FISCAL NOTE

Date Requested: March 10, 2017
Time Requested: 01:30 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2864 Introduced HB2933
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General 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 reduce the rate of the consumer sales and service tax and use tax; to provide for further reductions to the rate of tax under certain circumstances and to eliminate certain exemptions and special rates. According to our interpretation, the proposed bill would reduce the Consumer Sales and Service Tax and Use Tax rate to 5.5 percent effective January 1, 2018 and implement a decreasing mechanism based on a number of criteria to a minimum sales tax rate of 5 percent. The proposed bill also removes certain exemptions for telecommunications, personal and professional services, contracting services, and certain utilities. Other proposed changes affecting motor vehicles are not addressed in this analysis; the West Virginia Division of Motor Vehicles will provide a revenue estimate of these changes. As written, the bill would apply the sales tax to water, education, and medical services and out-of-pocket medical expenses. We note that this may not be the bill’s intent. In order to accomplish the objective of taxing water utilities, the exclusion of services subject to regulation by the Public Service Commission (PSC) would have to be amended. We thus assume that these services and out-of-pocket medical expenses were intended to remain excluded from taxation and exclude these items in the enclosed analysis. Proposed base broadening enhancements have the potential to add roughly $105.6 million in FY2018 General Revenue Fund collections, largely driven by new taxes on services and telecommunications. This estimate reflects five months of collections, as base broadening would not occur until January 1, 2018, at the new rate of 5.5 percent. FY2019 collections could increase by $259.8 million, reflecting a full-year of collections at the new rate for base-broadening enhancements only. These estimates by major category are provided in the table below. FY2018 FY2019 Telecommunications $22.9 million $56.4 million Personal Services $1.8 million $4.4 million Professional Services $31.6 million $77.8 million Contracting Services $42.4 million $104.3 million Mobile Homes $1.9 million $4.7 million Day Care Services $1.3 million $3.3 million Other Services and Expenses $3.7 million $9.0 million Total Estimated Collections $105.6 million $259.8 million In total, the net revenue increase, including both base-broadening enhancements and impact of the declining rate on revenues, is expected to be roughly $80.8 million in FY2018 and $152.3 million in FY2019, the first full year at the reduced rate of 5.5 percent. We project the tax rate could decline to 5.25 percent beginning January 1, 2020 and to 5.0 percent beginning January 1, 2021. Revenue gains in the short term are offset by the declining sales tax rate. It is expected that the revenue gain resulting from this legislation would decline through FY2022, at which point it would stabilize absent other revenue-affecting measures. Fiscal Year Net Revenue Impact 2018 $80.8 million 2019 $152.3 million 2020 $135.1 million 2021 $70.3 million 2022 $23.2 million Additional costs incurred by the State Tax Department would be $55,000 in FY2018 and $80,000 for each year thereafter.



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 0 55,000 80,000
Personal Services 0 35,000 70,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 20,000 10,000
2. Estimated Total Revenues 0 80,800,000 23,200,000


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


According to our interpretation, the proposed bill would reduce the Consumer Sales and Service Tax and Use Tax rate to 5.5 percent effective January 1, 2018 and implement a decreasing mechanism based on a number of criteria to a minimum sales tax rate of 5 percent. The proposed bill also removes certain exemptions for telecommunications, personal and professional services, contracting services, and certain utilities. Other proposed changes affecting motor vehicles are not addressed in this analysis; the West Virginia Division of Motor Vehicles will provide a revenue estimate of these changes. As written, the bill would apply the sales tax to water, education, and medical services and out-of-pocket medical expenses. We note that this may not be the bill’s intent. In order to accomplish the objective of taxing water utilities, the exclusion of services subject to regulation by the Public Service Commission (PSC) would have to be amended. We thus assume that these services and out-of-pocket medical expenses were intended to remain excluded from taxation and exclude these items in the enclosed analysis. Proposed base broadening enhancements have the potential to add roughly $105.6 million in FY2018 General Revenue Fund collections, largely driven by new taxes on services and telecommunications. This estimate reflects five months of collections, as base broadening would not occur until January 1, 2018, at the new rate of 5.5 percent. FY2019 collections could increase by $259.8 million, reflecting a full-year of collections at the new rate for base-broadening enhancements only. These estimates by major category are provided in the table below. FY2018 FY2019 Telecommunications $22.9 million $56.4 million Personal Services $1.8 million $4.4 million Professional Services $31.6 million $77.8 million Contracting Services $42.4 million $104.3 million Mobile Homes $1.9 million $4.7 million Day Care Services $1.3 million $3.3 million Other Services and Expenses $3.7 million $9.0 million Total Estimated Collections $105.6 million $259.8 million In total, the net revenue increase, including both base-broadening enhancements and impact of the declining rate on revenues, is expected to be roughly $80.8 million in FY2018 and $152.3 million in FY2019, the first full year at the reduced rate of 5.5 percent. We project the tax rate could decline to 5.25 percent beginning January 1, 2020 and to 5.0 percent beginning January 1, 2021. Revenue gains in the short term are offset by the declining sales tax rate. It is expected that the revenue gain resulting from this legislation would decline through FY2022, at which point it would stabilize absent other revenue-affecting measures. Fiscal Year Net Revenue Impact 2018 $80.8 million 2019 $152.3 million 2020 $135.1 million 2021 $70.3 million 2022 $23.2 million Additional costs incurred by the State Tax Department would be $55,000 in FY2018 and $80,000 for each year thereafter.



Memorandum


The stated purpose of this bill is to reduce the rate of the consumer sales and service tax and use tax; to provide for further reductions to the rate of tax under certain circumstances and to eliminate certain exemptions and special rates. The proposed bill would benefit from review by the Public Service Commission (PSC) to check for conflicts of law, particularly regarding dueling fees (e.g., water delivered through pipes loses its exemption status in the bill). The bill states that sales of hookup services would not be exempted in West Virginia Code §11-15-2; such hookups are considered taxable under current law. In contrast to other exemptions removed in the proposed language, the bill does not specify water as being effective January 1, 2018. It is unclear whether this was the intent. Further, the amended language in West Virginia Code §11-15-9 et seq. names specific items as being subject to the tax, rather than repealing the exemption language. This could lead to some Taxpayers making the argument in litigation that items were not specifically named as subject to the tax. This is a common argument even with current statute. In West Virginia Code §11-15A-3, the bill refers to changes to the tax on mobile homes as an “exemption” when it is more accurately describe as a reduced rate.



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov