Date Requested: June 16, 2017
Time Requested: 08:41 AM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
4050 Engrossed SB1017
CBD Subject: Taxation


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 Senate Bill 1017 as passed on June 15, 2017. This analysis is contingent on the revenues and projected economic activity associated with the passage and enactment of Engrossed Senate Bill 1003, Relating generally to WV Parkways Authority, and Engrossed Senate Bill 1006, Increasing funding for State Road Fund, as recommended by the Governor.
    
    According to our interpretation, passage of this bill would result in a potential net gain of roughly $92.3 million in FY2018 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases six months prior to Personal Income Tax rate reductions in comparison with current Law. Thereafter, State General Revenue Fund tax collections would increase by roughly $62.7 million in FY2019, which incorporates the first full-year effect of the proposed Personal Income Tax reductions. The provisions of this bill would effectively increase current Law tax revenues by an estimated $61.8 million in FY2020, $61.5 million in FY2021, and $61.3 million in FY2022. Due to the provisions of a trigger mechanism to reduce Personal Income Tax rates, the net revenue impact would be reduced from current estimate under accelerated economic conditions. Details of the various proposed tax Law changes follow.
    
    The provisions of this bill would replace the current Severance Tax rate structure on coal with alternative tiered tax rate structures that reduce industry tax burden when prices are low and raise industry tax burden when prices are high. At current price levels, the proposed changes would result in a decrease in tax liability for steam coal and some potential small decrease in tax liability for certain types of thin-seam and some metallurgical coal. The net impact of these proposed Severance Tax changes would be a $37.4 million reduction in State coal Severance Tax collections in FY2018 relative to current Law. Producing coal counties would lose additional shared coal Severance Tax revenues of roughly $1.2 million in FY2018. Beginning in FY2019, the annual loss in State coal Severance Tax revenues would approach $38.3 million and the annual loss in county coal Severance Tax collections would approach or exceed $1.7 million per year. Based on past independent research reports, lower tax rates on steam coal may result in a very modest increase in annual production.
    
    Under the provisions of this bill, the State Consumer Sales and Service Tax and Use Tax rate would increase from 6 percent to 6.5 percent effective July 1, 2017. During the first full year of effect, this impact on the current base and the inclusion of the proposed base-broadening enhancements are expected to yield approximately $222 million for the State General Revenue Fund and up to $4 million for the Sales Tax Increment Financing (STIF) Districts. The sales tax would apply to: telecommunications services; digital goods; electronic data processing services; health fitness memberships; primary opinion research; services, machinery, supplies, and materials directly used or consumed for communication; and services, machinery, supplies, and materials directly used or consumed for transportation with the exception of coal transport. The bill would also eliminate the annual transfer of General Revenue Fund sales tax collections to the State Road Fund, an estimated net gain of $11.7 million per year for the General Fund, beginning with FY2018 sales. Finally, the provisions of this bill would add a new sales tax exemption for services of professional employer organizations, resulting in a small loss of revenue.
    
    Given that the sales tax provisions take effect on July 1, 2017, total General Revenue Fund collections for the 11-month collection period in FY2018 would be roughly $203.1 million, assuming full immediate compliance with the tax changes. 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 $238.4 million, inclusive of the State Road Fund sales tax transfer.
    
    Within the past five years, authority was given to municipal governments to impose a local sales tax of up to 1 percent in addition to the State sales tax. Currently, 28 municipal governments that account for roughly 17 percent of the State’s population impose a local sales tax with an annual yield of roughly $70 million. An additional 11 municipal governments plan to add a local sales tax beginning July 1, 2017. When the sales tax base is broadened, these municipal governments also gain additional tax collections. Passage of this bill would effectively enhance local municipal sales tax collections by roughly $2.4 million per year.
    
