Proposed legislation to repeal West Virginia’s income tax and replace it with an 8 percent sales tax would cost the state about $610 million a year in lost revenue and could cause “undesired outcomes” that would harm businesses, consumers and workers in the state, according to a government analysis.
According to the fiscal note prepared by Deputy Revenue Secretary Mark Muchow, while the sponsors of Senate Bill 335 presumably intend for it to spur greater economic growth over time, it could have the opposite effect.
“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,” Muchow said in the note, which was filed Thursday.
“Significantly higher business tax burdens could, in effect, produce undesired outcomes. All taxes are ultimately paid by individuals,” Muchow added.
He advised that higher indirect taxes on business purchases could result in a combination of lower wages, lower employment and higher consumer prices.
“A thorough independent analysis of the economic consequences associated with massive tax changes is strongly recommended,” Muchow stated.
The proposed 8 percent consumption tax would apply to many goods and services that aren’t currently taxed, including groceries, nonmedical professional services, personal services, public utility bills, including electricity, water, sewer, phone and cable, and various direct-use purchases by businesses.
Once fully implemented, the consumption tax would bring in $1.33 billion to $1.39 billion more a year than the current $1.29 billion raised through the 6 percent consumer sales tax, Muchow’s fiscal note projects.
But that would not be enough to offset the estimated $1.7 billion to $2 billion a year in lost revenue with the repeal of the state income tax, it says.
By the budget year 2020-21, that would amount to an annual tax revenue deficit of $610 million, according to the fiscal note.
The analysis also warns of other “significant leakages” of revenue, caused by consumers evading the higher tax rate on goods and services.
“It is plausible that individuals may take advantage of lower tax rates in surrounding states, particularly within border communities,” Muchow stated. “Due to the difficulty in anticipating consumer behavior, and especially on a restricted timetable, the estimates enclosed in this brief analysis will not necessarily reflect the full extent of the impacts such consumption shifts will have on revenues.”
Sen. Robert Karnes, R-Upshur, lead sponsor of the bill and chairman of the Select Committee on Tax Reform, where the bill is pending, could not be reached for comment.
Last week, the tax committee rejected, on a 5-2 vote, a motion by Sen. Robert Plymale, D-Wayne, to delay consideration of the income tax repeal bill until the fiscal note on it was completed. Both Democrats on the committee voted to wait for the analysis; all five Republicans voted not to delay. Karnes said at the time that waiting for the analysis would have amounted to allowing the committee to be “held hostage” by the Justice administration.
Reach Phil Kabler at email@example.com, 304-348-1220 or follow @PhilKabler on Twitter.