Whether eliminating income taxes will help West Virginia depends on who you ask

Ted Boettner, executive director of the West Virginia Center on Budget & Policy

By RUSTY MARKS

The State Journal

CHARLESTON, W.Va. — During a recent debate on the floor of the West Virginia Senate, Senate Majority Leader Ryan Ferns, R-Ohio, called a plan to move the state’s tax structure to consumption taxes and eventually eliminate the personal income tax a “bold, aggressive approach” that would send the Mountain State “on a path to real prosperity.”

Sen. Ryan Ferns, R-Ohio

Republican leaders in the Senate — and Democratic Gov. Jim Justice — believe eliminating the state income tax would entice people and businesses to move to West Virginia and would lead to economic growth. Sen. Robert Karnes, R-Upshur, whose Select Committee on Tax Reform has been working since February on plans to phase out the income tax, said rolling back income tax rates in the Mountain State would make West Virginia’s income taxes lower than in three of four surrounding states, and competitive with the fourth.

Justice and Senate Republicans hope to eliminate the state’s personal income tax altogether. But they can’t get there all at once. The tax plan currently under discussion would roll back income tax rates 15 percent next year and 20 percent the year after, with “triggers” built into the budget to allow further lowering if certain state revenue levels are reached.

“We are taking a responsible, prudent approach to this,” said Senate President Mitch Carmichael, R-Jackson. Carmichael is one of the key proponents of eliminating the income tax and replacing the revenue with higher and more broadly applied consumption taxes like the state sales tax. Carmichael created Karnes’ committee to help figure out how to eliminate income taxes for state residents without financially shooting state government in the foot.

Carmichael said many economists theorize that moving away from income taxes toward broad-based consumption taxes like the sales tax is a better way to fund government that is more fair to taxpayers. Such economists believe income taxes discourage people from saving their money and provide little incentive for people to work harder or longer, while citizens can choose whether or not to spend their money on goods and services and pay sales taxes.

Carmichael says people don’t have a choice about paying income taxes, but do have a choice about paying sales tax. Doing away with the income tax “puts people in charge of their own money,” he said.

Under the plan currently under discussion in the Senate, by Carmichael’s calculations a West Virginia resident who makes $30,000 per year would see an income tax reduction of $390 annually. “Even with an increase in the consumer sales tax and removing the exemption on telecommunications (cellphones), the net savings still is $229,” Carmichael said. “There is no way to deny that this plan puts money back into the hands of people, and gives individuals the freedom to choose how they spend their dollars.”

Divergent views

Not everyone agrees on whether eliminating income taxes and adding consumption taxes is a good strategy for West Virginia.“It’s a strategy that’s been tried elsewhere with little to show for it,” said Ted Boettner, executive director of the left-of-center West Virginia Center on Budget & Policy. “It’s not a surefire way to grow a state’s economy. Most of the states that have tried it over the past decade are doing worse than the national average.”In February, the Center on Budget & Policy published a report looking at the likely effects of eliminating the state income tax. The report, written by Boettner, argues states that have eliminated income taxes aren’t doing better than states that haven’t, and there is little evidence to show that eliminating income taxes leads to growth.

Ted Boettner, executive director of the West Virginia Center on Budget & Policy

 

“Most academic studies since 2000 find little to no impact on economic growth from reducing state personal income taxes,” the report said. “Business investments and location decisions are determined by a myriad of factors, many of which make up a larger share of the cost of doing business.”

According to Boettner, income taxes account for the biggest portion of West Virginia’s revenue, currently providing about 45 percent of the general revenue fund.

Boettner said reducing or eliminating the income tax and raising sales taxes would hit middle-class and lower income families hardest.

“Replacing West Virginia’s personal income tax with a higher sales tax would be a large tax cut for the top 1 percent of wage earners and a sizable tax increase for most families,” Boettner wrote. Despite not having to pay taxes on income, Boettner calculated the effects of the extra sales taxes would mean a tax increase of more than $700 for someone making $40,000 a year, while amounting to a tax cut of $28,000 for someone making $778,000.

Boettner also disagrees that eliminating income taxes leads to population growth.

