FISCAL NOTE
FUND(S):
General Revenue Fund, Local Property Tax, Tax Revenue Act of 2014
Sources of Revenue:
General Fund,Special Fund,Other Fund Local Property Tax, Tax R
Legislation creates:
A New Fund
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to create the Tax Revenue Act of 2014. The bill increases taxes on tobacco, beer, wine and liquor and provides for assessment of business machinery and equipment at salvage value. It establishes a special account for the increased revenue and provides that the first $1 million received from the increases be directed to the West Virginia Department of Agriculture to assist farmers with tobacco crop replacement programs. The bill also permits counties to make application for distribution of an amount equal to the 2013 revenue received by the county from the personal property tax on business machinery and equipment.
As written, this bill would increase the tax on cigarettes from $0.55 per pack of 20 cigarettes to $1.55 per pack, increase the tax on other tobacco products from 7 percent of the wholesale price to 10.5 percent, increase the beer barrel tax from $5.50 per barrel to $6.875 per barrel, increase the wine liter tax from $026406 per liter to $0.33010 per liter and increase the wholesale price of liquor sold by the State by 25 percent. Also, the bill would provide that the assessed value of business and commercial machinery and equipment, for Property Tax purposes, be assessed at salvage value. The bill additionally provides for the expenditure of the revenues generated by the increased taxes.
According to our interpretation, passage of this bill would result would result in greater centralization of government in West Virginia through the replacement of some locally imposed property tax revenues with additional State imposed taxes and fees. Local governments would be reimbursed for some portion of the calculated amount initially lost through lower tax receipts associated with the reduced valuation of certain types of business personal property.
The provisions of the bill fail to provide complete guidance with regard to the calculation of the base amount subject to reimbursement for each local jurisdiction, the method of reimbursement, the local jurisdictions eligible for reimbursement or the rules for determining the portion of taxes and fees allocated to the special revenue fund established to provide annual reimbursements. Therefore, the calculations of this fiscal note incorporate the following assumptions:
1. All local jurisdictions with tax collections attributable to business machinery and equipment are eligible for special fund reimbursements. These local jurisdictions include county commissions, school boards and municipalities. The bill uses the term “counties”.
2. Reimbursements to school boards would be pro-rated in a manner that provides local support funds for the State Aid to Schools formula. Otherwise, the State General Revenue Fund Budget effectively absorbs an additional cost equal to roughly 30% of the value of the local property tax reduction.
3. The base amount for each jurisdiction equals the full amount of tax assessed on business machinery and equipment and not the differential between the full amount and the reduced salvage value yield.
4. The revenue split between the General Revenue Fund and the special revenue fund will be based upon tax rate (e.g., the yield from the first 55 cents tax per pack of cigarettes accrues to the General Revenue Fund and the yield from the additional $1.00 per pack accrues to the special revenue fund). Both funds share in any revenue decline associated with reduced consumption tied to the higher tax rate.
5. If the yield of the special revenue fund falls below the calculated amount of 2013 business personal property taxes assessed on machinery and equipment, then reimbursements are pro-rated based on available funds.
6. It is assumed that the timing of reimbursements occurs at the same time local property taxes are due related to the July 1, 2014 assessment date and then each year thereafter.
7. It is assumed that business machinery and equipment property taxes affected by this bill do not include any similar property taxes paid by those assessed as public utilities or under the personal property tax rules applied to the oil and natural gas industry.
Based on the aforementioned assumptions, passage of this bill would result in the valuation of business machinery and equipment at salvage value for property tax purposes beginning on and after July 1, 2014. Revenues associated with valuations set on July 1, 2014 are not due to local governments in two separate installments until September 1, 2015 and March 1, 2016. The initial reduction in property valuations will result in an estimated decrease in property tax collections of $145 million in Fiscal Year 2016. Incorporating the impact on the school aid formula, the revenue reduction would be roughly allocated as follows:
• Local County School Boards: $52 million
• State General Revenue Fund: $44 million
• County Commissions: $39 million
• Municipalities: $10 million
However, the reduction distribution will differ for each county school, each county commission and each municipality based on both distribution of affected property and tax rate differences. On a statewide basis, nearly 40% of all personal property taxes are imposed as either excess levies or bond levies approved by the electorate.