    Beginning in Tax Year 2018, the provisions of this bill would implement a sizable reduction in State Personal Income Tax rates for all filers. The current five-bracket tax rate structure with rates ranging from 3.0 percent to 6.5 percent would be replaced with a five-bracket system with the following rates effective January 1, 2018: 2.75 percent on the first $20,000 ($10,000 for married filing separate); 4.75 percent on taxable income ranging between $20,000 and $35,000 ($10,000 and $17,500 for married filing separate); 5.75 percent for taxable income between $35,000 and $125,000 ($17,500 to $62,5000 for married filing separate); 6 percent for taxable income between $125,000 and $150,000 ($62,500 to $75,000 for married filing separate); and 6.5 percent for taxable income of $150,000 or more ($75,000 for married filing separate) with a base tax of $8,625 ($4,312.50 for married filing separate). It is 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 for the fifth tier benefit from a reduced tax rate while Taxpayers slightly above the cutoff do not.
    
    Based on our understanding, the proposed changes to Personal Income Tax rates effective January 1, 2018 would reduce revenues by $38.0 million in FY2018, $96.0 million in FY2019, and $99.0 million in FY2020. Thereafter, revenue losses associated with this change to rates are expected to be $104.0 million in FY2021 and $109.0 million in FY2022. We note these estimates do not include reductions that could occur based on triggered reductions. The trigger mechanism and associated rate reductions are described below.
    
    Beginning as early as January 1, 2019, rates in the bottom four tiers may reduce to 2.4 percent, 4.4 percent, 5.75 percent, and 5.75 percent, respectively, if certain trigger conditions are met. Beginning as early as January 1, 2020, rates in the bottom four tiers may further reduce to 2.05 percent, 4.05 percent, 5.1 percent, and 5.5 percent, respectively, if certain trigger conditions are met. Beginning as early as January 1, 2021, rates in the bottom four tiers may further reduce to 1.75 percent, 3.8 percent, 4.65 percent, and 5.0 percent, respectively, if certain trigger conditions are met. Our interpretation of the conditions of this trigger follow.
    
    Based on our understanding, the trigger mechanism will first be evaluated after the completion of the 2018 fiscal year. A five-year average of cumulative Personal Income Tax and Consumer Sales and Service Tax and Use Tax revenues will be calculated, with the most recent of those five years being FY2018 revenues, along with a similar five-year average of revenues with the most recent of those five years being FY2017 revenues. If the difference between these averages indicates an increase, the amount of this increase is determined and compared to the anticipated fiscal cost of the next reduction in Personal Income Tax rates. If the cost of reducing Personal Income Tax rates is less than the revenue increase in both income tax and sales and use tax collections, the next rate reduction will occur effective January 1 of the next calendar year. In such a year as the trigger mechanism is effective for a third time, triggering the final proposed reduction in Personal Income Tax rates, the sales and use tax rate will also decrease from 6.5 percent to 6.25 percent.
    
    When considering all changes to Personal Income Taxes proposed in this bill (including both the proposed rate reductions and changes to modification for Social Security benefits, military retirement, personal exemptions, and others as described below) and sales tax enhancements, it does not appear that the proposed trigger would be in effect through FY2022. We note, however, that the differences in five-year averages in out years are approaching the associated cost of the next Personal Income Tax reduction, indicating that greater than anticipated growth in sales tax collections could affect this projection.
    
    The proposed bill also creates a one-time rebate of Personal Income Taxes paid by certain Taxpayers during TY2016. For resident Taxpayers having West Virginia taxable income of $10,000 or less, the rebate will be $150 per return. For resident Taxpayers having West Virginia taxable income of at least $10,000 but less than $25,000, the rebate will be $100 per return. Taxpayers must have had a positive West Virginia income tax liability on their 2016 return to receive the rebate. The proposed rebate is expected to reduce FY2018 revenues by $23.6 million.
    
