West Virginia legislators are again discussing an idea to “tweak” state taxes by moving much, if not all, of the personal income tax burden to consumers’ sales tax. That doesn’t make sense to me. Here’s why.
Eliminating a tax does not eliminate a cost. Roads still need paving, schools still need funding and police still need to patrol. And the cost of these services continues to rise. What we paid $1 for in 2010, now costs $1.19.
But before we eliminate the state personal income tax in favor of sales and use taxes, let’s see how we compare with our competitor-neighbors. We pay 6% consumer sales tax, as do our friends in Pennsylvania, Maryland and Kentucky. Ohioans pay 5.75%, and Virginians pay from 5.3% to 7%, depending on their region of the state. So, we’re competitive.
Now, how much would we have to raise our consumers’ sales taxes to make up for eliminating personal income taxes? In our 2019-20 budget, the personal income tax was budgeted to bring in $2.16 billion, and the consumer sales tax, $1.34 billion.
Combined, that’s $3.5 billion in revenue. Now, eliminate state income tax revenue and we’d need to increase our sales tax rate to 15.6 percent to bring in $3.5 billion. And then our consumer sales taxes would be double any neighboring state.
The theory is that this move, eliminating personal income tax and increasing consumer sales taxes, will attract businesses and retirees to locate here. Problem with that is, it doesn’t always work. Fact is, it’s hard to see where it has in the history of our state.
Nevertheless, many believers point to a 2012 study by supply-side economist Arthur Laffer. In that study, Laffer looked at nine states with no income tax and compared them with nine states that had relatively high income tax rates and concluded that states with no income tax outperformed the states with high income tax rates.
However, there’s a difference in correlation and causation. Alaska, for instance, has had zero income tax since 1969 because of revenue from the sale of oil and gas leases on the North Slope.
That hasn’t spurred a recent growth rate, however. From 2010 to 2019, Alaska has averaged less than 1% per year, or precisely 0.2745%, growth, on average.
As compelling as Laffer’s 2012 reasoning is, increasing revenue by attracting a bigger population through a lower price (tax rate) has one overlooked effect. The greater the population served, the higher the total costs. We serve 1.8 million people in West Virginia on our $3.5 billion combination of consumer sales tax and state income tax. Serving double that population to 3.6 million would probably require double that, or $7 billion.
And, we have no assurance that consumer sales tax collection will outgrow costs of an increased population or if, in fact, population will grow at all.
Nonetheless, the main reason I don’t see this working is that the cost of state personal income tax (maximum 6.5%, comparable to surrounding states) is not enough to matter to most businesses or retirees.
It would be like if the price of gasoline being perpetually 15 cents lower in West Virginia than surrounding states. While that’s nice, that’s not enough to entice people or businesses to move here.
So, if we switch from the income tax to sales tax, who loses?
Seniors would lose. Seniors usually have reduced incomes and, thus, would pay less in income tax but more in sales tax. So, would the working poor. They tend to pay little, if any, income taxes, but much more of their income in sales taxes.
Who benefits? Usually, those with higher incomes consuming a lower percentage of their income, so no income tax, only sales tax.
Nonetheless, do you know what’s going to happen to the economy in the next 12 months? Neither do I. And that’s the biggest reason for the Legislature to stand by and not “tweak” taxes for this session.