Date Requested: May 24, 2017
Time Requested: 01:32 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
4019 Comm. Sub. Eng. HB107
CBD Subject: Governor -- Bills Requested By


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Increases Revenue From Existing Sources, Increases Existing Expenses



Fiscal Note Summary


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


    This analysis addresses the Engrossed Committee Substitute for House Bill 107 as passed by the House of Delegates on May 19, 2017.
    
    According to our interpretation, passage of this bill would result in a potential net gain of roughly $105.5 million in FY2018 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases six months prior to changes to the Personal Income Tax structure that result in reductions compared with current Law. Thereafter, State General Revenue Fund tax collection gains would begin to slow as the phase-in of income tax changes take effect. It is expected that the General Revenue Fund would increase by roughly $72.3 million in FY2019, by $38.2 million in FY2020, by $30.6 in FY2021, and by $27.3 million in FY2022. Net revenue gains in following years gradually dissipate as losses related to changes to taxable Social Security income outweigh revenue increases in sales tax base-broadening enhancements.
    
    The proposed bill would alter the current structure the sales tax and Personal Income Tax and raise the Qualified Rehabilitated Historic Building Tax Credit to 25 percent of qualified investments. Specifically, with respect to the sales tax, the bill would remove exemptions for telecommunications services; electronic data processing; health and fitness memberships; primary opinion research; materials directly used in communications with the exception of those materials used for developing broadband infrastructure; and the annual Division of Highways transfer for sales taxes paid on construction materials. The bill would alter current Law affecting contracting by taxing the first $40,000 of labor services. All changes would be effective July 1, 2017 with the exception of the Division of Highways transfer, which would be effective June 1, 2017. Based on our understanding, these base-broadening enhancements and other changes would increase General Revenue Fund collections by roughly $124.2 million in FY2018, reflecting an 11-month collection period, $137.4 million in FY2019, and $140.4 million in FY2020. By FY2022, estimated increases to General Revenue Fund revenue collections are expected to be approximately $148.0 million. It is anticipated that the proposed bill would result in a small increase in revenues for the Sales Tax Increment Financing (STIF) Districts and approximately $6 million for the local governments that levy municipal sales taxes.
    
    With the window of time closing between now and July 1st, there is a growing likelihood of lower initial collections due to the lack of time for vendors and tax collectors to adequately prepare for the upcoming tax changes. Assuming normal growth in the sales tax base, FY2019 tax receipts would rise by $137.4 million.
    
    With respect to the Personal Income Tax, the proposed bill would allow all military retirement benefits as a decreasing modification beginning January 1, 2018; would implement a three-year phase-out of taxable Social Security income for those making less than $100,000 by exempting 25 percent beginning January 1, 2018, 50 percent January 1, 2019, and 100 percent January 1, 2020; and would increase the personal exemption allowance to $2,500 per person for individuals with federal adjusted gross income of less than $100,000 beginning January 1, 2018. These changes are expected to reduce General Revenue Fund collections by roughly $18.7 million in FY2018 and $63.5 million in FY2019. In out years, annual losses resulting from these changes to Personal Income Tax are expected to be $100.6 million in FY2020, $112.2 million in FY2021, and $119.1 million in FY2022. These losses are primarily driven by the phase-out of taxable Social Security income for those making less than $100,000 and anticipated increased costs as the State’s aging population increasingly receives Social Security income. It is also important to note the presence of a cliff in which Taxpayers with similar liabilities will receive different tax treatment. For example, Taxpayers slightly below the income cutoff are eligible to deduct taxable Social Security benefits while Taxpayers slightly above the cutoff are not.
    
    It is our assumption that the intent of the proposed bill was to apply the increased personal exemption and Social Security exclusion income cutoffs on a per return basis rather than per individual. If the intent was to allow these changes on a per individual basis, expected revenue deficits are anticipated to be much greater than those estimated in this analysis. With respect to Social Security income, the full-year impact on FY2020 revenues could be an additional loss of at least $32.0 million. The current structure of Personal Income Tax returns makes adequate analysis of the deficit resulting from the increased personal exemption tied to individual income cutoff rather than the tax return income cutoff difficult.
    
    The marginal tax rate on incremental income in excess of $99,999 is very high given an abrupt end to both the proposed extra $500 personal exemption allowance and the taxable Social Security exclusions. The proposed $100,000 income cutoff would apply equally to both joint filers’ income tax returns and married filing separate filers. Therefore, many joint filers with income of $100,000 or more might alter their tax filing status to married filing separate status to take advantage of the proposed tax provisions available to lower income filers resulting in additional loss of tax revenue. Our expectation is that this altered behavior could impact General Revenue Fund collections by between $3.5 million and $5.0 million in FY2019, by between $8.0 million and $10.7 million in FY2020, and by between $17.2 million and $22.9 million in FY2021. Under the proposed bill, annual revenue losses would continue to deepen as more individuals receive Social Security income.
    
    Our interpretation of the proposed increase to the Qualified Rehabilitated Historic Building Tax Credit to 25 percent of qualified investments is expected to result in a revenue loss of roughly $1.6 million per year beginning as early as FY2019.
    
