A day after the House of Delegates passed its version of a bill to phase out personal income taxes in the state, the Senate Finance Committee on Tuesday introduced an amendment to House Bill 3300 to make it a tax cut on steroids. The amendment cuts $1.09 billion in income taxes initially, and then phases out the entire $2.1 billion annual revenue source in as little as four years.
The Senate plan offsets the income tax cuts with $932 million a year in other tax hikes, including raising the state sales tax from 6% to 8.5%; reimposing the sales tax on food, and legalizing and taxing recreational marijuana — contingent on federal decriminalization of cannabis.
“When I was reading this bill, I was surprised, frankly. The majority of it is about cannabis,” Senate Minority Leader Stephen Baldwin, D-Greenbrier, said of the Senate strike-and-insert amendment.
The proposal also eliminates several exemptions to sales taxes, including many for professional services. It increases cigarette taxes by $1 a pack and imposes a state hotel-motel tax of 4.3%.
Sen. Bill Ihlenfeld, D-Ohio, noted that the higher sales tax, current local hotel-motel taxes of up to 6%, and an additional 1% sales tax in home-rule cities could increase the cost of a hotel stay by as much as 19.8%. He wondered if the state hospitality industry had been consulted on the plan.
The Senate proposal outpaces Gov. Jim Justice’s income tax cut plan, which calls for an initial $1.07 billion cut to be partially offset with more than $900 million a year in other tax hikes.
Unlike the governor’s plan, the Senate proposal does not increase beer, wine or liquor taxes, does not have a tiered severance tax system and does not tax luxury items.
A breakdown of the proposal:
- Increase in sales taxes to 8.5%; $625 million a year. (Justice’s plan would increase the sales tax to 7.9%.).
- Elimination of sales tax exemptions; $98 million. (Legal, accounting, architectural and engineering services would be taxes at 3%.).
- Cigarettes, tobacco, e-cigarette tax hikes; $80.7 million.
- Restoration of 2.5% sales tax on groceries, including soft drinks; $67 million.
- Excise tax on recreational marijuana; $45 million. Earlier Tuesday, the House rejected by a 53-46 margin an amendment to decriminalize marijuana in legislation rewriting the state Criminal Code (House Bill 2017), in a possible foreshadowing of House reaction to the Senate proposal.
- New state hotel-motel tax, $25 million.
Under the House version of the bill, the income tax would be phased out in annual multiples of $150 million a year, with a $75 million reduction in the first year, since the legislation would take effect midway through the tax year. It does not increase other taxes to offset revenue losses.
On Tuesday, a fiscal note on the House version of HB 3300 from the Department of Revenue raised questions about whether the legislation is constitutional, since it defers to the state Tax Commissioner a number of powers, including authority to set new personal income tax rates each year.
“This raises Constitutional concerns and may be an unconstitutional delegation of legislative powers,” the fiscal note, written by Deputy Revenue Secretary Mark Muchow, states.
According to the fiscal note, the House version of the tax plan would cut state revenue by $75 million in the 2021-22 budget year, $245 million in 2022-23, $303 million in 2023-24, $502 million in 2024-25, $872 million in 2025-26, and “by increasing amounts in subsequent fiscal years.”
Also Tuesday, competing resolutions for constitutional amendments to give the Legislature authority to set some or all personal property tax rates advanced in the House and Senate (HJR3, SJR7) and will be on passage stage Wednesday.
If either resolution is adopted by the Legislature, which requires a two-thirds vote of both houses, a resolution would be placed on the November 2022 general election ballot to revise the Tax Limitation Amendment of 1932.
Adopted at the height of the Great Depression in an attempt to help residents avoid foreclosure on their homes and farms, the amendment set low levy rates for real and personal property, and locked them into the constitution, beyond the purview of legislation.
If ratified by voters, the Senate resolution would allow the Legislature to set tax rates for all classes of personal property. The House resolution initially applied only to business inventory and equipment. It was amended in the House on Tuesday to also apply to personal property taxes on vehicles.
Personal property taxes on business inventory and equipment has long been a target of the state business community.
At a House Judiciary virtual public hearing Monday, three business officials spoke in favor of the resolution, while eight speakers opposed it.
That included county officials concerned that their counties would suffer from legislatively imposed tax cuts. Property taxes primarily fund county school systems, along with county and municipal governments.
A fiscal note for the Senate resolution concluded that there’s no way to know how much revenue will be lost if the amendment is ratified until future legislatures set new tax rates.
Eliminating the business inventory and equipment tax entirely would reduce tax collection by more than $400 million.
Also Tuesday, the Senate advanced to passage stage a bill to exempt sales of small arms and ammunition from sales taxes (HB 2499). The was after rejecting an amendment by Baldwin to extend the sales tax exemption to apply to purchases of gun safes and other gun safety devices.
Baldwin said his proposal would increase what is expected to be a $1.5 million tax break by $50,000 a year.
“$50,000 for gun safety devices that will save lives,” Baldwin said. “$50,000 to keep a child from finding a weapon.”
The amendment was rejected on an 18-16 vote.