Passage of this bill would also increase a number of State taxes as replacement funding for lost local property taxes. Effective July 1, 2014, the bill would raise the cigarette excise tax from 55 cents per pack to $1.55 per pack, increase the tax on other tobacco products from 7 percent of the wholesale price to 10.5 percent, increase the beer barrel tax from $5.50 per barrel to $6.875 per barrel, increase the wine liter tax from 26.406 cents per liter to 33.01 cents per liter and increase the wholesale price of liquor sold by the State by 25 percent. Collections associated with these higher taxes and fees would begin with some lag in Fiscal Year 2015 or roughly one year prior to the realization of revenue loss associated with the property tax changes. However, less than a full-year of revenue enhancement would be realized in Fiscal Year 2015 due to both a lag in the timing of tax receipts and the lack of a floor stock tax, particularly on cigarettes at the time of the rate change. Higher than normal tax receipts would occur prior to the rate change and lower than usual activity would occur immediately after the rate change due to Taxpayer behavior shifting purchases to a period prior to the tax rate increases. The following revenue estimates reflect a full year revenue effect that might not fully be realized until Fiscal Year 2016 (the Net Gain amounts include the increase in revenue attribute to the change in the tax rate and the reduction in the Consumers Sales and Service Tax attributable to declines in consumption attributable to higher prices for the indicated commodities).
Tax Type Net Gain
Cigarettes $119.50 Million
Other Tobacco $ 3.00 Million
Beer $ 1.75 Million
Wine Liter $ 0.49 Million
Liquor Mark-Up $ 3.28 Million
Net Change $128.02 Million
Tax Type General Revenue
Cigarettes -$22.20 Million
Other Tobacco -$ 0.40 Million
Beer -$ 0.15 Million
Wine Liter -$ 0.01 Million
Liquor Mark-Up -$ 0.12 Million
Net Change -$22.88 Million
Tax Type Tax Revenue Act of 2014 Fund
Cigarettes $141.70 Million
Other Tobacco $ 3.40 Million
Beer $ 1.90 Million
Wine Liter $ 0.50 Million
Liquor Mark-Up $ 3.40 Million
Net Change $150.90 Million
The State tax increases would initially generate roughly $150.9 million for the Tax Revenue Act of 2014 Fund. The first $1 million generated from the increased taxes would be directed to the West Virginia Department of Agriculture to assist farmers with tobacco crop replacement programs. The remaining $149.9 million would be available for the reimbursement of Property Tax foregone on business machinery and equipment. The amount available for reimbursement is an amount slightly greater than the initial calculated reduction in local business property taxes. In addition, the State General Revenue Funds would decrease by roughly $22.88 million due to reductions in base excise tax collections and sales tax collections associated with tax induced reduced consumption levels of cigarettes, tobacco, beer, wine and alcohol. Local municipal governments currently imposing local sales taxes may also experience some decrease in local sales tax collections, especially in areas bordering the State of Ohio. The replacement funds would initially cover all of the local property tax revenue loss. It is our interpretation that the local property revenue loss subject to reimbursement would be fixed forever according to the actual numbers for the 2013 tax year. Excise tax revenues, especially cigarette excise tax collections, tend to decrease slightly over time with changes in Taxpayer behavior and demographics. Therefore, the coverage ratio for the annual $145 million commitment may also decrease over time.
Additional administrative costs to the State Tax Department attributable to passage of this bill are unknown, but would likely be substantial. Also, local governments are likely to incur some additional administrative costs attributable to passage of this bill.
Under the assumption that only a one-time measurement of values of commercial and industrial machinery and equipment property tax by all individual local governments is necessary, than there would be a significant one-time cost to the State Auditor’s Office and the State Tax Department to set the baseline number subject to reimbursement for all 55 county commissions, all 55 county school boards, and all 235 municipal governments, including splits between regular levy taxes, individual excise levy taxes, and individual bond levies.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2014
Increase/Decrease
(use"-") |
2015
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
0 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
0 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
As written, this bill would increase the tax on cigarettes from $0.55 per pack of 20 cigarettes to $1.55 per pack, increase the tax on other tobacco products from 7 percent of the wholesale price to 10.5 percent, increase the beer barrel tax from $5.50 per barrel to $6.875 per barrel, increase the wine liter tax from $026406 per liter to $0.33010 per liter and increase the wholesale price of liquor sold by the State by 25 percent. Also, the bill would provide that the assessed value of business and commercial machinery and equipment, for Property Tax purposes, be assessed at salvage value. The bill additionally provides for the expenditure of the revenues generated by the increased taxes.
