(Click here to read the Introduction to the Fair Tax Reform Plan.)

FAIR 55 TAX REFORM PLAN FOR WEST VIRGINIA © [TIESA 2017]

FISCAL SCORE CARD ILLUSTRATION

Proposal: (1) Repeal property tax on all vehicles and newly-acquired tangible personal property EXCEPT chattels real (TPP) and centrally assessed public utility (PU) property, and phase-out tax on existing TPP [=$453 million in 2017]; (2) Phase-out income taxes [=$2 billion in FY 2018], keeping only severance (1/2 rate), B&O, property transfer, insurance, beer, liquor profits and tobacco excise taxes, plus two replacement consumption taxes and a temporary, lower rate tax on passive and deferred income of individuals with AGI over $25,000; (3) Convert sales/use taxes to a General Consumption Tax (GCT) with fewer exemptions; (4) As fiscal milestones are met, phase-in new Enterprise Consumption Tax (ECT); (4) Require Legislature to fund, via per/student block grants to local BOEs, 100% K-12 education regular levy/current expenses to its “thorough and efficient” standard; (5) Except for existing excess/bond levies and future BOE excess/bond levies, give counties/municipalities (local govt.) full tax power over the remaining property tax base consisting of real estate (including chattels real) (RE) and public utility (PU) property; (6) If, despite local govt. units’ revenue-raising capacity via all regular RE/PU tax, and enhanced home rule, when, needed to make a particular unit whole for loss of its TPP base, the Legislature would have to enhance that capacity as authorized by local referenda; (7) Fully mitigate any regressive or anti-competitive effects of expanding the consumption tax bases and (8) Show revenue neutrality, while expanding the tax base through economic growth.

1. FY 2018 GENERAL FUND BUDGET (net of retained non-tax revenues)	4,080,850
2. Replacement of schools’ regular levy property tax base	551,286
3. Fair Tax Credit Card (for tax on clothing purchases by low-income taxpayers)	15,000
4. Rainy Day Fund Cushion	+10,723
5. Total General Fund Tax Revenue Neutral Target	4,657,859
6. General Consumption Tax (GCT) @5.5% on sales of all goods and services EXCEPT: wages, sales of licensed medical services, retail sales of prescription appliances/medicines, sales to/by any govt. unit, sales to/by non-profits not competing with private enterprise, SNAP/WIC purchases, purchases of goods for direct use in agriculture, natural resource production, manufacturing or for resale, isolated sales, sales between related entities and day care/babysitting charges (w/o change to local govt. sales/use taxes and special district excise taxes)	1,966,483
7. Enterprise Consumption Tax (ECT) (gradually phased up to) 5.5% on privilege of engaging in free market due to state/local govt. infrastructure, protections, etc., imposed on consumption by for-profit and not-for profit entities (w/annual earned receipts > $100K), by way of: wages, interest, dividends, rents and royalties paid and profits retained, less cost of new capital assets, plus depreciation of the same, minus credit for payments/donations directly reducing state/local govt. burdens, incl. healthcare provider tax (single sales factor apportionment)	1,954,378
8. Temporary Passive Income Tax (TPIT) @4%-6.5%(until phase-out) on non-social security, non-pension, deferred income & passive investment income of those w/>$25K AGI	88,298
9. Severance Tax (ST) @ 2.5 % (not including retained 0.35% local ST share) and Other Retained (B&O, RE Transfer, Ins. Prem., Beer, Liquor Tobacco) (same bases/rates)	+648,700
Total of replacement/retained tax revenues	4,657,859

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Key to Data Sources for Fair 55 Tax Reform Plan for West Virginia© [TIESA 2017]

Line 1.    Source: FY 2018 WV General Fund Budget, (as of 7/1/2017) by WV Budget Office. Non-tax revenue items to be retained, but not included in stated values here, would consist of Departmental Collections, Miscellaneous Receipts, Miscellaneous Transfers, Interest Income, Special Revenue Transfer, HB 102 Lottery Transfers, Liquor License Renewals and Senior Citizen Tax Credit Reimbursements, for a total of $181 million. NOTE: The State’s current share of ad valorem property tax revenues of $7 million and property transfer tax revenues of $10.2 million are not included in the entered amount for state general revenue target purposes, because the proposal contemplates the reallocation of the former to counties and municipalities and of the latter to counties. See Line 3, below, and Fair 55 Tax Reform Plan © text, pages 14-18, below and Section C. of the Case for the Fair 55 Tax Reform Plan© infra. for explanations of how, when combined with the reallocation to them of the entire real and public utility property tax base, such allocations assure no possible revenue loss to counties and municipalities as a result of repeal of tangible personal property tax.

Line 2. Source:     2017 Classified Assessed Valuations/Taxes Levied, by WV State Tax Dept.

Line 3. Source: State Tax Commissioner’s Fifty-Second Biennial Report (October, 2017, p. 55), listing 2015 Total Resident Personal Income Tax Returns, broken down by Federal Adjusted Gross Income (FAGI) brackets, and showing the number of exemptions taken on returns in each bracket. The amount of credit entered is the total annual amount of General Consumption Tax (GST) the individuals, represented by the number of exemptions in the FAGI brackets falling between $0 and half of the $20,000 to $40,000 bracket (minor dependents included), would otherwise pay if each of them bought an average of $500 of clothing per year. 50% of the $20,000 to $40,000 bracket is used to reflect the phase-out of the contemplated clothing tax credit between those FAGI levels. See Section D. of the Case for the Fair 55 Tax Reform Plan©, Infra, pages 24-25, for a full explanation of the rationale for, and efficacy of, this aspect of the proposal.

