Date Requested: February 16, 2017
Time Requested: 01:41 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2206 Introduced SB335
CBD Subject:


FUND(S):

General Revenue Fund; State Road Fund

Sources of Revenue:

General Fund,Other Fund State Road Fund

Legislation creates:

Neither Program nor Fund



Fiscal Note Summary


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


    The stated purpose of this bill is to prospectively repeal the consumer sales and service tax, the use tax and the personal income tax, to enact the general consumption tax law and the temporary single rate income tax law and to phase out the corporation net income tax.
    
    According to our interpretation, the provisions of this bill would repeal the 6 percent Consumer Sales and Service Tax and Use Tax effective July 1, 2017 and replace it with an 8 percent General Consumption Tax. Under the General Consumption Tax, the legal incidence of tax would transfer from the consumer to the vendor but the tax would still be stated on the consumer’s invoice. According to our interpretation, the tax base of the General Consumption Tax would match the current sales tax base except for the following major enhancements on which the Tax would be imposed:
    
    (1) Food for home consumption; (2) direct use purchases by businesses engaged in transportation, communications, public utility service, gas storage, transmission, and research and development; (3) non-medical professional services such as legal services, accounting services, engineering services, architecture services, real estate services, brokerage services, advertising services, and funeral services, among others; (4) personal services such as hair, nail, and skin care and non-medical personal home care; (5) public utility services such as electricity, natural gas, water, sewer, telecommunications, solid waste, and intra-state transportation; (6) contracting services with an added exemption for material purchases used by contractors in fulfilling their contracts; and (7) various other smaller base enhancement, including but not limited to electronic data processing, sales of farm products by the producer, health fitness services, newspaper sales by route carriers, mobile homes at full rate, and numerous miscellaneous business input purchases.
    
    The bill would also eliminate the Tourism Tax Credit programs. It is assumed that tuition for private primary and secondary schooling and for postsecondary education would remain exempt from this Tax and are therefore excluded from the estimates provided. (The bill would increase the tax rate on the purchase or lease of motor vehicles subject to the separate Motor Vehicle Sales Tax administered by the Division of Motor Vehicles for deposit in the State Road Fund. This fiscal note does not address these changes. DMV would be expected to provide such an estimate.)
    
    The increase in the consumption tax rate, in combination with the proposed base-broadening changes, would result in an estimated annualized gain in State General Revenue of roughly $1.30 billion to $1.35 billion per year. Due to the normal month lag in collections relative to purchases, FY2018 General Revenue Fund tax receipts would rise by nearly $1.2 billion and FY2019 receipts would rise by roughly $1.33 billion. These figures do not adequately account for potential leakages in surrounding states, particularly those with lower sales tax rates. The State currently diverts roughly $15.5 million in sales tax collections to Sales Tax Increment Financing Districts. The annual diversion amounts would roughly double as the result of the provisions of this bill. By repealing the Consumer Sales and Use Tax, the provisions of this bill effectively also repeal the municipal sales tax currently imposed by 28 municipalities. That number will increase to 39 effective July 1, 2017. Assuming that the intent of the bill is to preserve the municipal sales tax, enactment of this bill would further enhance municipal sales tax collections by roughly $50 million or more per year.
    
    According to our interpretation, the provisions of this bill would also repeal the Personal Income Tax effective January 1, 2018 and replace this Tax with the Temporary Single Rate Income Tax at a flat rate of 0.6 percent in 2018, 0.4 percent in 2019 and 0.2 percent in 2020. The base of the new temporary tax would be expanded to generally equal federal adjusted gross income less $2,000 for each personal exemption allowance available on the Taxpayer’s federal income tax return. For purposes of the estimate of revenue associated with the new temporary tax, we assume that the bill would be amended to allow for required deductions for various sources of income exempt from State income tax by Federal Law and for the State tax refund accounting adjustment. The proposed change would result in a decrease in State Personal Income Tax collections of roughly $650.0 million in FY2018, $1.7 billion in FY2019, $1.8 billion in FY2020, and roughly $2.0 billion in FY2021.
    
