Heading into the 2011 election, only two of West Virginia’s 34 state senators were Republicans. Today only three of them are not. The House of Delegates, which was comfortably Democratic until the 2014 election, now has an 88-member Republican majority to just 12 Democrats. It is the fourth most lopsided delegation in the country, behind Wyoming (92.4 percent of the Republican legislature), Hawaii (89.4 percent Democrat) and South Dakota (88.7 percent Republican).
And yet this overwhelmingly Republican legislature, with a Republican governor, entered the 2023 legislative session where it has been for years: with nearly every Republican and every legislative leader calling for tax reform and tax relief, but with uncertain prospects. of success.
Sometimes Democrats lead on tax reform. Sometimes the Republicans do. Sometimes it’s a bipartisan effort. But when a party has overwhelming numbers in state government, the leadership of that party has consistently articulated a key political objective, and that objective is thwarted time and time again, something is wrong. Instead of Republicans and Democrats arguing over preferred tax policies, the real parties in West Virginia have turned out to be the House of Representatives, the Senate, and the executive branch.
Previously, the governor and both houses of the legislature have debated, and sometimes switched sides, expanding the sales tax base, property tax relief, and income tax cuts. The result is that, despite the fact that most lawmakers in Charleston say they want tax reform, meaningful progress has stalled for years.
It’s enough to generate cynicism about West Virginia’s ability to join the vast majority of states (43 of them!) in offering significant tax relief from 2021, or the majority of states (28) that cut taxes. rates—much less to make broader reforms. But low expectations cannot be an excuse. West Virginia has the revenue and, it seems, the legislative desire to improve the state’s fiscal competitiveness this year. Can be done.
Senate Republicans rightly prioritized tangible property tax reform last year, focusing on a constitutional amendment that would allow them to repeal the state’s archaic and uncompetitive inventory tax and make a dent in other taxes on business machinery and equipment that increase the cost of investing in the state. . They are still upset by the governor’s opposition to the amendment, and some want another go at the issue.
However, an electorate that so forcefully rejected the amendment in 2022 is unlikely to change course in a few years. While important, tangible personal property tax reform with the go-ahead of a constitutional amendment is probably not on the cards right now.
But the income tax relief is.
West Virginia entered the new year with a surplus of nearly $1 billion above estimates for the current fiscal year (just six months later), which some experts expect to be closer to $1.7 billion by the end of the fiscal year in June. While a boom in severance tax revenue is responsible for a good chunk of the surplus, the state’s revenue baseline is much higher than it was before the pandemic. And in an increasingly mobile environment, where more people can work remotely and where more companies can select a location without requiring their entire workforce to be there, tax competition has taken center stage.
When West Virginia last cut its top income tax rate, the nationally average top rate was 8 percent (albeit on a somewhat narrower base). Today it is 5 percent and it is declining.
Unable to directly exempt tangible property from taxes, Senate Republicans have proposed state refunds to offset these local tax payments. The sales would do reduce the cost of capital investment in West Virginia, a worthy goal, and could help businesses penalized by the state’s increasingly archaic inventory tax. But companies would still have to calculate the value of all their machinery and equipment each year, remit the tax, and then wait for a refund, reducing the benefit of repeal or reform. Designing a reimbursement system that does not create perverse incentives for locations to overpay can also be difficult. The Senate’s emphasis on tangible property tax relief is well justified, but it would be a shame if the debate were to bog down once again, when tax relief is within reach.
Nor should income tax relief be considered insignificant. Lower individual tax rates are associated with faster population growth, greater upward mobility in employment, higher gross state product, higher investment, higher rates of business formation, and more innovation. Even a rebalancing toward more consumption taxes and away from high income tax rates has important economic benefits. With enough revenue growth to lower income taxes as part of a net tax cut, lawmakers can score a real victory for West Virginians.
The House legislation, which passed an overwhelming, bipartisan majority 95-2 voteis dead on arrival at the senate, according to Senate Finance Chairman Eric Tarr (R). In addition to disappointment over the neglect of tangible personal property tax reform, House members fear the House bill will go too far, too fast.
Under HB 2526income tax rates would be halved in three years, yielding a top rate of 3.25 percent in 2025 at a cost, when fully implemented, of just under $1.5 billion by year. That’s lower than the top rate in all but three of the 41 states that tax income, and two of them (Indiana and Pennsylvania) also have local income taxes.
West Virginia has practiced budget discipline in recent years, creating ample room for tax relief as revenues grow under the current tax system while spending remains stable. In addition, Gov. Jim Justice (R) is proposing to put $700 million in reserve, which could be used in case revenues fall too low.
But the Senate is right that the proposed cuts are steep, especially when individual income tax accounts for about half of general fund revenue and more than 10 percent of all state spending. Instead of cutting rates by 30 percent in the first year and another 10 percent each for the next two years, lawmakers could use revenue triggers to introduce reductions gradually. It may be possible to cut rates in half over time, but committing to doing it in three years is an aggressive step. And if revenue falls short of expectations, the legislature could find itself in the unenviable position of pausing or reversing the cuts. There must be room for both chambers and the governor to negotiate to provide taxpayers with significant income tax relief while legitimate pacing concerns are addressed.
Twenty-one of the states with an individual income tax have cut rates since 2021. Some have done it twice. Twelve states have cut corporate income taxes, while other states have cut sales taxes; dramatically expanded income tax deductions, exemptions, and credits; reduced special taxes; instituted property tax relief; and, less beneficially, issued tax refunds, suspended taxes on gasoline, and offered other forms of tax relief. West Virginia is one of seven states that has not offered any significant tax relief since 2021, and five of the other six waive individual income tax.
Michigan and West Virginia. That’s the full list of states with an individual income tax that haven’t taken any significant tax breaks in the past two years.
Surely West Virginia policymakers can find a way to get off that unenviable short list.
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