According to our interpretation, passage of this bill would result would result in greater centralization of government in West Virginia through the replacement of some locally imposed property tax revenues with additional State imposed taxes and fees. Local governments would be reimbursed for some portion of the calculated amount initially lost through lower tax receipts associated with the reduced valuation of certain types of business personal property.
The provisions of the bill fail to provide complete guidance with regard to the calculation of the base amount subject to reimbursement for each local jurisdiction, the method of reimbursement, the local jurisdictions eligible for reimbursement or the rules for determining the portion of taxes and fees allocated to the special revenue fund established to provide annual reimbursements. Therefore, the calculations of this fiscal note incorporate the following assumptions:
1. All local jurisdictions with tax collections attributable to business machinery and equipment are eligible for special fund reimbursements. These local jurisdictions include county commissions, school boards and municipalities. The bill uses the term “counties”.
2. Reimbursements to school boards would be pro-rated in a manner that provides local support funds for the State Aid to Schools formula. Otherwise, the State General Revenue Fund Budget effectively absorbs an additional cost equal to roughly 30% of the value of the local property tax reduction.
3. The base amount for each jurisdiction equals the full amount of tax assessed on business machinery and equipment and not the differential between the full amount and the reduced salvage value yield.
4. The revenue split between the General Revenue Fund and the special revenue fund will be based upon tax rate (e.g., the yield from the first 55 cents tax per pack of cigarettes accrues to the General Revenue Fund and the yield from the additional $1.00 per pack accrues to the special revenue fund). Both funds share in any revenue decline associated with reduced consumption tied to the higher tax rate.
5. If the yield of the special revenue fund falls below the calculated amount of 2013 business personal property taxes assessed on machinery and equipment, then reimbursements are pro-rated based on available funds.
6. It is assumed that the timing of reimbursements occurs at the same time local property taxes are due related to the July 1, 2014 assessment date and then each year thereafter.
7. It is assumed that business machinery and equipment property taxes affected by this bill do not include any similar property taxes paid by those assessed as public utilities or under the personal property tax rules applied to the oil and natural gas industry.
Based on the aforementioned assumptions, passage of this bill would result in the valuation of business machinery and equipment at salvage value for property tax purposes beginning on and after July 1, 2014. Revenues associated with valuations set on July 1, 2014 are not due to local governments in two separate installments until September 1, 2015 and March 1, 2016. The initial reduction in property valuations will result in an estimated decrease in property tax collections of $145 million in Fiscal Year 2016. Incorporating the impact on the school aid formula, the revenue reduction would be roughly allocated as follows:
• Local County School Boards: $52 million
• State General Revenue Fund: $44 million
• County Commissions: $39 million
• Municipalities: $10 million
However, the reduction distribution will differ for each county school, each county commission and each municipality based on both distribution of affected property and tax rate differences. On a statewide basis, nearly 40% of all personal property taxes are imposed as either excess levies or bond levies approved by the electorate.
Passage of this bill would also increase a number of State taxes as replacement funding for lost local property taxes. Effective July 1, 2014, the bill would raise the cigarette excise tax from 55 cents per pack to $1.55 per pack, increase the tax on other tobacco products from 7 percent of the wholesale price to 10.5 percent, increase the beer barrel tax from $5.50 per barrel to $6.875 per barrel, increase the wine liter tax from 26.406 cents per liter to 33.01 cents per liter and increase the wholesale price of liquor sold by the State by 25 percent. Collections associated with these higher taxes and fees would begin with some lag in Fiscal Year 2015 or roughly one year prior to the realization of revenue loss associated with the property tax changes. However, less than a full-year of revenue enhancement would be realized in Fiscal Year 2015 due to both a lag in the timing of tax receipts and the lack of a floor stock tax, particularly on cigarettes at the time of the rate change. Higher than normal tax receipts would occur prior to the rate change and lower than usual activity would occur immediately after the rate change due to Taxpayer behavior shifting purchases to a period prior to the tax rate increases. The following revenue estimates reflect a full year revenue effect that might not fully be realized until Fiscal Year 2016 (the Net Gain amounts include the increase in revenue attribute to the change in the tax rate and the reduction in the Consumers Sales and Service Tax attributable to declines in consumption attributable to higher prices for the indicated commodities).