    As written, the proposed bill would create a decreasing modification for Social Security benefits included in federal Adjusted Gross Income (AGI) when federal AGI is less than $75,000 ($37,500 for married filing separate). For the tax year beginning January 1, 2018, 50 percent of eligible benefits may be deducted from an individual’s Personal Income Tax and for the tax year beginning January 1, 2019, 100 percent of eligible benefits may be deducted. We estimate this change would reduce Personal Income Tax revenues by approximately $4.5 million in FY2018, by $20.8 million in FY2019, and $24.1 million in FY2020. Revenue losses in out years are expected to be roughly $25.8 million in FY2021 and $27.6 million in FY2022. Reductions associated with this modification are anticipated to grow at a faster rate than typical income growth given the incorporation of Cost of Living Adjustments at the federal level and the aging Baby Boomer population increasing eligibility for taxable Social Security benefits. 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.
    
    Beginning January 1, 2018, the proposed bill would allow a personal exemption of $2,500 for each federal exemption for Taxpayers with federal Adjusted Gross Income of $50,000 or less ($25,000 for married filing separate). The estimated cost of this change is $6.4 million in FY2018 and roughly $16 million per year for each year thereafter. The bill would also increase the tax preference for military pensions from exclusion on the first $22,000 of benefits received under current Law to a full income exclusion beginning in 2018 at a cost of roughly $1 million in FY2018 and roughly $3 million per year thereafter. Additionally, the bill would increase the State Historic Rehabilitated Buildings Tax Credit from 10 percent to 25 percent, resulting in a net cost of $1.6 million per year beginning as early as FY2019. This cost estimate solely relates to the continuation of current level average activity into the future with a higher State tax benefit tied to such average activity. The actual level of historic building rehabilitation activity is heavily tied to the demand for commercial real estate in major urban areas.
    
    Additional administrative costs to the State Tax Department are expected to be $35,000 for the remainder of FY2017, $158,000 in FY2018, and $85,000 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 35,000 158,000 85,000
Personal Services 0 125,000 65,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 3,000 0
Other 35,000 30,000 20,000
2. Estimated Total Revenues 0 92,300,000 61,300,000


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


    This analysis addresses the Engrossed Senate Bill 1017 as passed on June 15, 2017. This analysis is contingent on the revenues and projected economic activity associated with the passage and enactment of Engrossed Senate Bill 1003, Relating generally to WV Parkways Authority, and Engrossed Senate Bill 1006, Increasing funding for State Road Fund, as recommended by the Governor.
    
    According to our interpretation, passage of this bill would result in a potential net gain of roughly $92.3 million in FY2018 General Revenue Fund tax receipts largely due to the implementation of proposed sales tax increases six months prior to Personal Income Tax rate reductions in comparison with current Law. Thereafter, State General Revenue Fund tax collections would increase by roughly $62.7 million in FY2019, which incorporates the first full-year effect of the proposed Personal Income Tax reductions. The provisions of this bill would effectively increase current Law tax revenues by an estimated $61.8 million in FY2020, $61.5 million in FY2021, and $61.3 million in FY2022. Due to the provisions of a trigger mechanism to reduce Personal Income Tax rates, the net revenue impact would be reduced from current estimate under accelerated economic conditions. Details of the various proposed tax Law changes follow.
    
    The provisions of this bill would replace the current Severance Tax rate structure on coal with alternative tiered tax rate structures that reduce industry tax burden when prices are low and raise industry tax burden when prices are high. At current price levels, the proposed changes would result in a decrease in tax liability for steam coal and some potential small decrease in tax liability for certain types of thin-seam and some metallurgical coal. The net impact of these proposed Severance Tax changes would be a $37.4 million reduction in State coal Severance Tax collections in FY2018 relative to current Law. Producing coal counties would lose additional shared coal Severance Tax revenues of roughly $1.2 million in FY2018. Beginning in FY2019, the annual loss in State coal Severance Tax revenues would approach $38.3 million and the annual loss in county coal Severance Tax collections would approach or exceed $1.7 million per year. Based on past independent research reports, lower tax rates on steam coal may result in a very modest increase in annual production.
    