    The proposed bill also authorizes the phase-out of the Corporation Net Income Tax rate by one percentage point per year and the phase-down of the Severance Tax by one percentage point over two consecutive years beginning in the year that the Temporary Single Rate Income Tax rate falls to zero as long as the combined Rainy Day Fund balance total is at least 10 percent of the State General Revenue Fund budget. The earliest date contemplated by the provisions of this bill for these phase-downs to begin would be 2021. No estimate is provided for these proposed changes due to concern that the triggering criteria would not be met absent the implementation of other financial changes not covered within this bill.
    
    The fiscal consequences to the State General Revenue Fund (i.e., Current Law absent any proposed enhancements to balance FY2018 Budget) associated with the provisions of this bill are as follows:
    
    Fiscal Year--Consumption Tax-Income Tax=Net Change
    FY2018--+$1.20 billion-$650 million=+$550 million
    FY2019--+$1.33 billion-$1.70 billion=-$370 million
    FY2020--+$1.36 billion-$1.80 billion=-$440 million
    FY2021--+$1.39 billion-$2.00 billion=-$610 million
    
    The cumulative revenue impact following the first four years of enactment would be a net General Revenue Fund decline of $870.0 million. The impact is positive for FY2018 primarily due to consumption tax changes, inclusive of the two percentage point increase and base-broadening measures, that occur six months prior to extensive modification to the existing income tax structure.
    
    The proposed bill represents the most massive tax reform effort of any State in recent memory. Most states commit significant resources toward adequate measurement of tax reform impact on businesses and residents prior to adoption of a significant change. The resources and timeframe for the preparation of this fiscal note are woefully inadequate to properly measure the cumulative extent of all consequences associated with proposed changes. It is presumed that one of the possible objectives behind this proposed bill may be greater economic growth over time. However, the provisions of this bill effectively increase taxes on business inputs by an amount that is at least double the potential income tax savings on business profits. The greater tax savings would occur for a number of individuals with wage and salary income and those with retirement income. Significantly higher business tax burdens could, in effect, produce undesired outcomes. All taxes are ultimately paid by individuals. However, higher indirect taxes on business purchases could be priced economically in terms of some combination of lower wage income, lower employment, and higher consumer prices. The private sector service economy is currently much smaller in West Virginia than the national average. The State’s per capita Gross State Product attributable to the private service sector was just $21,414 in 2014, trailing the national average of $36,836 by more than 40 percent.
    
    The Tax Department anticipates significant leakages due to compliance and economic issues associated with the increased tax rate for goods and services. It is plausible that individuals may take advantage of lower tax rates in surrounding states, particularly within border communities. Due to the difficulty in anticipating consumer behavior, and especially on a restricted timetable, the estimates enclosed in this brief analysis will not necessarily reflect the full extent of the impacts such consumption shifts will have on revenues.
    
    A thorough independent analysis of the economic consequences associated with massive tax changes is strongly recommended.
    
    The State Tax Department will incur additional administrative costs of $245,000 for the remainder of FY2017, $230,000 in FY2018, and $235,000 for FY2019.
    



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 245,000 230,000 235,000
Personal Services 50,000 200,000 200,000
Current Expenses 100,000 0 0
Repairs and Alterations 0 0 0
Assets 0 10,000 0
Other 95,000 20,000 35,000
2. Estimated Total Revenues 0 550,000,000 -610,000,000


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


    According to our interpretation, the provisions of this bill would repeal the 6 percent Consumer Sales and Service Tax and Use Tax effective July 1, 2017 and replace it with an 8 percent General Consumption Tax. Under the General Consumption Tax, the legal incidence of tax would transfer from the consumer to the vendor but the tax would still be stated on the consumer’s invoice. According to our interpretation, the tax base of the General Consumption Tax would match the current sales tax base except for the following major enhancements on which the Tax would be imposed:
    
    (1) Food for home consumption; (2) direct use purchases by businesses engaged in transportation, communications, public utility service, gas storage, transmission, and research and development; (3) non-medical professional services such as legal services, accounting services, engineering services, architecture services, real estate services, brokerage services, advertising services, and funeral services, among others; (4) personal services such as hair, nail, and skin care and non-medical personal home care; (5) public utility services such as electricity, natural gas, water, sewer, telecommunications, solid waste, and intra-state transportation; (6) contracting services with an added exemption for material purchases used by contractors in fulfilling their contracts; and (7) various other smaller base enhancement, including but not limited to electronic data processing, sales of farm products by the producer, health fitness services, newspaper sales by route carriers, mobile homes at full rate, and numerous miscellaneous business input purchases.
    
    The bill would also eliminate the Tourism Tax Credit programs. It is assumed that tuition for private primary and secondary schooling and for postsecondary education would remain exempt from this Tax and are therefore excluded from the estimates provided. (The bill would increase the tax rate on the purchase or lease of motor vehicles subject to the separate Motor Vehicle Sales Tax administered by the Division of Motor Vehicles for deposit in the State Road Fund. This fiscal note does not address these changes. DMV would be expected to provide such an estimate.)
    
    The increase in the consumption tax rate, in combination with the proposed base-broadening changes, would result in an estimated annualized gain in State General Revenue of roughly $1.30 billion to $1.35 billion per year. Due to the normal month lag in collections relative to purchases, FY2018 General Revenue Fund tax receipts would rise by nearly $1.2 billion and FY2019 receipts would rise by roughly $1.33 billion. These figures do not adequately account for potential leakages in surrounding states, particularly those with lower sales tax rates. The State currently diverts roughly $15.5 million in sales tax collections to Sales Tax Increment Financing Districts. The annual diversion amounts would roughly double as the result of the provisions of this bill. By repealing the Consumer Sales and Use Tax, the provisions of this bill effectively also repeal the municipal sales tax currently imposed by 28 municipalities. That number will increase to 39 effective July 1, 2017. Assuming that the intent of the bill is to preserve the municipal sales tax, enactment of this bill would further enhance municipal sales tax collections by roughly $50 million or more per year.
    
    According to our interpretation, the provisions of this bill would also repeal the Personal Income Tax effective January 1, 2018 and replace this Tax with the Temporary Single Rate Income Tax at a flat rate of 0.6 percent in 2018, 0.4 percent in 2019 and 0.2 percent in 2020. The base of the new temporary tax would be expanded to generally equal federal adjusted gross income less $2,000 for each personal exemption allowance available on the Taxpayer’s federal income tax return. For purposes of the estimate of revenue associated with the new temporary tax, we assume that the bill would be amended to allow for required deductions for various sources of income exempt from State income tax by Federal Law and for the State tax refund accounting adjustment. The proposed change would result in a decrease in State Personal Income Tax collections of roughly $650.0 million in FY2018, $1.7 billion in FY2019, $1.8 billion in FY2020, and roughly $2.0 billion in FY2021.
    
    The proposed bill also authorizes the phase-out of the Corporation Net Income Tax rate by one percentage point per year and the phase-down of the Severance Tax by one percentage point over two consecutive years beginning in the year that the Temporary Single Rate Income Tax rate falls to zero as long as the combined Rainy Day Fund balance total is at least 10 percent of the State General Revenue Fund budget. The earliest date contemplated by the provisions of this bill for these phase-downs to begin would be 2021. No estimate is provided for these proposed changes due to concern that the triggering criteria would not be met absent the implementation of other financial changes not covered within this bill.
    
    The fiscal consequences to the State General Revenue Fund (i.e., Current Law absent any proposed enhancements to balance FY2018 Budget) associated with the provisions of this bill are as follows:
    
    Fiscal Year--Consumption Tax-Income Tax=Net Change
    FY2018--+$1.20 billion-$650 million=+$550 million
    FY2019--+$1.33 billion-$1.70 billion=-$370 million
    FY2020--+$1.36 billion-$1.80 billion=-$440 million
    FY2021--+$1.39 billion-$2.00 billion=-$610 million
    
    The cumulative revenue impact following the first four years of enactment would be a net General Revenue Fund decline of $870.0 million. The impact is positive for FY2018 primarily due to consumption tax changes, inclusive of the two percentage point increase and base-broadening measures, that occur six months prior to extensive modification to the existing income tax structure.
    
