxes in favor of an 8 percent sales tax, a Senate select committee received updated numbers Saturday from a state revenue official on the slowed-down implementation plan.
Deputy Revenue Secretary Mark Muchow went over the ins and outs of a plan to phase out the state’s personal income tax and corporate tax over the next three decades.
Though in the short run, the plan could balance the state’s budget, Muchow said when the income tax repeal takes full effect, the state could face as high as a $1.8 billion deficit in 2033.
To break it down, the new bill calls to implement the 8 percent sales tax starting Oct. 1. Come Jan. 1, 2018, the income tax will be reduced to a flat rate of 2.65 percent, which holds until 2023, at which time it begins a nine-year period of tapering off to zero.
Thus, when the state collects both the 8 percent sales tax and peak levels of the income tax, it will possibly run a budget surplus, according to Muchow. However, the boom will turn a corner, ending up well into the red by 2033 when the income tax and other tax-revenue sources are scrapped at large.
Consumption tax
The consumption (sales) tax of 8 percent will bring in $750 million in revenue in fiscal year 2017 (shortened because of the Oct. 1 start date), $1.1 billion in fiscal year 2018 and $1.73 billion by 2033, Muchow said.
Income tax repeal
When the income tax changes to the 2.65 percent flat rate in 2018, the lowest personal income tax rate of any state that claims one.
That rate will hold steady until 2023 under the bill, until it begins withering away at a reduction rate of 0.27 percent per year over the next 9 years until it hits zero, Muchow said.
This could also happen sooner if at the end of any given fiscal year, the state holds a balance in a rainy day budget shortfall fund of at least 15 percent of the size of its general fund.
If this happens, the income tax rate will decrease by 0.1 percent for every $50 million dollars the state collects via the sales tax exceeding $2.5 billion.
According to Muchow’s projections, the state will lose revenue of $376 million in fiscal year 2017 (a shortened year, due to the proposed law’s late start), $890 million in 2018 and $3.46 billion by 2033.
Other tax decreases
Once the personal income tax rate hits zero, if that same rainy day fund balance is 10 percent or more than the size of the state’s general revenue fund, the corporate income tax rate will phase out incrementally over the next six to seven years.
If all this occurs, by roughly 2040, natural gas and other severance taxes will decrease from 5 percent to 3 percent over a two-year period.
Muchow said the lost revenues in severance taxes would cost the state $30 million in fiscal year 2018, $68 million in fiscal year 2019, and between $70 and $78 million in each following year.
Additionally, individual counties that receive a local coal severance tax will decrease by roughly $1 million in fiscal year 2018 and roughly $4 million each year thereafter, he said.
Net effects
Putting all the changes together, Muchow said the revised bill shows a $344 million boost for the state in fiscal year 2018, a possible surplus without any budget cuts.
However, he said that would start to come undone a bit in fiscal year 2019 ($152 million) as revenues fall, likewise in fiscal years 2020 ($135 million) through 2023 ($69 million) when the income tax cuts begin, until it reaches the red as the cuts continue, outpacing the increases in consumption tax revenue.
However, Muchow noted the limitations of his analysis, and he said there are variables not accounted for and that a more thorough evaluation is needed.
“We note, this is a massive tax-reform effort, the full impact of which has not been appropriately addressed,” he said. “A whole lot more needs to be put into it.”
Following his presentation, Muchow took questions and comments from the committee members.
Both Sen. Ryan Ferns, R-Ohio, and Greg Boso, R-Nicholas, asked Muchow about different trends in the state’s sales tax over the years.
Muchow said they have been largely flat over the last decade or so, despite their boom in the 1990s. He attributed this to the state’s decision not to tax groceries and pharmaceutical products. Additionally, he said the growing availability of circumventing the tax via online shopping contributed as well.
On the contrary, he said, income tax revenue has increased over the past decade. Roughly 10 years ago it brought in $1.2 billion for the state, while it brings in as much as $1.8 billion now.
Prior to adjourning, Ferns made a motion the bill add a clause exempting retired military members’ pension funds from taxation. The motion passed unanimously.
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