    Under the provisions of this bill, the State Consumer Sales and Service Tax and Use Tax rate would increase from 6 percent to 6.5 percent effective July 1, 2017. During the first full year of effect, this impact on the current base and the inclusion of the proposed base-broadening enhancements are expected to yield approximately $222 million for the State General Revenue Fund and up to $4 million for the Sales Tax Increment Financing (STIF) Districts. The sales tax would apply to: telecommunications services; digital goods; electronic data processing services; health fitness memberships; primary opinion research; services, machinery, supplies, and materials directly used or consumed for communication; and services, machinery, supplies, and materials directly used or consumed for transportation with the exception of coal transport. The bill would also eliminate the annual transfer of General Revenue Fund sales tax collections to the State Road Fund, an estimated net gain of $11.7 million per year for the General Fund, beginning with FY2018 sales. Finally, the provisions of this bill would add a new sales tax exemption for services of professional employer organizations, resulting in a small loss of revenue.
    
    Given that the sales tax provisions take effect on July 1, 2017, total General Revenue Fund collections for the 11-month collection period in FY2018 would be roughly $203.1 million, assuming full immediate compliance with the tax changes. 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 $238.4 million, inclusive of the State Road Fund sales tax transfer.
    
    Within the past five years, authority was given to municipal governments to impose a local sales tax of up to 1 percent in addition to the State sales tax. Currently, 28 municipal governments that account for roughly 17 percent of the State’s population impose a local sales tax with an annual yield of roughly $70 million. An additional 11 municipal governments plan to add a local sales tax beginning July 1, 2017. When the sales tax base is broadened, these municipal governments also gain additional tax collections. Passage of this bill would effectively enhance local municipal sales tax collections by roughly $2.4 million per year.
    
    Beginning in Tax Year 2018, the provisions of this bill would implement a sizable reduction in State Personal Income Tax rates for all filers. The current five-bracket tax rate structure with rates ranging from 3.0 percent to 6.5 percent would be replaced with a five-bracket system with the following rates effective January 1, 2018: 2.75 percent on the first $20,000 ($10,000 for married filing separate); 4.75 percent on taxable income ranging between $20,000 and $35,000 ($10,000 and $17,500 for married filing separate); 5.75 percent for taxable income between $35,000 and $125,000 ($17,500 to $62,5000 for married filing separate); 6 percent for taxable income between $125,000 and $150,000 ($62,500 to $75,000 for married filing separate); and 6.5 percent for taxable income of $150,000 or more ($75,000 for married filing separate) with a base tax of $8,625 ($4,312.50 for married filing separate). It is 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 for the fifth tier benefit from a reduced tax rate while Taxpayers slightly above the cutoff do not.
    
    Based on our understanding, the proposed changes to Personal Income Tax rates effective January 1, 2018 would reduce revenues by $38.0 million in FY2018, $96.0 million in FY2019, and $99.0 million in FY2020. Thereafter, revenue losses associated with this change to rates are expected to be $104.0 million in FY2021 and $109.0 million in FY2022. We note these estimates do not include reductions that could occur based on triggered reductions. The trigger mechanism and associated rate reductions are described below.
    
    Beginning as early as January 1, 2019, rates in the bottom four tiers may reduce to 2.4 percent, 4.4 percent, 5.75 percent, and 5.75 percent, respectively, if certain trigger conditions are met. Beginning as early as January 1, 2020, rates in the bottom four tiers may further reduce to 2.05 percent, 4.05 percent, 5.1 percent, and 5.5 percent, respectively, if certain trigger conditions are met. Beginning as early as January 1, 2021, rates in the bottom four tiers may further reduce to 1.75 percent, 3.8 percent, 4.65 percent, and 5.0 percent, respectively, if certain trigger conditions are met. Our interpretation of the conditions of this trigger follow.
    
    Based on our understanding, the trigger mechanism will first be evaluated after the completion of the 2018 fiscal year. A five-year average of cumulative Personal Income Tax and Consumer Sales and Service Tax and Use Tax revenues will be calculated, with the most recent of those five years being FY2018 revenues, along with a similar five-year average of revenues with the most recent of those five years being FY2017 revenues. If the difference between these averages indicates an increase, the amount of this increase is determined and compared to the anticipated fiscal cost of the next reduction in Personal Income Tax rates. If the cost of reducing Personal Income Tax rates is less than the revenue increase in both income tax and sales and use tax collections, the next rate reduction will occur effective January 1 of the next calendar year. In such a year as the trigger mechanism is effective for a third time, triggering the final proposed reduction in Personal Income Tax rates, the sales and use tax rate will also decrease from 6.5 percent to 6.25 percent.
    