    The proposed bill represents the most massive tax reform effort of any State in recent memory. Most states commit significant resources toward adequate measurement of tax reform impact on businesses and residents prior to adoption of a significant change. The resources and timeframe for the preparation of this fiscal note are woefully inadequate to properly measure the cumulative extent of all consequences associated with proposed changes. It is presumed that one of the possible objectives behind this proposed bill may be greater economic growth over time. However, the provisions of this bill effectively increase taxes on business inputs by an amount that is at least double the potential income tax savings on business profits. The greater tax savings would occur for a number of individuals with wage and salary income and those with retirement income. Significantly higher business tax burdens could, in effect, produce undesired outcomes. All taxes are ultimately paid by individuals. However, higher indirect taxes on business purchases could be priced economically in terms of some combination of lower wage income, lower employment, and higher consumer prices. The private sector service economy is currently much smaller in West Virginia than the national average. The State’s per capita Gross State Product attributable to the private service sector was just $21,414 in 2014, trailing the national average of $36,836 by more than 40 percent.
    
    The Tax Department anticipates significant leakages due to compliance and economic issues associated with the increased tax rate for goods and services. It is plausible that individuals may take advantage of lower tax rates in surrounding states, particularly within border communities. Due to the difficulty in anticipating consumer behavior, and especially on a restricted timetable, the estimates enclosed in this brief analysis will not necessarily reflect the full extent of the impacts such consumption shifts will have on revenues.
    
    A thorough independent analysis of the economic consequences associated with massive tax changes is strongly recommended.
    
    The State Tax Department will incur additional administrative costs of $245,000 for the remainder of FY2017, $230,000 in FY2018, and $235,000 for FY2019.



Memorandum


    The stated purpose of this bill is to prospectively repeal the consumer sales and service tax, the use tax and the personal income tax, to enact the general consumption tax law and the temporary single rate income tax law and to phase out the corporation net income tax.
    
    The proposed bill contains several possible title defects in West Virginia Code §§11-13A et seq., 11-15 et seq., 11-15A et seq., and 11-21 et seq. The definitions of a number of terms used in the proposed bill, including those for “person or persons,” “prepaid wireless calling service,” and “service and selected service,” are inconsistent with either those used in West Virginia Code §11-15B or the Streamlined Sales and Use Tax Agreement (SSUTA) of which West Virginia is a part. Inconsistencies in these definitions can cause West Virginia to violate the Agreement.
    
    As written, the proposed bill does not define what is intended by the term “appliances” (see West Virginia Code §11-15C-9(a)(7) for reference) nor what is intended by the term “responsible person” (West Virginia Code §11-15C-19). Litigation may be necessary for the latter to determine what individuals the bill is referencing. Wording in the proposed bill related to the School Major Improvement Fund and the School Construction Fund, subsections (b) and (c) of West Virginia Code §11-15C-24, respectively, mistakenly reference “section sixteen of this article” when §11-15C-18 should be referenced.
    
    Subsection (e) of West Virginia Code §11-15C-24 presumes voter ratification of the “Fair and Simple Tax Reform Amendment to the constitution of this state.” However, the bill makes no other mention of such an amendment and makes no citation to where any such amendment has been proposed.
    
    Changes to West Virginia Code §11-24 et seq. of the proposed bill are confusing. As written, proposed changes provide for conditions once the rate reaches 1 percent (see West Virginia Code §11-24-4(9) for reference). However, the use of the bill’s “whichever is greater” language may create an impasse. Further, the tax rate putatively imposed by this new subsection will be suspended until Tax Year 2021, even though it purports to be effective for tax years beginning January 1, 2018.
    
     Person submitting Fiscal Note: Mark Muchow
     Email Address: kerri.r.petry@wv.gov