Proposed Tax Changes in WV Legislature Puts Federal COVID Rescue Funds in Jeopardy

House Votes 0-Yeas and 100-Nays on the Governor’s Tax Shift Proposal

This is our fourth blog on the proposals to phase-out the state personal income tax and raise the retail sales tax in the West Virginia legislature.  It all started with a proposal from Governor Justice.  Then the state legislature tried to make his unworkable proposal somehow work.  The House passed its own version, HB 3300.  Next the Senate Finance Committee came up with its own version, Amended HB 3300, which passed the full Senate.  That version then moved back to the House for a vote.  Whew.



And that final version died on the House Floor on a vote of 0-Yeas and 100-Nays.  

Is this dangerous proposal dead in West Virginia?  Hard to say.  Governor Justice has stated that he will
“barnstorm” the state to try to sell his tax shift proposal to the public and legislators. We shall see if a special session of the state legislature will bring our Delegates and Senators back to Charleston to look at this proposal again.

And don’t get lost in the details – all these variations that arose in the legislature are all the same bad concept.

Each of the three variations of the proposal to phase-out the state personal income tax have some different details – some designed to make the real impact of the proposal harder to bring into focus.  But the bottom line is the same:  if West Virginia phases out the state personal income tax, total revenue available to support all state-funded programs will be reduced by 40-50 percent. Two of the three proposals tried to back-fill that huge budget hole by raising other taxes.  Even with other new taxes, the budget revenue shortfall is only half-filled.  The most significant tax increase on the table is to the state retail sales tax – from 6% to 8% in the third version that the House voted on.

So first it is clear we are looking at a tax shift not a tax cut.  The cuts to the state personal income tax will benefit rich West Virginians.  The increase in the retail sales tax will hurt West Virginians with less income – including low- and middle-class West Virginians – and small businesses.

According to our colleagues at the West Virginia Center on Budget and Policy, the proposal that the House voted down and that the Governor wants to keep alive will:

  • In its first year, would be a net tax increase for the average taxpayer in the bottom 60 percent of households.
  • Give West Virginia the highest state sales tax in the country.
  • 44 percent of the net savings would go to the wealthiest five percent of households in West Virginia, those with an average annual income of $346,000.

Second, the same folks who are hurt by the retail sales tax increase will find that the remaining large budget revenue shortfall will drive cuts to programs that help families with less income who struggle to make ends meet. 

Make no mistake about it.  These are the most dangerous proposals to the health programs that we care about that we have faced in many years.  Even if the increase in the retail sales tax is part of the deal, these proposals blow a huge hole in the state budget.  Programs that could be on the budget chopping block:  Medicaid, CHIP, substance use disorder intervention programs, mental health programs, school health programs, health care for families at risk and children in foster care, family violence prevention and intervention programs, local public health programs, the list goes on. 

American Rescue Plan Act sends Millions of New Federal Funds to WV - BUT There is an Important “You Cut, We Cut” Provision

There is another serious problem with the proposal that should make legislators think twice about this crazy tax shift onto families that make less money.  

In the recently passed federal American Rescue Plan Act (ARPA) there is some interesting language that according to constitutional experts is completely legal.  The ARPA says that if states take action to cut net revenue from taxes, they will have to repay to the federal government the amount of that cut from their federal ARPA allotment.  To be clear, if West Virginia cuts the personal income tax and reduces state revenues, the state risks losing new federal funds that are supposed to help our families and economy recover from the impact of the COVID epidemic.  A blog by Nick Johnson at the Washington-based Center on Budget and Policies has more about this important provision.

The Governor and state legislators seem to be trying to ignore this ARPA language.  Yet there is no question that the federal government has the right to say how federal funds can be used.  The new ARPA federal dollars can be used to support education, health care, transportation, internet connectivity, and to cover COVID-related costs.  The new federal dollars cannot be used to fill a new budget gap created by new tax cuts.  Federal rules and guidelines that provide more details about this important provision are due out in May. 

Let’s hope that our elected officials take the time to understand all the negative budget ramifications of any proposal to shift taxes onto people who have less income by phasing out the state personal income tax and forcing increases in other taxes and cuts to vital programs.  We will monitor developments and keep you informed so you can educate your family, friends, and neighbors about what is brewing in Charleston under the Capitol dome.

 


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