    When considering all changes to Personal Income Taxes proposed in this bill (including both the proposed rate reductions and changes to modification for Social Security benefits, military retirement, personal exemptions, and others as described below) and sales tax enhancements, it does not appear that the proposed trigger would be in effect through FY2022. We note, however, that the differences in five-year averages in out years are approaching the associated cost of the next Personal Income Tax reduction, indicating that greater than anticipated growth in sales tax collections could affect this projection.
    
    The proposed bill also creates a one-time rebate of Personal Income Taxes paid by certain Taxpayers during TY2016. For resident Taxpayers having West Virginia taxable income of $10,000 or less, the rebate will be $150 per return. For resident Taxpayers having West Virginia taxable income of at least $10,000 but less than $25,000, the rebate will be $100 per return. Taxpayers must have had a positive West Virginia income tax liability on their 2016 return to receive the rebate. The proposed rebate is expected to reduce FY2018 revenues by $23.6 million.
    
    As written, the proposed bill would create a decreasing modification for Social Security benefits included in federal Adjusted Gross Income (AGI) when federal AGI is less than $75,000 ($37,500 for married filing separate). For the tax year beginning January 1, 2018, 50 percent of eligible benefits may be deducted from an individual’s Personal Income Tax and for the tax year beginning January 1, 2019, 100 percent of eligible benefits may be deducted. We estimate this change would reduce Personal Income Tax revenues by approximately $4.5 million in FY2018, by $20.8 million in FY2019, and $24.1 million in FY2020. Revenue losses in out years are expected to be roughly $25.8 million in FY2021 and $27.6 million in FY2022. Reductions associated with this modification are anticipated to grow at a faster rate than typical income growth given the incorporation of Cost of Living Adjustments at the federal level and the aging Baby Boomer population increasing eligibility for taxable Social Security benefits. 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.
    
    Beginning January 1, 2018, the proposed bill would allow a personal exemption of $2,500 for each federal exemption for Taxpayers with federal Adjusted Gross Income of $50,000 or less ($25,000 for married filing separate). The estimated cost of this change is $6.4 million in FY2018 and roughly $16 million per year for each year thereafter. The bill would also increase the tax preference for military pensions from exclusion on the first $22,000 of benefits received under current Law to a full income exclusion beginning in 2018 at a cost of roughly $1 million in FY2018 and roughly $3 million per year thereafter. Additionally, the bill would increase the State Historic Rehabilitated Buildings Tax Credit from 10 percent to 25 percent, resulting in a net cost of $1.6 million per year beginning as early as FY2019. This cost estimate solely relates to the continuation of current level average activity into the future with a higher State tax benefit tied to such average activity. The actual level of historic building rehabilitation activity is heavily tied to the demand for commercial real estate in major urban areas.
    
    Additional administrative costs to the State Tax Department are expected to be $35,000 for the remainder of FY2017, $158,000 in FY2018, and $85,000 for each year thereafter.
    



Memorandum


    This analysis addresses the Engrossed Senate Bill 1017 as passed on June 15, 2017. This analysis is contingent on the revenues and projected economic activity associated with the passage and enactment of Engrossed Senate Bill 1003, Relating generally to WV Parkways Authority, and Engrossed Senate Bill 1006, Increasing funding for State Road Fund, as recommended by the Governor.
    
    The new enacting clause of the proposed bill refers to West Virginia Code §11-13A-3f as being amended, but is actually added as a new section. Further, the basis of the coal severance tax is a per ton tax based on “FOB mine realizations” per §11-13A-3f. No definition of this term is provided.
    



    Person submitting Fiscal Note: Elizabeth Pardue
    Email Address: kerri.r.petry@wv.gov