Unfazed by a looming budget crisis, some lawmakers are pursuing destructive tax proposals that would shift more of the tax load onto working families and small businesses to pay for tax cuts for wealthy and powerful special interests.
West Virginia already has an upside down tax system that requires more from low- and middle-income residents than the wealthy. Commonsense reform would rebalance the tax system while providing enough revenue to close the state’s $500 million budget gap and invest in the building blocks of thriving communities, such as schools, public colleges, transportation and public safety.
Similar to Kansas’ failed tax experiment, Senate Bill 335 puts West Virginia on a path to eliminate the state’s personal and corporate income taxes, reduce severance taxes and replace with them with a broad-base 8 percent sales tax that would be the highest in the nation. In Kansas, this has resulted in an ongoing fiscal crisis that has forced cuts to schools and other services people rely on every day, without the promised economic benefit. Kansas’ Republican-controlled legislature is now trying to reverse course.
SB 335 would dramatically increase taxes on low-income populations and the middle-class to pay for large tax breaks for the richest West Virginians. If enacted, it would probably be the largest redistribution of wealth in the state in the past century.
SB 335 will also reduce what people spend in local stores, slowing the state’s economic growth and job creation. A higher sales tax makes the price of everything that is subject to a tax go up, and that is likely to reduce spending at local businesses. When they can, people will, instead, cross the border or buy from out-of-state internet merchants who do not charge sales tax or charge a lower rate, causing West Virginia small businesses to lay off workers.
Businesses will also face higher sales taxes that will eliminate a portion of any savings from the income tax cuts. A substantial share of business purchases — such as electricity, heat, water, machinery, equipment, computers, furniture and shipping supplies — will now be taxed at 8 percent, hurting West Virginia small businesses by adding thousands of dollars in annual expenses.
Our tourism industry will suffer as the state lodging tax increases from 6 percent to 11 percent. Combined with the 6 percent local hotel occupancy tax, West Virginia would have the highest lodging tax in the nation.
Because the increased sales tax revenue is unlikely to fully replace the lost income tax revenue, the state will almost certainly have to cut back on funding for schools and other services provided at the local level, and local governments, in turn, likely will increase business taxes to make up some of the difference.
The idea that economists agree that taxing consumption is better for economic growth than taxing income is just not true. There is no consensus among economists that shifting from reliance on state income taxes to sales taxes would improve economic growth.
Another tax proposal in the House, House Bill 2934, would replace the state’s graduated income tax structure with a flat 5.1 percent income tax rate. A graduated income tax that taxes higher incomes at higher rates allows our state’s revenue to keep pace with growth in the economy, because the state’s wealthiest residents capture so much of the income generated by economic growth in today’s lopsided economy. For example, between 1979 and 2007, the top 1 percent of income earners in West Virginia received 74 percent of real income growth while the bottom 99 percent received less than 7 percent.
Similar to SB 335, the House’s flat-rate proposal would raise taxes on 80 percent of West Virginians while giving the wealthiest in the state a huge tax break. Instead of another tax break for those on top, we need to clean up our tax code by getting rid of special carve-outs for the powerful, not adding more of them. Regular, working people already pay higher taxes, relative to their income, than the richest in our state. Both of these proposals would double-down on this upside-down system.
While we all want a strong economy with good-paying jobs, shifting more of the tax load onto working families to pay for tax cuts for the wealthy is not going to get us there. It does nothing to address our state’s looming budget crisis or the things that hold our state’s economy back, such as a large, unhealthy and undereducated workforce, an undiversified economy, low wages and deteriorating and inadequate infrastructure.
If West Virginia wants to avoid becoming a failed state in the future, it will have to take up common-sense tax reform that pays for the things communities need and asks everyone to contribute.
Ted Boettner is the executive director of the West Virginia Center on Budget and Policy.