Tom Crouser: Consumption tax could be a problem (Daily Mail)

I am troubled with the idea of adopting a higher consumption tax and eliminating the state income tax, as proposed by Senate Bill 335. It’s not the theory, necessarily; it’s the practicality of having an 8 percent sales tax. Here’s why:

An 8 percent tax would leave West Virginia with the highest tax rate in the nation, let alone among bordering states. The West Virginia Chamber of Commerce reports 75 percent of us live within an easy drive of the border.

So there would logically be leakage of sales to neighboring states. That’s obvious, but then there’s more.

The chamber also cites an independent study it commissioned suggesting “pyramiding” of the tax resulting from exemption eliminations. That’s where one business buys raw-material-type products from another and adds the 8 percent at each level until we’re paying much more than 8 percent.

Currently, purchases for resale are exempt from consumer’s sales tax. Should a raw material go through three hands before it reaches the consumer (apples to applesauce to a restaurant serving applesauce), then the actual tax collected is 26 percent of the original cost plus another 8 percent to the consumer or some 36 percent due to compound interest, which is the reason for the exemption.

The idea behind SB 335 is to attract bordering states’ retirees through elimination of state income taxes. But retirees are consumers, too, so the higher sales tax and resultant higher prices would discourage relocation as the absence of income tax would encourage it.

Florida is often cited as a state without an income tax, which has attracted many retirees. But there are other factors.

What factors? Sunshine, lower housing costs, availability of housing in the first place, lower-cost airline travel so the grandkids can easily visit, and living in a place the grandkids want to visit come to mind. Same can be said of Texas.

But, most importantly, without an income tax, Florida’s sales tax still is only 6 percent, and Texas’ is 6.25 percent, even with the exemptions (higher in some counties and municipalities).

So, eliminate the income tax, keep the sales tax at 6 percent and it might work. But that’s not the plan. The plan is to increase the sales tax to 8 percent and eliminate numerous exemptions compounding price issues.

Not only that, but here’s where my experience with small business comes into play.

If you buy $1,000 of my stuff and I buy $1,000 of yours, then we could just exchange the items (barter) without paying the sales tax and call it even. Note, this is illegal, as exchanges like this are required to be reported as sales. But not everyone does. And the higher the tax, the more the incentive to evade.

So, not only would we lose sales to neighboring states and face higher prices, we will see an increase in the black market for goods and services, as well as see increased costs of tax collectors to catch scallywags who evade the tax.

Again, eliminate the income tax, end up with a competitive sales tax and much of this effect will be avoided. But that’s not the plan. The plan is to make up lost income tax revenue as well as balance the budget with a higher sales tax.

Not prudent to me.

Doesn’t appear to be prudent to Deputy Revenue Secretary Mark Muchow either. I know him, and I’m one Republican who believes his reputation of not playing politics with analysis.

In a fiscal note to SB 335, he noted, “The provisions of this bill effectively increase taxes on business inputs by an amount that is at least double the potential income tax savings on business profits.”

He also said, “A thorough independent analysis of the economic consequences associated with massive tax changes is strongly recommended.”

Amen. I think that as well.

Let’s not become another Kansas by adopting unproven theories of taxation. Let’s just balance our budget where we are.

Tom Crouser is a small business consultant writing from his home at Mink Shoals. He may be reached at tom@crouser.com. Follow him on Twitter @WVTomCrouser.

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