    Additional costs incurred by the State Tax Department are expected to be $2,000 for the remainder of FY2017, $10,000 in FY2018, and $65,000 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 2,000 10,000 65,000
Personal Services 2,000 10,000 45,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 20,000
2. Estimated Total Revenues 0 105,500,000 28,800,000


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


    This analysis addresses the Engrossed Committee Substitute for House Bill 107 as passed by the House of Delegates on May 19, 2017.
    
    According to our interpretation, passage of this bill would result in a potential net gain of roughly $105.5 million in FY2018 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases six months prior to changes to the Personal Income Tax structure that result in reductions compared with current Law. Thereafter, State General Revenue Fund tax collection gains would begin to slow as the phase-in of income tax changes take effect. It is expected that the General Revenue Fund would increase by roughly $72.3 million in FY2019, by $38.2 million in FY2020, by $30.6 in FY2021, and by $27.3 million in FY2022. Net revenue gains in following years gradually dissipate as losses related to changes to taxable Social Security income outweigh revenue increases in sales tax base-broadening enhancements.
    
    The proposed bill would alter the current structure the sales tax and Personal Income Tax and raise the Qualified Rehabilitated Historic Building Tax Credit to 25 percent of qualified investments. Specifically, with respect to the sales tax, the bill would remove exemptions for telecommunications services; electronic data processing; health and fitness memberships; primary opinion research; materials directly used in communications with the exception of those materials used for developing broadband infrastructure; and the annual Division of Highways transfer for sales taxes paid on construction materials. The bill would alter current Law affecting contracting by taxing the first $40,000 of labor services. All changes would be effective July 1, 2017 with the exception of the Division of Highways transfer, which would be effective June 1, 2017. Based on our understanding, these base-broadening enhancements and other changes would increase General Revenue Fund collections by roughly $124.2 million in FY2018, reflecting an 11-month collection period, $137.4 million in FY2019, and $140.4 million in FY2020. By FY2022, estimated increases to General Revenue Fund revenue collections are expected to be approximately $148.0 million. It is anticipated that the proposed bill would result in a small increase in revenues for the Sales Tax Increment Financing (STIF) Districts and approximately $6 million for the local governments that levy municipal sales taxes.
    
    With the window of time closing between now and July 1st, there is a growing likelihood of lower initial collections due to the lack of time for vendors and tax collectors to adequately prepare for the upcoming tax changes. Assuming normal growth in the sales tax base, FY2019 tax receipts would rise by $137.4 million.
    
    With respect to the Personal Income Tax, the proposed bill would allow all military retirement benefits as a decreasing modification beginning January 1, 2018; would implement a three-year phase-out of taxable Social Security income for those making less than $100,000 by exempting 25 percent beginning January 1, 2018, 50 percent January 1, 2019, and 100 percent January 1, 2020; and would increase the personal exemption allowance to $2,500 per person for individuals with federal adjusted gross income of less than $100,000 beginning January 1, 2018. These changes are expected to reduce General Revenue Fund collections by roughly $18.7 million in FY2018 and $63.5 million in FY2019. In out years, annual losses resulting from these changes to Personal Income Tax are expected to be $100.6 million in FY2020, $112.2 million in FY2021, and $119.1 million in FY2022. These losses are primarily driven by the phase-out of taxable Social Security income for those making less than $100,000 and anticipated increased costs as the State’s aging population increasingly receives Social Security income. It is also important to note the presence of a cliff in which Taxpayers with similar liabilities will receive different tax treatment. For example, Taxpayers slightly below the income cutoff are eligible to deduct taxable Social Security benefits while Taxpayers slightly above the cutoff are not.
    
    It is our assumption that the intent of the proposed bill was to apply the increased personal exemption and Social Security exclusion income cutoffs on a per return basis rather than per individual. If the intent was to allow these changes on a per individual basis, expected revenue deficits are anticipated to be much greater than those estimated in this analysis. With respect to Social Security income, the full-year impact on FY2020 revenues could be an additional loss of at least $32.0 million. The current structure of Personal Income Tax returns makes adequate analysis of the deficit resulting from the increased personal exemption tied to individual income cutoff rather than the tax return income cutoff difficult.
    
    The marginal tax rate on incremental income in excess of $99,999 is very high given an abrupt end to both the proposed extra $500 personal exemption allowance and the taxable Social Security exclusions. The proposed $100,000 income cutoff would apply equally to both joint filers’ income tax returns and married filing separate filers. Therefore, many joint filers with income of $100,000 or more might alter their tax filing status to married filing separate status to take advantage of the proposed tax provisions available to lower income filers resulting in additional loss of tax revenue. Our expectation is that this altered behavior could impact General Revenue Fund collections by between $3.5 million and $5.0 million in FY2019, by between $8.0 million and $10.7 million in FY2020, and by between $17.2 million and $22.9 million in FY2021. Under the proposed bill, annual revenue losses would continue to deepen as more individuals receive Social Security income.
    
    Our interpretation of the proposed increase to the Qualified Rehabilitated Historic Building Tax Credit to 25 percent of qualified investments is expected to result in a revenue loss of roughly $1.6 million per year beginning as early as FY2019.
    
    Additional costs incurred by the State Tax Department are expected to be $2,000 for the remainder of FY2017, $10,000 in FY2018, and $65,000 for each year thereafter.
    



Memorandum


    



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