Tax Type Net Gain
Cigarettes $119.50 Million
Other Tobacco $ 3.00 Million
Beer $ 1.75 Million
Wine Liter $ 0.49 Million
Liquor Mark-Up $ 3.28 Million
Net Change $128.02 Million
Tax Type General Revenue
Cigarettes -$22.20 Million
Other Tobacco -$ 0.40 Million
Beer -$ 0.15 Million
Wine Liter -$ 0.01 Million
Liquor Mark-Up -$ 0.12 Million
Net Change -$22.88 Million
Tax Type Tax Revenue Act of 2014 Fund
Cigarettes $141.70 Million
Other Tobacco $ 3.40 Million
Beer $ 1.90 Million
Wine Liter $ 0.50 Million
Liquor Mark-Up $ 3.40 Million
Net Change $150.90 Million
The State tax increases would initially generate roughly $150.9 million for the Tax Revenue Act of 2014 Fund. The first $1 million generated from the increased taxes would be directed to the West Virginia Department of Agriculture to assist farmers with tobacco crop replacement programs. The remaining $149.9 million would be available for the reimbursement of Property Tax foregone on business machinery and equipment. The amount available for reimbursement is an amount slightly greater than the initial calculated reduction in local business property taxes. In addition, the State General Revenue Funds would decrease by roughly $22.88 million due to reductions in base excise tax collections and sales tax collections associated with tax induced reduced consumption levels of cigarettes, tobacco, beer, wine and alcohol. Local municipal governments currently imposing local sales taxes may also experience some decrease in local sales tax collections, especially in areas bordering the State of Ohio. The replacement funds would initially cover all of the local property tax revenue loss. It is our interpretation that the local property revenue loss subject to reimbursement would be fixed forever according to the actual numbers for the 2013 tax year. Excise tax revenues, especially cigarette excise tax collections, tend to decrease slightly over time with changes in Taxpayer behavior and demographics. Therefore, the coverage ratio for the annual $145 million commitment may also decrease over time.
Additional administrative costs to the State Tax Department attributable to passage of this bill are unknown, but would likely be substantial. Also, local governments are likely to incur some additional administrative costs attributable to passage of this bill.
Under the assumption that only a one-time measurement of values of commercial and industrial machinery and equipment property tax by all individual local governments is necessary, than there would be a significant one-time cost to the State Auditor’s Office and the State Tax Department to set the baseline number subject to reimbursement for all 55 county commissions, all 55 county school boards, and all 235 municipal governments, including splits between regular levy taxes, individual excise levy taxes, and individual bond levies.
Memorandum
The stated purpose of this bill is to create the Tax Revenue Act of 2014. The bill increases taxes on tobacco, beer, wine and liquor and provides for assessment of business machinery and equipment at salvage value. It establishes a special account for the increased revenue and provides that the first $1 million received from the increases be directed to the West Virginia Department of Agriculture to assist farmers with tobacco crop replacement programs. The bill also permits counties to make application for distribution of an amount equal to the 2013 revenue received by the county from the personal property tax on business machinery and equipment.
The bill, as written, may raise State Constitutional issues.
The West Virginia Constitution requires that like property be taxed no higher than other types of property of equal value. As written, the bill would assess business and commercial machinery and equipment at salvage value. However, some individuals, public utilities, railroads, and natural gas producers may operate identical machinery and equipment, but will not receive the same valuation treatment.
The provision in proposed W. Va. Code §11-28-1(b) pertaining to the tax imposed on the sale or use of tobacco products, other than cigarettes, provides that the tax is to “be increased by fifty percent whether sold at retail or wholesale.” The terminology in the current law indicates the tax is on the “wholesale price of each article or item of tobacco product other than cigarettes sold by the wholesaler or subjobber dealer, whether or not sold at wholesale, or if not sold, then at the same rate upon the use by the wholesaler or dealer.” The difference in language may result in different interpretations of the imposition of the proposed tax increase.
Person submitting Fiscal Note: Mark B. Muchow
Email Address: Roger.D.Cox@wv.gov