The nation’s most respected state public finance policy experts unanimously concur that an ideal state tax structure is one that is: characterized by a broad base and low rates, simple to comply with and to administer, stable as to revenue yield, transparent and predictable in its application to taxpayer and administrator alike, neutral as to economic resource allocation, adequate to generate sufficient revenues to fund necessary government operations and fair to all.⁸ That latter principle, in turn, embodies fairness among taxpayers (i.e. neutrality, ability to pay), fairness to the taxpayer community as a whole (i.e. simplicity, transparency, predictability) and fairness to the government acting as the people’s instrument to provide necessary public goods (e.g. infrastructure, education, community health, physical safety of persons and property) and to have the capacity to achieve a just and orderly society (e.g. the rule of law, social safety net, etc.). This proposal has been designed to fully honor and advance each of those guiding principles.

At the heart of this proposal is the thesis that, overall, because they promote each of the foregoing tenets of an ideal tax structure, consumption taxes, which are broad-based and free of many exemptions, offer what is, easily, the best approach to generation of public revenues. That is, they are simple to administer and with which to comply, highly stable in revenue yield (particularly compared to taxes on profits and income) and neutral in terms of resource allocation. Moreover, due to its automatic inclusion in the total charged price, a consumption tax is not only easier and much cheaper to administer but, as a further practical matter, is likely to encounter far less taxpayer resistance than a tax where a form has to be filled out and accompanied by a check written and mailed to the government (e.g. the income tax).¹

As challenges, to the desirability of using a broad-based consumption tax, to achieve those policy ends, there are typically three major objections raised. First, it is argued that broad consumption taxes should not be adopted because they have a highly regressive impact when applied to purchases of life necessities (e.g. food, clothing, medicine, healthcare services, utility and transportation services) by low income persons. Of course, in that undeniable social policy drawback of a consumption tax is also found tacit recognition of two of its intrinsic functional advantages: to-wit, as a transactional excise tax collected by the vendor, it is both immediately transparent and inherently self-assessing in its operation. Thus, the customer’s decision to purchase is also his or her decision to be taxed.

However, if we can assume full amelioration of the regressive aspects of a consumption tax, as is the case with the Fair 55 Tax Reform Plan© (see, Section D infra), a principled argument can be made that, as a result of such immediate self-assessment, such a tax is a far more efficient and choice-honoring way to measure and implement the ability-to-pay policy objective than is the convoluted, loop-hole riddled income tax, even with its nominally progressive rate structure. That is, as long as a consumption tax does not apply to purchases of life’s necessities by low-income individuals, who better to determine the taxpayer’s “ability to pay” than the taxpayer in making his or her own decision to purchase goods and services?

Indeed, in his September 20, 2016 presentation to the Legislature’s Joint Select Committee on Tax Reform, Tax Foundation policy analyst, Jared Walczak, indicated that a consumption tax with a “[b]road base permits lower rates and shifts [the economic burden] toward higher-income individuals even without exemptions for select goods.” That is so because, since higher-income individuals have more disposable income to spend, by taxing the purchase of a broader array of goods and services, such individuals will contribute more to the public treasury. ²

Of course, if, as anticipated, implementation of the Fair 55 Tax Reform Plan© has a broad economic stimulus effect, that will be the primary reason the Plan ultimately provides West Virginia with a larger, more stable tax base. Specifically, as the economic modeling required to precede final adoption of this plan is expected to show, the overall stimulus of its key elements should readily satisfy the goal of promoting economic growth in all business sectors, regardless of any shifts of relative burdens among them to achieve the neutrality which the current system woefully lacks. ³

In addition to contentions about being inherently regressive, the second, of the typical major policy challenges to a consumption tax, is the practical economic claim of disadvantage to in-state vendors when their competitors across a state border are not required to charge a tax on the same item of consumption if it has been made taxable when sold here. The manner, by which the Fair 55 Tax Reform Plan © not only addresses, but fully mitigates, the effects of both these two purported reasons, not to adopt a broad-based consumption tax, is fully described in Section D., infra. Those measures entail both targeted relief, and a simple border-neutralizing use tax enforcement provision.

Moreover, beyond such remedial provisions, among its other progressive aspects is that adoption of a broad-based consumption tax directly enables the state to eliminate BOTH the highly regressive tax on tangible personal property (TPP) for motor vehicles and the personal income tax on most individuals, all as illustrated on the foregoing Fair 55 Tax Reform Plan’s© Fiscal Scorecard and as discussed elsewhere in this paper. At the same time, retention of the current consumption tax exemptions for rent paid for housing, for purchases of professional healthcare services, for retail purchases of prescription medicine, and for consumer purchases of groceries with food stamps and WIC vouchers, all further promote fairness among taxpayers based on ability to pay. Beyond that, the Fair 55 Tax Reform Plan© now contains a unique low-income clothing purchase tax relief plan (the “Fair Tax Credit Card”), which would make it far less regressive in terms of clothing purchases than the current consumers sales tax.

Third, there is the contention, particularly from business interest groups, that the taxation of the consumption of goods and services used by business (often labeled “inputs” by commentators) is, inherently, bad policy. Beyond the fact, that the Fair 55 Tax Reform Plan© does include the retention of many of the current exemptions for purchases of goods for resale, etc., is the larger point that the criticism of the taxation of business inputs is always raised in the context of tax structures which ALSO impose heavy tax burdens on income and property. As discussed in detail in Sections C., D. and E. infra, because the Fair 55 Tax Reform Plan© either eliminates those other taxes (e.g. on TPP) or greatly reduces the scope of such taxes, it, thereby, largely negates the policy assumptions of such criticism.

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1. Though an entirely reasonable respect for the efficiencies of modern technology, no doubt, largely explains the growing insistence of public revenue agencies that taxpayers submit returns and make remittances electronically, at the least, such a relatively less “painful” procedure also serves to somewhat diminish the acuity of taxpayers’ reflection on the high cost in time and money of their own tax compliance.

2. Walczak’s presentation also, somewhat predictably, repeated the mantra that an ideal consumption tax system exempts “business inputs” to avoid tax “pyramiding.” However, as discussed below, that point, being always made in the context of overall tax structures also imposing high taxes on income and capital assets, loses much of its practical significance when (as in the Fair 55 Tax Reform Plan©) those other taxes are eliminated, and when the “conduit” nature of all taxes on businesses is fully appreciated. See, Section E. pp. 28-35, infra.

3. See, Section J. pp. 41-47, infra., and as found by the GCFT.

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Contact Michael Caryl for further questions or assistance.

The Fair 55 Tax Reform Plan (Part 1)

The Fair 55 Tax Reform Plan (Part 2)