“For every 10 people who have moved from West Virginia to Florida — a state that doesn’t have an income tax — eight people have moved from Florida to West Virginia,” he wrote. “Most people moving out of West Virginia go to states that levy income taxes.”

Boettner also said income tax revenues have grown by 249 percent since 1990, while sales tax revenue has grown by only 136 percent.

“Instead of cutting the income tax, lawmakers should pursue efforts to limit itemized deductions, modernize tax brackets and create a refundable earned income tax credit,” Boettner said.

But Garrett Ballengee, director of the conservative Cardinal Institute for West Virginia Policy, takes a view almost diametrically opposed to that held by Boettner.

“All things being equal, I think that taxation predicated on consumption (e.g., sales tax) is a more desirable way to raise revenue than that raised through income taxation,” Ballengee said. “Simply put, an income tax makes work/labor more expensive relative to leisure. This means that individuals will work less under the presence of an income tax — this is because a tax on something makes the underlying activity, by definition, more expensive. It’s the exact same theory underlying the idea that a tobacco tax will decrease the amount of smoking in a society when compared to a society that has no tobacco tax.”

Ballengee said an income tax discourages savings because income that is saved is taxed again with gains from interest or capital.

“Savings are the backbone of an economy because savings are used to provide the capital for entrepreneurs and businesses,” he said. “When savings increase, interest rates decrease — because supply of loanable funds has increased — which makes investment in things such as factories, research and development, workers, etc., cheaper.

“The presence of the income tax discourages and distorts this critical process.”

Ballengee said an income tax is also less transparent than a consumption tax.

“Most of us never look at our paychecks, except, perhaps, for the first one that we receive from a new employer,” he said. “Over time, folks simply ignore the amount of taxes that they are paying — this is especially true for direct deposit.

“This is not the case for a consumption tax as the amount that goes to the government is transparent and comes on every receipt for every purchase. It is important for folks to realize how much of their money goes to the government and a consumption tax is better in this respect, as well.”

Ballengee said consumption taxes hit those earning less money the hardest, but said government could offer deductions or rebates to low-income families.

“Though less tangible, the responsible repeal of the income tax also sends a clear message to families and businesses across the country that West Virginia is serious about changing the way it conducts its business; the state is finally looking to do and try something different to kickstart its maligned economy,” Ballengee said.

Carmichael agrees people who make less money spend a greater percentage of it for goods and services, but other benefits are in place for some relief.

“We already exempt food (from the sales tax),” he said. “At the lower income levels, there are other benefits that people receive.”

In 0ther states

Since 2012, five states — Kansas, Maine, North Carolina, Ohio and Wisconsin — have significantly cut their income taxes. Whether they’re doing any better or worse is also a subject of debate.Many of those who believe eliminating income taxes leads to economic growth point to a 2012 study by supply-side economist Arthur Laffer. In the study, Laffer looked at nine states with no income tax and compared them with nine states that had relatively high income tax rates.Laffer looked at growth rates for population, employment, state and local tax revenue and gross state product (the state equivalent to GDP). He concluded the states with no income tax outperformed the states with high income tax rates. Two of the high-tax states, Ohio and Maine, have since made moves to cut their income tax rates.

But the Institute on Taxation and Economic Policy, a research group that studies tax issues and frequently crunches numbers for the West Virginia Center on Budget & Policy, looked at different factors and came up with a different conclusion.

While noting that states without income tax frequently make up for the lack of revenue with higher taxes in other areas, ITEP concluded that states with higher income tax rates saw greater growth in median wages and better GSP growth per capita than states with no income tax.

One of the loudest arguments that cutting income tax rates doesn’t work comes from Kansas, which drastically cut income tax rates in 2013.

“When Kansas Gov. Sam Brownback won passage of these tax cuts he said it ‘will be like a shot of adrenalin into the heart of the Kansas economy,’” Boettner wrote.

Boettner said Kansas went from a $500 million surplus before enacting tax reform to a $700 million deficit. “Brownback’s plan to eliminate the state income tax has also resulted in nine rounds of budget cuts, two sales tax hikes, increased debt, three credit rating downgrades and more people leaving Kansas than moved in since the tax plan took effect.”

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