Line 4. This is purely a function of the computational interplay of the assumed rates and tax base changes. No policy implication should be drawn from the either the existence, much less the amount, of such surplus beyond the prudence of having a cushion when relying on projections of revenue to fund government expenditures.

Line 5. Tax revenue neutrality was sought and readily demonstrated (i.e. FY 2018 General Fund Tax Revenue Estimate of $4.081 billion + $0.453 billion in Repealed Tangible Personal Property Taxes = $4.534 billion vs. Fair 55 Tax Reform Plan Fiscal Scorecard Total of $4.658 billion) simply to answer the question, inherently raised in tax reform discussions, to-wit: “how are you going to pay for that?” As the text of this proposal explains in greater detail, the ultimate goal is to achieve revenue responsibility through a revenue-generating system that is fair, simple, neutral, competitive, transparent, flexible to evolving needs and circumstances, and, most importantly responsive only to broad democratic process a/k/a popular consent.

Line 6. Source: FY 2018 WV General Fund Budget, (as of 7/1/2017) by WV Budget Office and 2016 Consumers Sales and Use Tax Expenditure Study by WV State Tax Dept. The entered amount is sum of the budgeted FY 2018 Consumers Sales and Use Tax revenues, and the estimated annual value of the various exemptions selected to be eliminated. That sum was then divided by the current 6% rate, and multiplied by the proposed/test rate of 5.5%, to yield the entered amount. Where possible, the inherent overlapping, of certain exemptions to be eliminated, was considered and duplications eliminated. However, because disaggregation of services (taxable) from goods (exempt) purchased for direct use in production activities, and of contracting services for government (exempt) from all other contracting services (taxable), was not possible, a computational assumption was indulged that those items offset each other. Thus, it was assumed that the lost tax revenue, associated with retaining the exemption of contracting services for government, offset the addition of the tax revenue due to the taxation of services for direct use in various private production activities. The details of the GCT are substantively explained on pages 18-27 of Section D. of the The Case for The Fair 55 Tax Reform Plan ©, infra.

Line 7. Source: 2015 Statistics of Income, by th IRS, showing the breakdown of sources of FAGI for WV taxpayers; and FY 2018 WV General Fund Budget, WV Budget Office for the Corporation Net Income Tax (CNIT) budgeted revenue. The entered amount is a combination of: (a) employee compensation, (b) Form Schedule C and (c) Schedule E pass-through entity income, all multiplied by the assumed/test rate of 5.5 %, plus budgeted CNIT revenues divided by 6.5% and multiplied by 5.5 %, plus 5.5% on an assumed annual average expenditure per reporting entity of $170,000 for interest, dividends, rents and royalties. The amount for that final group of consumption tax base components had to be assumed due to the absence of direct public data on such expenditures. The amount assumed for those four components is likely to be conservative in light of the fact that, if West Virginia’s 35,000 business establishments as of 2012 (See, 2012 Economic Census of the United States, US Census Bureau) just, on average, spent the amount that business firms in the United States (all industry categories and entity forms) averaged spending on rent and interest ALONE, they would have spent more than half the amount assumed here for ALL four of those major items. See, Statistical Abstract of the United States, US Census Bureau. That leaves less than half of the estimated average taxable expenditure amount for not only dividends paid, but, far more importantly, for the disproportionately high amount of royalties paid by West Virginia’s dominant natural resource extraction industries. The amount deducted to account for the credit for healthcare provider tax paid was taken from the State Tax Commissioner’s 52nd Biennial Report. The exemption for smaller organizations, having less than $100,000 in annual commercial receipts, would not count public or private grants, gifts or donations against that minimum threshold, thus effectively exempting all religious and other donor-supported charitable organizations. NOTE: There are at least two major reasons why the ECT amount entered is likely to be understated: (a) The ECT would be imposed on federal taxable income before the reducing adjustments are taken to determine WV taxable income for CNIT purposes; and (b) certain other elements of the ECT base (i.e. annual depreciation charged, less capital purchases) have not been directly included in the stated amount due to the lack of easy access to such specific data, and, instead, have been either assumed to cancel each out (depreciation and capital purchases) or conservatively extrapolated from broader data (rent, royalties, interest and dividends paid as explained above).

Line 8. Source: 2015 Statistics of Income, by IRS, showing the breakdown of income sources, by FAGI brackets, for WV taxpayers. The entered amount is the result of applying graduated rates of 4%, 5%, 5.5%, 6% and 6.5%, to the combined amounts of the identified deferred and passive income sources (non-social security, non-pension individual retirement benefits, and investment income such as interest and dividends), for taxpayers with FAGI of more than $25,000, $50,000, $75,000, $100,000 and $200,000, respectively.

Line 9. Source: FY 2018 WV General Fund Budget, (as of 7/1/2017) by WV Budget Office. The entered amount for severance tax is the result of dividing the budgeted annual general fund revenues for that tax by 5% and then multiplying the result by 2.5 %. To the extent the general fund budgeted severance tax revenue includes revenues derived from natural resource production which is taxed at less than 5% (e.g. regular state/non-local coal @ 4.65%, the thin seam coal production taxed variously at 2% and 1%), then both the tax base and the entered amount are understated.

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Contact Michael Caryl for further questions or assistance.

The Fair 55 Tax Reform Plan (Part 1)